Monitor | China Inc's balance sheet is flashing danger signals
Mainland's recent lending boom has pushed corporate leverage into a potentially perilous state in terms of ratio of operating cash flow to debt
If you want to know whether a recession is coming, don't look at the top-down macroeconomic numbers like gross domestic product.
Instead, focus on the bottom-up analysis of consumer, corporate and government balance sheets. They make a far more reliable warning system.
In emerging Asia, where consumer debt is generally modest and government finances relatively sound, it is corporate balance sheets that we should be looking at.
Specifically, says Gillem Tulloch, managing director of Hong Kong-based independent research outfit Forensic Asia, we should pay attention to corporate leverage and solvency.
China has to have an economic contraction to cleanse the system
Tulloch's preferred measure is the ratio of operating cash flow to debt. Operating cash flow he describes as "true profit": the money a company earns from its business before splashing out on capital expenditure.
