China firms post better fourth quarter but weak cash flows dent outlook - private survey

BEIJING (Reuters) - Chinese firms reported strong performance in the fourth quarter, with hiring on the rise and profits up, but the outlook for 2017 is uncertain as cash flow remains weak and inventories rose at a record pace in late 2016, a private survey showed.

Retail was the strongest sector in terms of revenue and profit in the fourth quarter, a quarterly survey of more than 3,300 firms by China Beige Book International (CBB) showed, though weak capital expenditures suggested a cautious outlook.

The manufacturing sector also improved from the third quarter, with 54 percent of companies seeing revenue gains, led by automobile manufacturers, the survey said, while property and commodities remained strong.

But despite stronger top and bottom-line performance, cash flow deteriorated once again as receivables and payables worsened across nearly every sector.

"Still-­deteriorating cash flow says the war over corporate health has not been won and the economy thus remains on unsafe ground," authors Leland Miller and Derek Scissors wrote in a note accompanying the report.

"Stronger profits and weaker cash flow can only co-­exist in the short run. One will have to give way in 2017."

Indeed, China reported on Tuesday that profits at industrial firms rose at the fastest pace in three months in November, but analysts questioned whether they were driven by price speculation or genuine demand.

The survey showed that firms continued to hire in the fourth quarter, with 43 percent of participants adding staff, up from 30 percent a year ago.

The main concern of Chinese leaders is joblessness, not the economic growth rate, and a steady labor market could mean reduced stimulus, regardless of other indicators, said CBB.

Bank borrowing hit the highest levels since mid-2013, with CBB suggesting that firms could be taking more loans to fund shortfalls as cash flow deteriorates.

A narrowing of the gap between interest rates charged by commercial banks and those available from shadow banks - whose rates are higher - led to a pick-up in lending by the non-bank financial sector, CBB said.

(Reporting by Elias Glenn; Editing by Richard Borsuk)