China’s CFOs Less Optimistic than a Year Ago

China’s leading chief financial officers (CFOs) are less optimistic about financial performance in 2014 than they were last year, identifying global macroeconomic risk as a primary concern ahead of a moderating domestic economy says Bank of America Merrill Lynch (BofA Merrill).

In a survey of regional CFOs commissioned by the bank, 77% of China-based respondents said they expect revenues in 2014 to rise, down from 79% in 2013. The majority of polled China CFOs were also more cautious when it comes to the outlook for profit growth, with 59% forecasting higher year-end figures compared to 66% last year.

Macroeconomic risk in 2014 was identified as a major concern by 47% of China-based respondents, the highest level recorded in Asia Pacific and above the regional average of 33%, while only 17% of China CFOs cited moderating domestic growth as a concern.

“While China CFOs remain fairly optimistic within the current business environment, sentiment has clearly moderated with expectations of revenues and particularly profits, shifting downward,” said Xiaoguang Huang, president, China, BofA. “Echoing our conversations with clients, CFOs in China are taking a more realistic view on expected growth in 2014.”

BofA Merrill’s ‘2014 CFO Outlook Asia report’ surveyed 639 CFOs and other senior financial executives in the region. Nearly 60% of them represented corporations with annual revenues of US$1bn and above.

The survey also found China CFOs will opt for organic growth rather than growth through mergers and acquisitions (M&A). In 2014, 60% of China CFOs have no plans to undertake any M&A activity. Instead, with offshore market opportunities looking less attractive than previous years, 52% of China CFOs will utilise surplus cash for organic growth opportunities.

Other key findings include:

• Around 40% of CFOs in China cite liquidity as their largest financial markets risk. A further 19% of China CFOs pinpoint regulatory and compliance risk as their primary challenge, which is higher than the 15% average for the region.
• For the minority pursuing an M&A strategy, half of China CFOs see Southeast Asia presenting the largest opportunity, while 37% named the countries in emerging Southeast Asia (Cambodia, Laos, Myanmar and Vietnam) as potential target market.
• Profitability will increasingly be tied to investment in technology such as digital forecasting tools and supply chain management. Over two-thirds (67%) of CFOs in China will look to improve profitability through technology, the highest percentage recorded regionally.
• Bank loans remain the preferred financing instrument of China CFOs (59%). However, they are increasingly turning to internal sources of funding with 37% identifying this option as their alternative financing route. This preference has moved to second place in 2014 from third last year.
• Significantly, the ongoing liberalisation of the Chinese renminbi (RMB) will also impact decisions at the China CFO level in 2014. Around 60% of China CFOs polled expect a positive impact on their businesses from further easing of domestic RMB capital controls, the region’s highest percentage.

The full report can be downloaded here.

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