China’s leading chief financial officers (CFOs) are less optimistic towards financial performance in 2014 compared to last year, identifying global macroeconomic risk as a primary concern, ahead of a moderating domestic economy.
In a survey of regional CFOs commissioned by Bank of America Merrill Lynch, 77 percent of China-based respondents said they expect revenues in 2014 to rise, down from 79 percent in 2013. The majority of polled China CFOs are also more cautious when it comes to the outlook for profit growth, with 59 percent forecasting higher year-end figures compared to 66 percent last year.
Macroeconomic risk in 2014 was identified as a major concern by 47 percent of China-based respondents. That’s the highest level recorded in Asia Pacific and above the regional average of 33 percent. In contract, only 17 percent of China CFOs cite 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, Bank of America. “Echoing our conversations with clients, CFOs in China are taking a more realistic view on expected growth in 2014.”
The Bank of America Merrill Lynch 2014 CFO Outlook Asia report surveyed 639 CFOs and other senior financial executives in the region. Close to 60 percent of them represent corporations with annual revenues of US$1 billion and above.
Now in its third edition, the report offers insight into the strategies deployed by key financial decision makers across multiple industries and 12 economies, with a 50-50 split this year between respondents from multinational corporations and large local companies. Interviews were conducted in Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand. In China, 75 companies were surveyed of which 47 had annual revenues of US$1 billion 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 percent of China CFOs do not plan to undertake any M&A activity. Instead, with offshore market opportunities looking less attractive than previous years, China CFOs will utilize surplus cash for organic growth (52 percent) opportunities.
Other key findings include:
- Approximately 40 percent of CFOs in China cite liquidity as their largest financial markets risk. A further 19 percent of China CFOs pinpoint regulatory and compliance risk as their primary challenge, which is higher than the 15 percent average for the region.
- For the minority pursuing an M&A strategy, half of China CFOs (50 percent) see Southeast Asia presenting the largest opportunity, while 37 percent 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 percent) 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 percent). However, they are increasingly turning to internal sources of funding with 37 percent identifying this option as their alternative financing route. This preference has moved to second place in 2014 from third last year.
- Significantly, the ongoing liberalization of the Chinese renminbi (RMB) will also impact decisions at the China CFO level in 2014. Approximately 60 percent of China CFOs polled expect a positive impact on their businesses from further easing of domestic RMB capital controls, the region’s highest percentage.
To download the Bank of America Merrill Lynch 2014 CFO Outlook Asia report, please visit the BAML website.