Mounting bills

During earnings season we realized diagnostic firms in China were starting to warn that the country’s Covid-19 testing blitz meant some customers – often local governments – were taking longer to pay their bills. That caught our attention: how big was the pile up?

I crunched the numbers and found the money owed is climbing rapidly. Eight of the largest listed virus-testing firms reported a combined 14.1 billion yuan ($2 billion) increase in accounts receivable as of June 30, up 73% from a year earlier. Among these companies, Shanghai Labway Clinical Laboratory Co. saw the biggest jump at 189%.

The payment delay highlights the mounting cost — financially, economically and socially — of the country’s efforts to stop the spread of omicron subvariants. China is increasingly using a combination of mass-testing and citywide lockdowns to control outbreaks, a growing issue as cases crop up in every province.

Recent moves boosted demand even further, as home town officials were asked to regularly test all residents for Covid regardless of infection levels in a new guidance released last week. That means local authorities — who are responsible for covering the cost of mass-testing — are increasingly facing a squeeze. Declining business activity is hurting tax revenue, while Covid-related spending is increasing.

It’s already showing up in the budget data for the first half of the year. National public revenue fell 10.2% from a year earlier, while public expenses rose 5.9%. Expenditure on health care increased 7.7%. Beijing alone spent 24% more to support Covid prevention measures.

The financial drain is occurring on both ends of the testing orders that are intended to maintain China’s Covid Zero policy. Diagnostic companies called out the growing size of payments outstanding as a top concern in their latest financial filings. Shanghai Labway attributed the reason for its negative net cash flow from operational activities to costs related to the lengthy payment period for Covid lab tests.

When will the companies get their money? Analysts told us it’s hard to predict. The uncertainties hinge on Covid cases, authorities’ attitudes, and the availability of other technologies and medications.

In the end, though, I expect they’re good for it given the importance of mass-testing to China’s Covid Zero policy and the ability of Beijing to backstop local governments. Bloomberg