Terms of payment between companies in China are getting longer due to increasing market competition, according to the latest edition of a survey from insurer Coface.
Chinese firms are being pressurised to extend terms of payment to win business in a tough marketplace. However, coupled with the tense global financial situation, there is a worrying increase in overdue accounts. The situation could be getting worse in 2008 with raw material prices rising and the recent freeze on bank credits.
The Coface report, entitled 'Corporate credit risk management in China', also highlights that the main financing source for Chinese companies is open account. More than half the companies surveyed were using open account as their preferred payment term, with a decreasing number of corporates using the more traditional letters of credit.
Payment terms are now being pushed out to an average of 90 days, compared to a 60-day payment terms reported in 2004, according to Coface.
Although the use of open account is a useful strategy for companies looking to expand their market share, Coface's survey noted that there are more overdue accounts, with 90% of companies dealing with late payments, with around 20% of those questioned saying they have to deal with overdue accounts of over 60 days.
Commenting on the findings, Yves Zlotowski, chief economist of Coface, remarks: "More than 80% of the respondents use amicable negotiation as their main recovery action.”
“Business climate in China, and especially creditor protection, is weaker than in the other emerging countries. China is rated A3 whereas the business climate rating is B.”
In January Coface launched a new type of rating system known as the business climate rating, with provides investors with a rating that assesses how easy it is to operate within a particular country. (Click here to read more about the new ratings system in GTR Jan/Feb 2008)
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