China’s economic picture is looking rosy, but tailwind risks could result in more payment defaults over the coming year.
Last year, the economy expanded by 6.9%, up from 6.7% the year before. Over the same period, fewer companies saw an increase in payment delays (29% in 2017 versus 46% in 2017), according to Coface’s China corporate payment survey.
So far, so good. But the credit insurer warns that the proportion of respondents experiencing payment delays of more than six months has gone up from 19% in 2016 to 26% in 2017. Furthermore, the share of companies for which “ultra-long” payment delays form more than 10% of turnover rose from 11% to 21%.
“You can’t take headline figures for granted,” Coface’s Asia Pacific economist Carlos Casanova tells GTR. “According to Coface’s experience, around 80% of those ultra-long payment delays don’t get paid at all. When these constitute a sizeable proportion of a company’s total annual turnover, their cash flow may be at risk.”
With China’s economy expected to slow over the coming years and the government expected to allow for some defaults to occur in industries with significant overcapacity, certain industries could be in for payment shocks, most notably those heavy industries, such as construction and energy, which have been subsidised and bailed out continually by the state over recent years.
Notably this week, the Chinese government issued a directive to state-owned banks to stop lending to local governments, in a view to deleverage parts of the economy which have been fuelled by rapid accumulation of debt. The directive warned banks not to lend money for capital projects, investment funds or public-private partnership projects.
The effects of such a move could be felt well down the supply chain: provincial China has seen unprecedented levels of projects being built over recent years, usually paid for by loans. These projects support entire ecosystems of construction, planning and contractual work. If the cash dries up, the projects will do the same, thus further defaults are almost guaranteed.
“There’s an emphasis on deleveraging and state-owned enterprise reform. If you’re in one of the traditional heavy industries such as energy and construction that are overcapacity and have had difficulties accessing finance in the past, you’ll have even more difficulties now,” Casanova says.
The survey, which quizzed 1,003 companies in China, the majority of which had a turnover of less than Rmb100mn, found that the average payment days increased from 68 to 76 in 2017, but that 67% of companies expect sales to improve. This has, however, led to negligence in the market.
“Better economic performance in 2017 has led to complacency amongst risk managers. Fewer than 20% of respondents declared using credit insurance or credit agency reports to mitigate their risks. The situation is worse for factoring and debt collection, with only 10% of those sampled reporting using these tools. 40% of respondents admitted that they use no credit management tools to mitigate credit risks,” Casanova says.