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80% of Chinese corporates were affected by late payments in 2014, and the situation is not about to improve, according to a Coface survey on corporate credit risk management in the country.

Forecasting Chinese GDP to slow down from 7.4% in 2014 to 7% in 2015, the insurer explains that the high cost of financing and low profitability will put corporates at higher risk of non-payment in the short term.

At 79.8%, the percentage of companies that reported overdue payments in 2014 is slightly lower than in 2013 (82%), but last year 56.7% of those surveyed saw an increase in the amounts that were overdue, compared to 45% the previous year.

The length of the overdue period is also growing, with 19.6% of respondent reporting that the average exceeded 90 days in 2014, as opposed to 17.8% in 2013.

Combining these results with the China Banking Regulatory Commission’s non-performing loan (NPL) ratio, which reached a high of 1.25% at the end of 2014, Coface warns not to overlook the risk of non-payment this year.

Rocky Tung, Coface economist for the Asia Pacific region, says: “While the NPL figures are seen as lagging indicators, they show the tough situation the Chinese economy is facing. This is confirmed by the payment behaviour revealed in Coface’s annual survey. NPL soared by 42.3% year on year, as of the end of 2014, led by the substantial increase of 58.8% in sub-standard loans. These trends show that risks are on the rise, involving both the real economy and the financial system.”

The insurer identifies chemicals, paper/wood and metals as particularly high-risk sectors, showing signs of deterioration in both payment experience and financial performance, pointing out “a crucial need for the costs of financing to come down”.

Additionally, 62% of the Chinese companies surveyed expect slower economic growth in 2015, after 2014 marked the country’s slowest growth rate in 24 years.

While hailing the monetary easing measures being introduced by the Chinese government to help corporates in the slowdown, Coface explains that more low-cost funding is needed, particularly for SMEs, in order to reduce credit pressure for all parties.
“Non-traditional measures that could help ease the liquidity misallocation in the real economy – particularly for SMEs – are underway, but patience is needed when Chinese policymakers are leading structural and financial reforms. For example, the approval of private-funded banks will serve the needs of SMEs, but the setup of these banks has taken some time following approval. We will need to give it further time before fruitful results can be achieved in the medium term,” adds Tung.

For its 12th edition, Coface’s China credit management survey gathered feedback from a sample of 882 companies based in the country, and operating in different sectors.