Despite improving economic conditions in China last year, payment delays are on the rise, according to a new survey.
And there was a decline in the number of businesses offering credit terms.
The China Corporate Payment Survey 2018 conducted by global risk management experts Coface, shows average payment terms in China increased to 76 days in 2017, up from 68 days in 2016.
The proportion of respondents experiencing payment delays exceeding 120 days increased to 26% in 2017 from 19% in 2016, while those experiencing ultra-long (more than 180 days) payment delays exceeding 2% of their annual turnover increased from 35% in 2016 to 47% in 2017.
More worryingly, those reporting that more than 10% of their annual turnover was tied up in ultra-long payment delays increased to 21% in 2017 from 11% in 2016.
According to Coface’s experience, around 80% of these 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.
The report’s author, Carlos Casanova, Coface Economist for Asia Pacific, noted that the Chinese economy staged a comeback last year.
“Exports grew by 7.7% YOY on average in 2017, compared to -7.6% YOY in 2016,” he said.
“GDP ticked up from 6.7% in 2016 to 6.9% in 2017, favoured by strong demand, as well as loose monetary and fiscal policy settings.
“As a result, risk managers have become more complacent, both in terms of their economic expectations and their risk management procedures.
“It comes as no surprise that an overwhelming majority of respondents (67%) stated that they expect economic growth to continue to improve in 2018.”
Coface has been conducting annual surveys covering companies’ payment experiences in China since 2003.
The main aim is to better understand corporate credit management practices and payment experiences.
In the latest survey, data was collected during the final quarter of 2017, with responses received from 1,003 companies.
No credit management tools
Of those surveyed, 40% reported they do not use any credit management tools.
“This is understandable in the context of improving payment conditions,” said Mr Casanova.
Fewer respondents stated they saw an increase in payment delays (29% in 2017 versus 46% in 2016).
And despite China’s better economic performance, tail risks have continued to increase.
Some pockets of stress are notable within the Chinese economy, says Mr Casanova.
The energy (33%), construction (32%), and automotive (27%) sectors registered the highest proportion of ultra-long payment delays exceeding 2% of turnover. Paper and textile recorded the lowest (10%), followed by the pharmaceutical sector (15%).
The main reason for the decline in the number of respondents offering credit sales was a drop in market confidence, said Mr Casanova.
Erosion in customer trust
Those offering credit sales dropped from 38% in 2016 to 31% last year.
The agri-food sector offered the shortest credit terms, equivalent to 55 days in 2017. Most respondents in this sector (88%) recorded average credit terms under 60 days.
The wood, textile, paper, retail, and metals sectors all reported credit terms below China’s average of 76 days.
“This is reflective of different industry standards, as well as erosion in customer trust following a difficult 2015 and 2016,” said Mr Casanova.
Almost half of all surveyed companies reported that “customers’ financial difficulties” was the main reason behind their payment delays in 2017.
When asked about the main reason behind such financial difficulties, 46% reported “fierce competition impacting margins” and “lack of financial resources” as the main culprits.
“In the context of tighter monetary and fiscal policies in 2018, we expect more financial difficulties will be experienced by customers in sectors that are currently suffering from high debt levels, long payment delays, and a large proportion of ultra-long payment delays exceeding 2% of annual turnover,” Mr Casanova said.