Payment delays on the rise in China as growth falters

Payment delays on the rise in China as growth falters  article image

For China, 2018 proved to be a relatively challenging year.

Growth slowed to 6.6% and according to Coface – a global leader in risk management – it is expected to decline further to 6.2% this year.

Payment delays have also deteriorated.

In its 2019 China Payment Survey, Coface found 62% of the 1500 companies surveyed in China experienced payment delays last year.

And 40% of respondents reported an increase in payment delays – much higher than the 29% registered the previous year.

More worryingly, the proportion of respondents experiencing ultra-long payment delays (more than 180 days) exceeding 2% of their annual turnover increased to 55% in 2018 from 47% the previous year.

In Coface’s experience, 80% of ultra-long payment delays are never paid. When these constitute more than 2% of annual turnover, a company’s cash flow may be at risk.

Gloomy outlook

As a result, more than half (59%) of those surveyed believe the economy will not improve this year – compared to 33% in 2017.

This is the worst projected outcome since 2003.

In this exclusive interview with Dynamic Export, Carlos Casanova, Coface’s Economist for the Asia Pacific Region, says he is not surprised by the survey findings.

“After a period of buoyant growth, it seems that unavoidable structural headwinds are finally catching up with China’s economy,” he says.

Slower economic growth has had a big impact on Chinese companies.

For instance, the amount of corporate bond defaults quadrupled, reaching US$16 billion, while the number of bankruptcy cases settled through the Supreme Court of the People’s Republic of China spiked to 6,646.

An escalation of trade tensions between the United States and China has not helped the situation.

Steep decline in retail sales

“The trade war has eroded consumer sentiment resulting in weaker domestic consumption,” says Mr Casanova.Need export insurance_carlos casanova

“We have seen a steep decline in retail sales and domestic consumption, including cars and jewellery.

“Domestic confidence is lower.”

Mr Casanova says he was most surprised by the high percentage of respondents who believe that growth will not improve this year.

“This is the first time that this has happened since Coface started conducting China payment surveys in 2003.”

And he shares the concerns of respondents.

“As economic growth slows further, risks will intensify in sectors where a large proportion of companies struggle with cash flows and stress in debt service,” he said.

“As far as we are concerned 2019 will be a much more challenging year – depending on the industry sector.”

These sectors are worst affected

The economic slowdown has resulted in more Chinese companies using longer payment terms to sustain business levels.

The survey found average payment terms increased to 86 days in 2018, up from 76 days in 2017 and in line with a trend that began in 2015.

Payment terms were longest for the automotive and transportation sectors, followed by construction and energy.

On the high-risk end of the spectrum, the largest proportion of respondents experiencing ultra-long payment delays exceeding 10% of their annual turnover was in the construction sector (28%), followed by automotive (27%) and information & communication technologies (25%).

The pharmaceutical sector recorded the lowest proportion (7%), ahead of the agri-food sector (12%).

And to further aggravate matters, almost 60% of respondents admitted to using banker acceptance drafts and/or commercial acceptance drafts in place of cash for payments.

Will payment delays escalate?

These represent hidden cash flow risks, which may prove problematic as growth continues to slow in 2019.

Will we see an increase in payment delays in China over the next 12 months?

“That remains to be seen,” says Mr Casanova.

“But we do expect an increase in payment delays in sectors that are currently experiencing stress – therefore 2019 could be even worse.

“So, Australian exporters should have the right tools in place to protect themselves from overdue payments and bad debts.”

Surprisingly, 30% of survey respondents who predict China’s economy will worsen, admit they don’t have credit risk management tools in place.

In light of the deterioration in payment delays and growth slowdown, Coface has given China a Country Risk Assessment:  B (fairly high).

Maintaining a cautious approach

High corporate indebtedness remains a major driver of risk in China, according to Coface’s risk assessment.

“We have been maintaining a ‘cautious risk’ approach in China since 2015 – and we continue to remain cautious,” said Mr Casanova.

He offered the following advice to Australian exporters: “Do your due diligence before trading in China.

“You must understand how the (economic) situation in China is evolving and be aware of the higher default rates.

“Chinese authorities have plans in place to tackle the current headwinds with a fiscal stimulus package.

“But exporters need to be more cautious about risks and do their homework on buyers in China and what type of companies they are dealing with.”


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