Payment conditions in China seem to be improving but businesses should continue to manage risks lurking beneath the surface.
The improvement in China’s economic fortunes has led to an improvement in business conditions. With Chinese economic performance rebounding in 2017 with the country posting GDP growth of 6.9% – the first annual acceleration for seven years and beating the government’s target – fewer corporates are claiming an increase in delayed payments. The extended period between the payment due date and the date the payment is received is something that has blighted corporates in China in recent years.
According to new data from French credit insurer, Coface, only 29% of the 1,003 corporates it interviewed for its latest China Corporate Payment Survey saw an increase in delayed payments in 2017. This is a marked improvement from the 46% that had experienced increased payment delays in 2016.
Devil in the detail
This is encouraging news for corporate cash flow in China. However, beneath the surface, the picture is not quite as positive.
Coface’s report indicates a worrying increase in businesses experiencing ultra-long payment delays in 2017. Twenty-six percent of corporates said this had been the case in 2017, up from 19% in 2016. Sectors most affected include construction, pharma and autos.
Whilst these statistics are concerning in themselves, digging further beneath the surface reveals significant additional risks. Indeed, the data shows that 21% of companies experiencing ultra-long payment delays have more than 10% of their annual turnover tied up in these payments. Coface estimate that roughly 80% of these ultra-long payment delays do not get paid at all. This could put cash flow at significant risk, notes the report.
Conditions are most worrying for companies operating in the energy, construction and auto sector. With corporate debt levels at an all-time high, and the Chinese government keen to deleverage parts of the economy, notably local governments and state-owned enterprises, companies across the supply chain might be in for a rough ride in the year ahead.
Despite the significant risks companies face, many risk managers in China are becoming complacent, according to Coface. This is evidenced by the decline in use of credit management tools to manage the risk of late/non-payment.
Coface found that fewer than 20% said their business used credit insurance or credit agency reports to mitigate the risk. Only 10% used factoring or debt collection products, with 40% saying they used no credit management tools at all.
The report notes that figures such as these are understandable in the light of the headline data that shows payment conditions are improving. Yet, given the existence of beneath-the-surface pockets of stress, and the fact that debt in China is at an all-time high, perhaps greater attention needs to be paid to risk management.
Coface expects more companies in the sectors that are currently experiencing either high debt levels or long payment delays that exceed 2% of annual turnover, to face further difficulties this year because of tighter monetary and fiscal policies.