There is a common concern held by many corporates operating in China: the decreasing credit conditions of companies in the country.
Numerous factors, including the slowdown in the economy and the broader structural shift towards the “new normal” (where the economy will be powered by services and domestic consumption rather than manufacturing and exports) mean that late payments are commonplace in China.
This issue was recently highlighted by Cefi Chen, Regional Treasury Director, China and Russia at Cummins who said the company had seen an uptick in the volume of late payments and the use of Bank Acceptance Drafts (BADs) – which can push out payment by as much as one year – as a method of payment, the net result being a negative impact on Cummins’ days sales outstanding and overall working capital cycle.
And this real-life account is consistent with the findings of French credit insurer Coface’s study into corporate payment practices in China. According to its surveys over the past five years, on average 80% of companies operating in China have experienced overdue payments.
Its most recent survey, however, shows that overdue payments reduced in 2016 with only 68% of the 1,017 respondent companies experiencing overdue payments. Fewer respondents also reported an increase in overdue amounts.
On the surface, these findings look positive for corporates operating in China, showing a clear reduction in overdue payment risk driven by a selective relaxation of credit controls. However, as Coface highlight, not all the findings are positive.
Most notably, of the 68% that have been exposed to late payments, over half had experienced ultra-long overdues (payments that are 180-days late). This is something that Coface cite as being a serious concern and that when “2% of a company’s total annual turnover is involved in ultra-long overdues, the company’s liquidity can become an issue and its ability to repay suppliers is questionable”.
What is perhaps even more concerning is that Coface estimates that approximately 80% of ultra-long overdue amounts (180 days or more) are not paid back at all, putting businesses under severe financial stress.
Coface’s survey also highlights the different credit conditions faced by companies in various sectors of the Chinese economy.
High-risk sectors include construction, chemicals, industrial machinery and electronics. Ultra-long overdue issues were particularly acute in the chemicals, industrial machinery and electronics, IT-telecoms, metals, pharmaceuticals and retail sectors.
“Of these, the chemicals and industrial machinery and electronics sectors gave the biggest causes for concern, as considerably more respondents in these sectors had over 10% of their turnover involved in ultra-long overdue issues and reported average overdue times of more than 150 days,” says the report.
Mitigating the risks
Surprisingly, despite the risk of late and non-payment in China, very few companies are taking steps to mitigate the risk. The survey found that less than half of companies are using credit management tools.
Amicable negotiations through things like repayment schedules are regarded as being the most effective tool to counter late payments.
There is some positive news in the fact that 56% of companies checked and monitored buyer credit-worthiness but overall the report concludes that “greater attention to risk management needs to be paid in China”.