Eight out of 10 companies in China experienced overdue payments in 2013, according to a survey of corporate credit risk management in China.
Conducted by Coface, the survey revealed that 82% of the interviewed companies reported overdue payments in 2013, a 5% increase compared to 2012 and the highest level in 3 years. Of those affected, 45% said the overdue amounts had also increased. Companies also experienced overdue payments for a longer period: 18% reported average overdues of more than 90 days, a 5% increase compared to 2012.
The chemical, industrial machinery and household electric & electronic appliances sectors are at higher risk. Since credit facilities will remain tight in 2014, a deterioration in corporate payments could lead to a significant ripple effect in China’s shadow banking market.
Payments that are over 6-months late are considered as highly risky. From Coface’s experience, there is an 80% chance that these overdue payments will not be paid at all if this is the case. Moreover, if the amount of overdue payments exceeds 2% of a company’s total sales, it is likely that these companies will have liquidity problems. This is the case of 33% of companies interviewed, a sign of a severe liquidity problems and a high risk of non-payment to their suppliers or borrowing banks or institutions.
“The deterioration of payments in China serves as an alert. Traditionally speaking, smaller companies in China do not necessarily have access to enough credit facilities from the regular banking system and this is the main driver of the growth in the shadow banking system. While we expect costs of funds to increase in 2014, the interest rate in the shadow-banking system is already high. The increasing trend to overdue payment exacerbates the liquidity issues of different stakeholders in the supply chain, and this vicious cycle could lead to a significant ripple effect,” says Rocky Tung, Economist of the Asia Pacific Region at Coface.
Most industries in China saw a marked deterioration in their payment experience in 2013. An increasing number of industry participants reported that their average overdue-period reached more than 60 days in 2013, showing signs of deterioration compared to 2012. This trend is especially worrying for 3 sectors: industrial machinery & electronics (+16%), household electric/electronic appliances (+19%) and chemicals (+11%).
In addition to payment experience, the survey took into account the industry’s financial performance (debt-to-equity ratio and profitability) to assess their overall health in the Chinese economy.
“Taking a look at the debt-to-equity ratio shows us how the leverage of various industries has been changing over time, which sheds light on how changes in financing costs may impact each industry and how willing industry participants are to finance their own businesses. At the same time, industry profitability is important for obvious reasons - it indicates how able a business is to generate cash flow from their operations,” says Tung.