China is gradually adopting international standards on credit sales which are becoming widespread to meet competition but also due to the cash flow problems of Chinese clients. The trend is also towards improvement with regard to the payment behaviour of companies. But despite these encouraging developments, Chinese companies are expecting the payment situation to worsen in the short-term, finds a Coface study.
The study on the payment behaviour of Chinese companies highlights their excellent resistance to the crisis due to the sharp increase in credit, stabilisation of the Yuan (up to June 2010) and broad stimulus plan. Nevertheless, in the context of high inflation and a tightening of the economic policies, growth should slow slightly from 2011 onwards (8.8% in 2011 in contrast to 10.3% in 2010), while remaining high in relation to other emerging countries.
However, the tightening of the economic policies and deep changes in the Chinese growth model will have microeconomic consequences. Low added value sectors (textiles, shoes, toys) will be the first to be affected by the withdrawal of the fiscal stimulus, the desire of the authorities to move up-market, salary increases and the rise in the value of the Yuan. An increase in bankruptcies in these sectors is to be expected.
Now the main source of finance for Chinese companies, credit sales have been rising sharply over the past two year (+23%). And nearly 88% of Chinese companies questioned by Coface resorted to credit transactions in 2010. This development can be explained by the various incentive measures and fiscal stimulus programmes put in place by the Chinese government.
Fifty-three percent of companies offer credit payment to their clients to meet competition and gain market shares, and 25% of these are forced to do so due to their clients’ cash flow problems; this category represented only 8% before the crises.
Since 2008 Chinese companies have seen a considerable improvement in the payment behaviour of their domestic buyers. In 2008 almost all surveyed companies recorded overdue payments; this share has since decreased by 26%.
Fewer overdue payments reported by companies, but also the number of overdue days is reduced : only 6.2% of overdue payments exceed 120 days (13.2% in 2009) and 2/3 are paid within a maximum period of 60 days.
These overdue payments are mainly caused by clients’ financial situations, themselves affected by competition, the lack of access to external resources and increasingly the cost of raw materials.
Amongst the various types of companies in China, private companies are deemed the most risky concerning payment, but on a stable level, whereas the risk seems to be getting higher among public companies, heavily indebted and subject to bankruptcy laws, like private companies.
“China has now reached 'international standards' in terms of intercompany credit and credit periods. The payment behaviour of Chinese companies, despite its improvement, is not exemplary, even though companies are equipped with the same tools as elsewhere, such as credit management and access to credit insurance, the latter being in sharp increase in China,” notes Thierry Graffin, deputy director of Risk Underwriting, Coface.
Uncertain Prospects for Improvement
Despite encouraging global trends, the Chinese companies questioned do not anticipate a significant improvement in payment behaviour in the short-term. 41.4% of companies expect that this improvement may take more than 3 years and 33% of companies do not believe the situation will ever improve.
This pessimism can be explained by companies’ concerns regarding the withdrawal of the fiscal stimulus; that is the case for 37% of companies questioned. Other fears also include: 31% of companies claim they are concerned about the tightening of credit whereas for 23% of companies the main danger comes from the rise of the value of the Yuan. Finally, salary increases following the social movements which affected Foxconn and Honda in China could curb performances in several sectors.
"2010 has been a very favourable year for Chinese companies due to growth and economic policy support. But in 2011, companies are undergoing series of negative impacts: the withdrawal of the budgetary stimulus, scarcer and more expensive credit, acceleration in the Yan’s appreciation, inflation and the increase in supply costs and above all the intense pressure to increase salaries. If in the medium-term, these impacts are welcome as they are favourable to Chinese growth in favour of consumption, in the short-term the most fragile companies could be in difficulty,” observes Constance Boublil, Coface economist, specialist in the Asia region.
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