Managing credit risk has gained importance in China across all industries over the years. About 85.4% of surveyed companies have some procedures in place to manage their credit risk in 2010, says a new study. The adoption of credit insurance as a credit management tool is getting popular in China. 42.3% of respondents reported adopting this tool in 2010, which is 31% higher compared to 2009 (32.3%).
“Despite the improvement in both credit sales and overdue payment in Mainland China, companies are not optimistic about the future overdue situation and are worried about the government’s withdrawal of stimulus policies. Effective and efficient credit management measures from specialists to mitigate risks is critical for China’s enterprises in 2011,” says Richard Burton, Deputy CEO, Asia Pacific for Coface.
The eighth annual survey of corporate credit risk management in China – conducted in the fourth quarter of 2010 by Coface, also reveals improvement in both credit sales and overdue payment in Mainland China though survey also revealed enterprise concern on 2011 economic outlook.
The survey says that 87.6% of respondents reported offering credit sales in 2010, up from 79.9% in 2009, and 64.9% in 2008, achieving a compound annual growth rate of 16% between 2008 and 2010. The increase is resulted from the strong domestic consumption spurred on by various incentives and central government’s stimulus policies. According to the survey, 53% companies increased credit sales due to keen competition in the domestic market. Amongst them, 44.6% increased credit sales to penetrate new domestic markets verse 31.7% in 2009. This indicated that Chinese corporations are becoming more aggressive in expanding in the domestic market.
Meanwhile, the general overdue situation in China has improved. 67.4% of companies experienced overdue payment in domestic sales in 2010, which is 6.4% lower than 2009 (72%) and 26% lower than 2008 (91.2%). Only 6.2% of respondents experienced payment overdue for more than 120 days in 2010, a reduction of 53% compared to the result of 2009 (13.2%).
Amongst various industries, the pharmaceuticals sector experienced the most significant improvement as no companies reported overdue payment of more than 2% of their domestic sales for more than 12 months in 2010, dramatically dropping from 18.8% in 2009. The sector grew in 2010, resulting from rising domestic consumption due to government’s health care reform and other factors such as increasing awareness of a generally aging population, and growing demand in the export market. China exported US$29 billions of health care products from January to September 2010, which is 27% more than 2009.
“As long as the China healthcare reform continues and the mainland authorities remain supportive, this sector is expecting a double digit growth in 2011,” says Burton.
Though the overdue payment of industrial machinery and electronics sector dropped in 2010, it is still the highest among major industries. 48.6% of companies reported having overdue payment of more than 2% of their domestic sales for 6 -12 months, while 23.4% reported such overdue payment for more than 12 months.
Strong competition and overcapacity are the major problems of the industry.
Surveyed companies in the textiles and clothing sector which increased their weight of credit sales significantly dropped from 48.1% in 2009 to 18% in 2010, reaching a five year low, although the National Bureau of Statistics of China stated that retail sales of textiles and clothing industry increased by 24.8% in 2010, reaching RMB 587 billions. Thus, only 28.2% of companies reported having overdue payment of more than 2% of their domestic sales for 6 to 12 months, down from 51.1% in 2009; while 15.4% of companies reported having such overdue payment for more than 12 months, dropped from 25.5% of 2009.
“It implies that textile companies are now more cautious on open account sales due to the keen competition and low value-added nature of the industry. The record high price of cotton causes widespread concern in the textiles and clothing industry over the past few months and we are expecting that this will continue to affect the industry,” notes Burton.
”For building & construction, transportation, iron & steel and industrial machinery, we will see growth in these sectors in the future because China plans to speed up urban infrastructure construction during its 12th Five-Year Plan. However, we should be cautious on the impact of overcapacity and rising materials cost in these sectors. With increased income of Chinese households and government’s continuous efforts to boost domestic consumption, sectors of household electronic appliances and pharmaceuticals will continue to enjoy strong growth in 2011,” adds Burton.
Withdrawal of Stimulus Incentives
Though the stimulus policies of Mainland China have boosted most industries in 2010, the situation may be short-lived with the gradual withdrawal of such initiatives in 2011. 37.2% of respondents consider the withdrawal as the factor affecting their business most in 2011, while 31.1% think the tighter monetary policy and bank lending will have the greatest impact.
Companies are increasingly aware of the inflationary pressure and the impact to their buyers. According to the survey, respondents regarding rising raw material prices as the main reason for financial difficulties leading to default payments noticeably increased from 7.5% in 2009 to 17.5% in 2010.
According to the latest data released by China's National Bureau of Statistics, China's consumer price index (CPI) rose 4.9% in January 2011 and was 0.3 % higher than that of December. Meanwhile, China's producer price index (PPI) in January climbed up by 6.6%, which was 0.7% up from previous month. “The inflationary pressure is expected to continue to exert in 2011. In addition to the interest rise announced by the central bank on 8 February, tightening of bank lending is expected to come. The low-value added companies are susceptible to cash flow problem and higher probability of default as a result, “ says Burton.
Regardless of the improvement in credit sales and overdue payment in 2010, companies in mainland China are not so confident in further improvement of payment behavior. 41.4% of respondents expect the overdue payment may take more than 3 years to improve while 33.3% expect it will never improve.
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