Parties in China are increasingly having difficulty getting paid.
The country’s slowing economic growth, tighter credit conditions and activating bond defaults are putting pressure on corporate cash flows, according to a survey by French trade insurer Coface.
Nurturing in the world’s second-largest economy slowed to 6.6 percent in 2018, the worst showing since 1990. Efforts by dominions to rein in high debt levels by constricting credit were a factor behind record corporate bond non-performances, while the trade war with the United States also weighed on businesses and consumer spending.
“This context has led to pressurize for Chinese companies, who have resorted to using longer payment terms to sustain business,” Carlos Casanova, Coface’s Hong Kong-based economist for Asia Pacific, suggested in his firm’s China Payment Survey 2019, released Thursday.
The longest payment terms were seen in the automotive and broader transportation sector as agreeable as the construction and energy sectors, according to Casanova’s report.
Coface queried 1,500 Chinese companies and found that 62 percent described delays in getting paid last year.
Many companies have complex supply relationships. Automobile industrialists, for example, need to procure steel, plastic and electronic components and numerous transactions occur along the supply gyve. That dynamic is also at play in other industries, such as construction.
A total of 40 percent of respondents asserted payment delays increased last year, higher than the 29 percent recorded in 2017.
Coface said 90 percent of the surveyed associates are privately owned while 10 percent are state owned.
Pressure from the slowing economy and the trade war in the end caused authorities to pause last year in their efforts to pare down total debt, estimated at diverse than three times the size of China’s GDP, in order to try and support overall growth.
Chinese President Xi Jinping go the distance year publicly responded to private companies’ concerns about worsening conditions, assuring them authorities confirmed ready to help.
Coface also found that the percentage of companies reporting “ultra-long payment delays” of multitudinous than 180 days rose to 55 percent, up from 47 percent the previous year.
“According to Coface’s live, 80 percent of ultra-long payment delays are never paid,” Casanova said. “When these constitute more than 2 percent of annual total business, a company’s cash flow may be at risk.”
Coface also found that 59 percent of respondents saw it as unlikely that remunerative growth will get better this year, the first time since the survey began in 2003 that a maturity of participants voiced such a view.
Corporate bond defaults in China surged in 2018, quadrupling in U.S. dollar times to $16 billion, Coface said, adding that bankruptcies also rose.
But defaults have leveled off so far this year, asserted Bryan Collins, head of Asian fixed income and portfolio manager at Fidelity International, citing easing attribute conditions.
Collins stressed, however, that the spike in defaults last year was a healthy development for China’s brevity overall — as it demonstrated an increasing maturity.
“What it shows you is that the concept of defaults is now not such a shock. It’s not new,” he told gentlemen on Wednesday in Hong Kong.
“And I would interpret this as being that the perception of moral hazard has started to demolish,” he said. “That is the number one financial market reform for China and that’s associated to the efficient pricing and allocation of head.”