China: shorter credit terms for most sectors and rising payment risks, says Coface

Payment terms in China shortened by 11 days on average in 2020, falling to 75 days, while the distribution of credit terms leaned towards a shorter rather than longer period, according to Coface’s 2021 China Corporate Payment Survey. The survey reveals that the percentage of firms using credit insurance increased from 17% in 2019 to 27% in 2020. Coface notes that overall the Chinese economy expanded by 2.3% in 2020, the only major economy to record growth, and the credit insurer expects GDP to accelerate to a 7.5% growth in 2021 – the fastest pace since 2013 and comfortably above the minimum of 6% set by the authorities. Coface says that in normal times, higher economic growth should translate into fewer incidents of payment delays, but the recovery has been uneven across sectors. Bernard Aw, economist for Asia-Pacific at Coface, said: “Coface’s latest China Payment Survey showed Chinese companies taking the necessary step to strengthen credit management in 2020 due to the Covid-19 pandemic. Credit terms were shortened in many sectors and more credit management tools were deployed, including the use of credit insurance and credit reports, alongside debt collection and factoring services. As a result, fewer companies experienced payment delays in 2020 compared to the previous year.” He continued: “While the path of the pandemic remains uncertain and a sustained economic recovery is far from guaranteed, Chinese firms are optimistic about China’s economic prospects, with 73% of respondents expecting growth to improve this year, up significantly from 44% in 2020. This coincided with more firms anticipating better sales performance and improved cashflows this year.” He added: “Nevertheless, the survey indicated that credit risks are building up in specific sectors, which warrant close monitoring in the coming months. The proportion of firms in the construction and energy sectors that reported ultra-long payment delays (over 180 days), amounting to more than 10% of annual turnover, doubled in 2020 to over 60%, hinting at heightened cashflow risks. This development overlapped with rising bond defaults in mainland China, especially in the construction and real estate sector.” Looking ahead, Coface says it expects corporate bond defaults and insolvencies in China to increase in 2021, especially among sectors that accumulated higher cashflow risks in 2020 due to the pandemic. The survey reveals that fewer companies experienced payment delays in 2020, with 57% of respondents reporting overdue payments, down from 66% in 2019. The drop in payment delays reflected a strong government policy response to soften the impact of the pandemic on business activity, which included tax relief, loan guarantees and loan interest waivers, Coface explains. According to the Coface survey, firms in 11 out of 13 sectors reported a decline in payment delays, despite the difficult context. Among them, wood, pharmaceuticals, transport and ICT reported the largest drops. There was no change in retail, while construction saw an increase in overdue payments. Customers’ financial difficulties were the main reason for payment delays. The lack of financing resources was the second most common reason – after fierce competition – suggesting that pockets of the economy may not have access to government support. Despite the pandemic, 47% of respondents admitted not using any credit management tool to mitigate cashflow risks in 2020, after 40% in 2019, the survey reports, while a greater proportion deployed more than one credit management tool. The percentage of firms using credit insurance increased from 17% in 2019 to 27% in 2020, while those using credit reports were at 31% in 2020, up significantly from 19%. Both factoring and debt collection also saw an increase compared to the previous year, reaching 10% and 13% respectively.

China: shorter credit terms for most sectors and rising payment risks, says Coface

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