Rising payment risks in China

A new report by Coface has highlighted the rising payment risks in China despite the country’s economy expanding by 2.3% in 2020 and it being the only major economy to record growth.

Coface expects the GDP in China to accelerate to a 7.5% growth in 2021. This would be the fastest pace since 2013, and comfortably above the minimum of 6% set by the authorities.

In normal times, higher economic growth should translate into fewer incidents of payment delays, but the recovery has been uneven across sectors. The report shows that payment terms 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.

Firms also benefited from greater fiscal and monetary support measures last year, which are expected to be further tapered this year. Coface expects an increase in bond defaults and insolvencies in 2021, especially among sectors that accumulated higher cash-flow risks in 2020 amid a slowdown in credit growth.

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.”

“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 cash flows this year.”

“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 (ULPDs, over 180 days) amounting to more than 10% of annual turnover doubled in 2020 to over 60%, hinting at heightened cash flow risks. This development overlapped with rising bond defaults in mainland China, especially in the construction and real estate sector.”

“Looking ahead, Coface expects corporate bond defaults and insolvencies in China to increase in 2021, especially among sectors that accumulated higher cash flow risks in 2020 due to the pandemic.”