Over the last few decades, multinational companies have stretched their supply chains deep into China’s manufacturing sector. However, record low economic growth in the country suggests they had best scrutinize the financial strength of corporate suppliers as well as customers in China. And research from credit-insurance provider Coface indicates troubles already are brewing: MNCs aren’t getting paid for their goods.
The Chinese government reported industrial production growing at 6.8 percent in the first two months of 2015 compared to the same period last year, the slowest year-over-year growth since those stats were first published in 1995, except for 2008 in the heart of the financial crisis. In addition, the producer price index fell sharply in the first two months compared to last year, while retail sales growth was the lowest in nine years and the increase in fixed-assets investments was the lowest in 14 years.
Grim statistics, none of which bode well for the bottom lines of multinationals’ Chinese suppliers and customers, the former of which also rely on Chinese corporate customers that may be stressed financially. In fact, Coface’s research found many companies facing significant challenges getting paid, even after taking heightened precautionary measures.
A March research report by Coface Economist Rocky Tung says that 79.8 percent of 882 Chinese-based corporate survey respondents reported experiencing overdue payments, and 56.7 percent of them saw an increase in the overdue amount over the past year. The percentage experiencing overdue payments is down slightly from the 81.9 percent of respondents reporting overdue payments in 2013, likely due to tighter credit controls creditors placed on customers. For example, 49.1 percent of respondents to last year’s survey said the maximum credit term extended to customers in 2013 was 120 days or longer, while only 37.3 percent said so for 2014.
“Despite the more prudent credit extension practice in 2014, payment experience remained weak, and corporates continued to face challenges,” the report says. “This is a result of the lack of financing resources and high cost of financing for smaller- and medium-size enterprises (SMEs), and the weak profitability led by the oversupplied situation in certain industries.”
Problematically, 56.7 percent of respondents said the amounts of overdue payments tended to be higher than the year before, compared to 45 percent in the survey for 2013, and a larger percentage of respondents said the average overdue period was longer than 90 days.
On the brighter side, Coface said that the percentage of respondents reporting pressure coming from ultra-long overdue payments of more than 180 days fell to 29.8 percent in 2014, compared to 33.4 percent in 2013 and 35.6 percent in 2012. The credit insurer noted that payments overdue past 180 days have a high probability of becoming eventual no-payments.
“Given such circumstances, if such ultra-long payments weigh heavily as a percentage of the company’s sales, it would logically lead to pressure on the company’s financials,” the report says. “Such a finding in this payment survey points to easing pressure on financials coming from long and massive overdue payments.”
Examining nine major business sectors, Coface found the chemicals, metals, and industrial machinery and electronics saw the greatest increases in overdue payments, while paper-wood and textiles saw decreases.