Chinese economy at risk of extended debt

According to the 5th edition of the Coface Survey Corporate Credit Risk Management in China, payment terms between companies in China are continuing to be extended.

Growing market competition means companies are forced to grant credit by extended terms of payment to their customers.

This financial situation leads to a worrying increase in overdue accounts. Increasing raw material prices and the recent freeze on bank credits could make the situation worse throughout this year.

Open account is the main financing source for Chinese companies. The 5th edition of the survey underlines that the use of open account is more and more frequent among companies established in China.

Over 50% of the companies questioned are using open account as their most preferable payment term, while the letter of credit, still widely used some years ago, is now hardly used.

In addition, payment terms are being extended with companies allowing payment terms of an average of 90 days, whereas the standard was 60 days back in 2004.

Going forward, open account is the main financing source for companies. The open account is now used as a major strategy to expand market share through acquisition of new customers in a highly competitive market, and it is a way to manage tight liquidity for the companies whose margins are significantly decreasing.

Overdue accounts that are now more frequent should be closely observed as 90% of the companies are facing them, among which 20% of the respondents have to deal with overdues of over 60 days.

Yves Zlotowski, chief economist of Coface, said over 80% of the respondents use amicable negotiation as their main recovery action.

Business climate in China, and specially creditor protection, is weaker than in the other emerging countries, added Mr Zlotowski.

China is rated A3 whereas the Business Climate Rating is B, he explained, which is the new Business Climate Rating, introduced by Coface in January of this year. Indeed, the survey shows a growing concern about corporate governance and risks of fraud.

This was the fifth annual survey by Coface on corporate credit risk management in China.

The survey was executed during the last quarter of 2007 with responses from 547 companies in mainland China, 10% of which are state owned, 20% private and 52% are wholly-owned by foreign businesses.

17% are joint ventures and 2% are collective owned companies. Around 65% of the companies are in manufacturing, 10% are in service industries and 24% are traders or wholesalers.

The objective of the survey is to provide a broad understanding of the status of payment experiences, payment trends and credit risk management in companies based in mainland China.

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