Non-payment risks in the Chinese economy (construction and energy)

Non-payment risks in the Chinese economy (construction and energy)
After an increase of 2.3% last year, Coface anticipates an increase in GDP growth to 7.5% in China in 2021. This would be the fastest pace since 2013, comfortably above the minimum of 6 % set by the authorities.

For example, the 2021 Coface survey on business payments in China [1] shows that payment terms were shortened by 11 days on average in 2020, falling to 75 days.


Businesses benefited from larger fiscal and monetary support measures last year, which are expected to be cut this year. Coface expects an increase in defaults and defaults on bonds in 2021, especially in sectors that have accumulated higher liquidity risks in 2020 in a context of slowing credit growth.

“Our survey showed that Chinese companies have taken the necessary steps to strengthen credit management in 2020 and enable the deployment of other tools such as credit insurance, deferrals or collections and factoring. Consequently, there are fewer companies that experienced payment delays in 2020 compared to the previous year, ”comments Bernard Aw, economist for Asia-Pacific at Coface.

“Although the trajectory of the pandemic remains uncertain, Chinese companies are optimistic about China's economic outlook: 73% of companies surveyed expect growth to improve this year, compared to 44% in 2020” added -he.

“Nonetheless, the survey indicated that credit risks accumulate in specific sectors. The proportion of construction and energy companies reporting ultra-long late payments (ULPD, over 180 days) representing more than 10% of annual revenue doubled in 2020 to more by 60%. This development coincided with the rise in defaults on corporate bonds in China, "warns the economist," and Coface expects defaults and defaults on corporate bonds in China to increase in 2021 . "

PAYMENT TIMES [2]: MOST SECTORS HAVE EXPERIENCED SHORTER DEADLINES, WITH THE EXCEPTION OF CONSTRUCTION
Fewer businesses experienced late payments in 2020, with 57% of respondents reporting late payments, up from 66% in 2019. The decrease in these delays reflects a strong government response aimed at mitigating the impact of the pandemic on commercial activity. This response includes tax breaks, loan guarantees and loan interest exemptions.

According to the Coface survey, companies in 11 out of 13 sectors reported a drop in payment terms, despite the difficult context. Among them, the timber industry, pharmaceuticals, transport and ICT recorded the largest declines, while construction saw an increase in late payments. The latter have remained unchanged in the retail trade.

The financial difficulties of customers were the main reason for late payments. Lack of financial resources was the second most common reason - after fierce competition - suggesting that parts of the economy would not have access to government support measures.

THE RECOVERY CREATES OPTIMISM, BUT PRICE RISE REMAINS A MAJOR CONCERN
China is the only major economy to experience positive GDP growth in 2020, and recent economic data indicates that this trend continues into the first quarter of 2021. Businesses are broadly optimistic about economic conditions, according to the survey. Over 70% of respondents expect growth to improve in 2021, a significant increase from 44% in 2020. A larger share of companies also anticipate increased sales and cash flow over the course of the year. the next 12 months. As a result, a majority (62%) of respondents expect their business to return to pre-COVID-19 levels in less than a year, while nearly a quarter estimate this period between a year and a half. and two years. Almost two-thirds of the companies surveyed said the pandemic led to higher commodity prices in the first place, as public health measures taken by governments disrupted global supply chains.

Despite the pandemic, 47% of respondents admitted not using any credit management tool to mitigate cash flow risks in 2020, after 40% in 2019. At the same time, a larger proportion deployed more than one tool credit management. The percentage of businesses using credit insurance increased from 17% in 2019 to 27% in 2020, while those using credit deferrals were 31% in 2020, up from 19% the previous year. Factoring and debt collection also saw an increase compared to the previous year, reaching 10% and 13% respectively.