Many Chinese private companies defer paying their bills
March 19, 2019 Category China News Round-up, Weekly
Record numbers of Chinese firms are defaulting on their bonds, while also taking longer than ever to pay their suppliers, says trade credit insurer Coface. A majority of companies expect lower growth this year, up from a third last year, as the private sector bears the weight of China’s economic slowdown. One example is Chuying Agro-Pastoral Group, a pig breeder in Henan province, which defaulted on a bond of CNY1.5 billion last year. It then made headlines in China in November when it offered to repay holders of debt it had defaulted on with ham or pork products. To compound matters, large numbers of its livestock starved to death, with the company not having the money to feed them. The company’s situation is emblematic of an awful year all round for China’s private sector, which felt the brunt of a government drive towards deleveraging. External factors, such as the U.S.-China trade war, are also causing trouble.
As China’s economic growth slowed to 6.6% last year, its corporate bond defaults quadrupled in value to USD16 billion, with the total number of bond defaults tripling to 119. Meanwhile, fewer companies are being paid on time, with 40% reporting that they have recorded an increase in payment delays, up from 29% in 2018, Coface’s study showed. In total, 62% of Chinese companies experienced payment delays in 2018. Over the course of a year, the average time it took for Chinese companies to receive payment rose by 10 days to 86 days. More worryingly, according to Coface, is that just over half of companies are now waiting longer than six months for payments worth over 2% of their total turnover. “According to Coface’s experience, 80% of ultra-long payment delays are never paid. When these constitute more than 2% of annual turnover, a company’s cash flow may be at risk,” the report said.
Aside from construction, the car industry is the sector which has one of the worst payment cycles, according to Coface. Companies in these industries take the longest to be paid (106 days and 105 days, respectively) and are also heavily exposed to the downturns in investment and consumption in China. These are also the two sectors with the most “ultra-long” payment delays – with 28% of payments in the construction sector and 27% of car industry payments outstanding for longer than 180 days and unlikely to ever be paid. The bond defaults and delayed payment periods do not exist in isolation, said Carlos Casanova, Asia-Pacific Economist at Coface. “A combination of tighter liquidity and elevated bond maturities led to a large number of respondents stating that they were experiencing payment delays due to their customers’ lack of financial resources,” he said. “Tighter liquidity was further exacerbated by the government deleveraging campaign and curbs on the shadow banking sector in the first half of 2018.” For the first time in the 16-year history of the Coface survey, a majority of Chinese companies (59%) expect lower growth this year, up from a third last year, the South China Morning Post reports.
But in the past few years, court rulings ordering borrowers to repay loans, have been better enforced. Since March 2016, CNY4.4 trillion owed by defaulters has been repaid. Defaulters’ names – including those of companies’ legal representatives – have been added to a publicly accessible online blacklist which restricts their consumption of goods and services, according to the China Daily. In the past three years, defaulters on the list have been blocked from taking 19.41 million flights and 5.61 million rail trips.
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