Few companies in China spared overdue payments: 80% of companies impacted

PARIS - Slower growth, rising non-performing loans, and RMB and stock market volatility are all concerns for China in 2016. A survey on corporate credit risk management by global credit insurer Coface, to which 1,000 Chinese companies responded, reveals that corporate payments continued to deteriorate in 2015, with eight out of 10 corporates experiencing overdue payments.

Coface says that  In addition to the unsolved issues of high leverage and overcapacity in many sectors, downwards pressure on the RMB and stock market volatility are concerns for the Chinese market in 2016, and that it is not expected that non-payments will improve in the short term.

Corporate overdues continue, despite a more prudent credit approach. In 2015, the average credit terms offered by China-based firms decreased again, reflecting a more prudent approach to granting credit facilities to customers. Coface says this is most probably the combined result of weak payment experience in recent years, deterioration of confidence and slower growth expectations.

Coface says the level of overdue payments  is in-line with non-performing loan (NPL) figures released by the China Banking Regulatory Commission. The NPL ratio reached 1.59% as of the end of 2015, its highest level since 2009 (compared to 1% in 2013). NPLs rose by more than 50% in the first three quarters of 2015.

Coface sees multiple challenges in 2016, and says Chinese firms that are suffering from overcapacity and low profits now have a higher probability of default beause the Government has decided to tackle overcapacity and ‘zombie’ companies.

“Even though credit growth is slowing, private debt is continuing to grow faster than GDP,” Coface says. “China has not yet entered a deleveraging process and the risks are increasing. Outstanding debt held by the private non-financial sector reached 201% of GDP in June 2015, compared to 114% in June 2008 and 176% in June 2013.”

Coface says heavy use of margin finance (investors borrowing to buy shares) has increased credit risks and could intensify the downwards spiral. At the same time, the yuan has recorded an unprecedented drop.

Says Coface economist Charlie Carre:  “The government’s strategy is ambiguous and the authorities are caught between two objectives.

They need to find a balance between, on one side, supporting GDP growth to prevent a ‘hard landing’ and to protect jobs, while on the other side managing the debt bubble risk. “

“At the same time, businesses in China are facing increasing challenges, such as high leverage with steep costs of financing (despite monetary easing), low profitability (driven by large overcapacities in certain sectors) and volatility on the foreign exchange and stock markets.

“Monetary easing measures have not been very effective in 2015 and Coface expects more stimulus packages in 2016 as the Chinese authorities endeavour to avoid a hard landing.”

The Coface survey reports the construction sector appearing to be the most at risk, with the situation deteriorating rapidly - 28.3% of the sector’s credit sales in overdue are over by more than 150 days and 57% of the sector’s respondents have more than 2% of their turnover impacted by overdues of more than six months.

The Metals and IT report sectors report, respectively, 13% and 15.2% of overdue credit sales of more than 150 days – while telecoms are also under pressure. www.coface.com (ATI).