Slow payments force more firms to fold
Mainland Chinese insolvency figures to rise 5 per cent this year after four years of decline, while bankruptcies in HK the highest since 2010
Corporate insolvency is expected to rise this year in China, with an increasing number of companies struggling to protect margins from late payments by customers.
Even as the economy continues to grow at a relatively good pace, Chinese firms are grappling with a state-driven shift in economic structure. This would inevitably lead to shrinking business opportunities in sectors such as construction, cement and steel, pushing up defaults in these areas, said Dutch trade credit insurer Atradius.
In a recent report, it forecast a "moderate increase" in China's insolvency rate this year.
Atradius' warning follows similar projections by competitors Euler Hermes and Coface, whose research shows a high level of receivables in arrears and rising bankruptcies.
The three companies command more than 80 per cent of the trade credit insurance market. Trade credit insurers protect sellers from payment defaults and other risks.
Euler Hermes, part of Allianz, Europe's biggest insurer, said it expected the official insolvency numbers to rise 5 per cent this year after four years of steady decline. The causes range from the clampdown on shadow banking and an oversupplied property market to tighter fiscal discipline among local governments.
The official bankruptcy figure of 2,630 last year masks the true picture of corporate health in China, it says. "Insolvency procedures in PRC jurisdiction are complicated and expensive, so a significant number of Chinese enterprises find alternative solutions to avoid filing for bankruptcy. The [insolvency] trend may be worse in reality."
Rocky Tung, Asia-Pacific economist at Coface. agreed: "Many people just close the business and go. Numerous bankruptcies went unnoticed. So the official number shouldn't be used as an indicator at all."
The lengthening of "days sales outstanding" (DSO) and overdue receivables also paint a dire picture. DSO measures the time it takes for a company to collect payments after a sale is transacted. In 2011, DSO in China was similar to the global average of 69 days, estimated Euler Hermes. Last year, the figure jumped to 90 days and is expected to rise again this year.
Eight out of 10 companies surveyed by Coface last year reported payments delinquency by customers, higher than the Asia-Pacific average of 70 per cent. A more worrying sign, according to Tung, is overdue payments longer than 180 days, or "ultra-long", exceeding 2 per cent of a company's annual sales.
"Chinese manufacturers have a profit margin of 2 to 5 per cent. Generally, when a payment is late for more than three months, it's considered almost unlikely that it will ever be paid. So when ultra-long overdue payments are over 2 per cent of a company's annual sales, it eats up all the profits," Tung said.
Increasing payment defaults also hurt some insurers' profitability. Atradius last year recorded a loss from its Asian operations, with a 155.3 per cent claims ratio in the region, due mainly to the "deteriorating environment in China", its annual report said.
Claims ratio is the total claims an insurer pays as percentage of total premiums it receives.
Hong Kong, in the midst of soaring property prices and a slackening retail sector, has had its own share of woes. Last year, the city recorded 9,945 cases of bankruptcy and compulsory winding-up, the highest since 2010, when the economy was stabilising in the aftermath of the 2008 financial crisis.
In the first quarter of this year, bankruptcies filed with the Receiver's Office rose 21 per cent to 2,567. "There are strong reasons to believe that the bankruptcy trend will continue," Tung said.
"The economy is showing flu-like symptoms. Property prices have been soaring to record levels, like fever, while the retail market is showing lacklustre momentum, like fatigue," he said.