According to a recent survey by COFACE, one of the leading global credit insurance companies, 8 out of 10 corporates in China experienced overdue payment in 2013.  Sectors of chemicals, industrial machinery and household electric & electronic appliances are at higher risk.  As credit facilities will remain tighten in 2014, deterioration in corporate payment could lead to significant ripple effect in the shadow banking market in China.

Coface stated that 82% of the interviewed enterprises reported overdue in 2013, a 5 % increase compared to 2012 and at the highest level in 3 years.  Among them, 45% also said the overdue amount had increased as well. Companies also experienced a longer overdue days: 18% reported an average overdue days longer than 90 days, a 5 % increase compared to 2012.

Payments that are over 6-months late are considered as highly risky.  From Coface’s experience, there is an 80% chance for these overdues not to be repaid at all if they were not paid within 6-months.  Moreover, if the amount of such overdue payment exceeds 2% of the total sales, it is believed that these companies could have liquidity problems. This is the case of 33% of interviewed companies, which is a sign of a severe liquidity problem and a high risk of non-payment to their suppliers or borrowing banks or institutions.

Deteriorated payment experience in China is an alert to us. Traditionally speaking, smaller companies in China do not necessarily get enough credit facilities from the regular banking system and such issues are the main driver of the shadow banking system development. While we are expecting cost of fund to point higher in 2014, interest rate in the shadow-banking system is already high. An increasing trend of overdue payment adds weights to liquidity management of different stakeholders in the supply chain, and the vicious cycle could lead to significant ripple effect,” says Rocky Tung, Economist of the Asia Pacific Region at Coface.

Source: Coface  –  To read the full press release including charts, please click here.