Coface China Corporate Payment Survey 2021: Rising Payment Risks in Construction and Energy Sectors Despite Stronger Economic Outlook

HONG
KONG SAR – Media OutReach – 26 May 2021 – Overall, the Chinese
economy expanded by 2.3% in 2020, being the only major economy to record
growth, and Coface expects the GDP to accelerate to a 7.5% growth in 2021. This
would be the fastest pace since 2013, and comfortably above the minimum of 6%
set by the authorities.

In
normal times, higher economic growth should translate into fewer incidents of
payment delays, but the recovery has been uneven across sectors.Thus, Coface’s
2021 China Corporate Payment Survey^[1]
shows that payment terms shortened by 11 days on average in 2020, falling to 75
days, while the distribution of credit terms leaned towards a shorter rather
than longer period.

Finally,
firms also benefited from greater fiscal and monetary support measures last
year, which are expected to be further tapered this year. Coface expects an
increase in bond defaults and insolvencies in 2021, especially among sectors
that accumulated higher cash-flow risks in 2020 amid a slowdown in credit
growth.

Bernard Aw, Economist for Asia Pacific at Coface, said:

“Coface’s
latest China Payment Survey showed Chinese companies taking the necessary step
to strengthen credit management in 2020 due to the Covid-19 pandemic. Credit
terms were shortened in many sectors, and more credit management tools were
deployed, including the use of credit insurance and credit reports, alongside
debt collection and factoring services. As a result, fewer companies
experienced payment delays in 2020 compared to the previous year.

“While the path of the pandemic remains uncertain
and a sustained economic recovery is far from guaranteed, Chinese firms are
optimistic about China’s economic prospects, with 73% of respondents expecting
growth to improve this year, up significantly from 44% in 2020. This coincided
with more firms anticipating better sales performance and improved cash flows
this year.

“Nevertheless, the survey indicated that credit
risks are building up in specific sectors, which warrant close monitoring in
the coming months. The proportion of firms in the construction and energy sectors
that reported ultra-long payment delays (ULPDs, over 180 days) amounting to
more than 10% of annual turnover doubled in 2020 to over 60%, hinting at
heightened cash flow risks. This development overlapped with rising bond defaults
in mainland China, especially in the construction and real estate sector.

“Looking ahead, Coface expects corporate bond
defaults and insolvencies in China to increase in 2021, especially among
sectors that accumulated higher cash flow risks in 2020 due to the pandemic.”

Payment delays^[2]: Most sectors
experienced shorter delays, except construction

Fewer
companies experienced payment delays in 2020, with 57% of respondents reporting overdue payments, down from 66% in 2019.
The drop in payment delays reflected a strong government policy response to
soften the impact of the pandemic on business activity, which included tax
relief, loan guarantees and loan interest waivers. According to Coface
survey, firms in 11 out of 13 sectors reported a decline in payment delays, despite
the difficult context. Among them,
wood, pharmaceuticals, transport and ICT reported the largest drops.There
was no change in retail, while construction saw an increase in overdue payments.

Customers’ financial difficulties
were the main reason for payment delays. The lack of financing
resources was the second most common reason – after fierce competition – suggesting
that pockets of the economy may not have access to government support.

Upturn boosts
optimism, but higher prices remain key concerns

With
China being the only major economy to see GDP growth in 2020, and recent
economic data pointing to a steady expansion in the first quarter of 2021,
firms are overall optimistic about economic conditions, according to the
survey. Over 70% of respondents expect growth to improve in
2021, up considerably from 44% in 2020. This optimism was accompanied by a greater
share of firms anticipating higher sales and cash-flows over the next 12 months.
Consequently, a majority (62%) of respondents expects their business to
return to pre-COVID-19 levels in less than a year, while nearly a quarter
estimates this period between one and two years. Higher prices was the most
common impact mentioned by respondents, where almost two-thirds stated that
the pandemic led to an increase in commodity prices, as governments’ public
health measures 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 greater proportion deployed more than one credit management
tool. The percentage of firms using credit insurance increased from 17% in 2019
to 27% in 2020, while those using credit reports were at 31% in 2020, up
significantly from 19%. Both factoring and debt collection also saw an increase
compared to the previous year, reaching 10% and 13%, respectively.

Bond defaults
and insolvencies set to rise in 2021

At
first glance, our survey’s findings may not seem to illustrate the connection
between cash-flow risks and corporate bonds defaults, but a sectoral
breakdown shows a strengthening of the link. The trend in China’s corporate
bond defaults has been on the rise since the first case in 2014, rising from
less than USD 1 billion in 2015 to a record USD 27 billion in 2020, according
to data compiled by Bloomberg. In the first four months of 2021, bond
defaults surged by over 70% to USD 18 billion, mostly in real estate, aviation
and electronics. A significant proportion of the defaults (37%) was
linked to HNA Group, a Chinese conglomerate involved in various industries
including aviation, real estate, financial services, tourism and others.
Our survey suggested that many of these sectors also had high cash-flow
risks, with 67% of respondents in construction reporting over 10% of annual
turnover tied up in ULPDs (Ultra Long Payment Delays), alongside 29% in ICT and
19% in transport.