China firms face $802b problem with unpaid bills

Bankruptcies could rise 20% as companies stagger under weight of record debts

BEIJING • Not since 1999 have China's companies had so much trouble getting customers to pay for what they have bought.

It now takes about 83 days for the typical Chinese firm to collect cash for completed sales, almost twice as long as emerging-market peers.

As payment delays spread from the industrial sector to technology and consumer companies, accounts receivable at the nation's public firms have swelled by 23 per cent over the past two years to about US$590 billion (S$801.7 billion), exceeding the annual economic output of Taiwan.

The raft of unpaid bills - bigger than at any time since former premier Zhu Rongji shuttered thousands of state-run companies at the turn of the century - shows how cash shortages at the weakest firms threaten not only banks and bondholders, but also China's vast web of interconnected supply chains.

With corporate bankruptcies projected to climb 20 per cent this year, more businesses may be forced to choose between two unpleasant options: keep extending credit to potentially insolvent customers, or cut off the taps and watch sales sink.

HARD TIMES

It's a big problem when you have rising insolvencies, a bad economic environment and less liquidity for small companies.

MR MAHAMOUD ISLAM, senior Asia economist at Euler Hermes in Hong Kong.

"There is a knock-on effect through the economy," said Mr Fraser Howie, the Singapore- based co-author of Red Capitalism: The Fragile Financial Foundation Of China's Extraordinary Rise, who has followed the nation's markets for more than two decades. "Part of the end game is default and closure."

It is easy to see why collecting payments is getting harder in China. Businesses and consumers have been squeezed by the deepest economic slowdown since 1990, while overcapacity has fuelled an unprecedented stretch of declines in producer prices.

Record corporate debt levels have left many firms struggling to meet their liabilities, with corporate insolvencies jumping by 25 per cent last year, according to Euler Hermes. The world's largest trade credit insurer sees another 20 per cent increase in Chinese bankruptcies this year, the most among 43 major markets.

People's Bank of China governor Zhou Xiaochuan underscored his concern about rising debt levels over the weekend, saying in a speech in Beijing that corporate lending had become too high.

"It's a big problem when you have rising insolvencies, a bad economic environment and less liquidity for small companies," said Mr Mahamoud Islam, senior Asia economist at Euler Hermes in Hong Kong.

Mr Chen Xingdong, chief China economist at BNP Paribas, sees at least two more years of delayed payments as companies struggle to reap better terms from their customers. "The hard time is still ahead," he said.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on March 22, 2016, with the headline 'China firms face $802b problem with unpaid bills'. Print Edition | Subscribe