MAINLAND FIRMS FACE CASH SQUEEZE

Companies affected by tight liquidity and overdue payments expect conditions to worsen this year

In the face of a bleak outlook on economic growth amid strict coronavirus controls, Chinese companies are being increasingly challenged by tighter cash flows and longer delays in receiving payments, according to business insiders and a recent survey.

“Tight cash flows and massive payment delays have become a universal problem in the textile industry,” said Yun Hai, chief executive of Guangzhou Jianpai SCM Tech, a consulting company in the garment supply chain.

“The capacity of foreign competitors has recovered, while geopolitical tensions and Covid outbreaks have put Chinese exporters in a grave situation. Cash flow is tight, adding another layer of pressure to corporate fiscal management.”

Coface, a global trade credit insurance group, said yesterday in its latest China Corporate Payment Survey on 1,000 Chinese companies that more firms saw payment delays last year, with the proportion rising to 42 per cent from 36 per cent in 2020.

“This was particularly the case for companies that depended mostly on the domestic market for sales, with anecdotal evidence – of weak local economic situation linked to the pandemic, as well as customers’ tight liquidity conditions – highlighted as reasons for an increase in overdue payments,” it said.

And with the ongoing Omicron outbreaks in the country, including in major economic and financial hubs, many companies expected to see their financial situation worsen, Coface said.

“Coface expects corporate bond defaults and insolvencies in China to increase in 2022, especially among sectors that accumulated higher cash-flow risks in 2021 due to the pandemic,” it said.

More companies reported extra-long payment delays – those overdue by more than six months – with the proportion rising to 19 per cent in 2021 from 15 per cent the previous year, according to the survey, which was conducted between November and January.

It also flagged a “notable” rise in the proportion of firms that saw overdue payments exceeding 10 per cent of annual turnover, with the total jumping to 40 per cent from 27 per cent previously.

More than 50 per cent of construction firms reported payment delays of longer than six months amid the downturn in the property market, followed by the agrifood industry with 47 per cent, it said.

“With China’s economic growth projected to slow in 2022, fewer companies are expecting an improvement in sales and cash flow,” the report said.

“Companies highlighted macro risks such as rising raw material prices, weakening domestic market demand and the continuation of the pandemic.”

Bernard Aw, Asia-Pacific economist at Coface, said the Omicron outbreaks since March were expected to further reduce payments received by Chinese companies.

“Some sectors that reported an increase in average payment delays in 2021 will be particularly vulnerable to strict Covid controls, leading to even longer delays, which raises the risk of nonpayment,” Aw said.

“Examples include transport and textiles. Construction is also vulnerable, as the sector continued to experience the longest payment delays [109 days] among 13 sectors.”

The State Council, China’s cabinet, said last week it would launch a sweeping inspection by the end of this month into overdue payments owed to small and medium-sized enterprises by government organisations and big companies.

It said it would order businesses that had faced difficulties making payments to work out specific repayment plans by the end of June.

Kent Liu, a Guangzhou-based industrial digital printing producer, said the situation had worsened in the past few months since the report was compiled.

“We have been most affected by downstream customers, mainly apparel and luggage brands, that have been delaying payments and settlements. So, we have to delay payments to our upstream suppliers,” Liu said.

His company’s sales in the domestic market last year totalled 40 million yuan (HK$46.7 million), but a quarter of that had not been received by the end of the year.

Tight cash flows and massive payment delays [are] a problem in the textile industry

YUN HAI, GUANGZHOU JIANPAI SCM TECH