Private companies in China are adjusting their business approaches in response to mounting payment delays, a slowdown in demand, and challenges stemming from overcapacity, according to findings revealed in a recent survey by Coface. In light of these challenges, Chinese private firms are adopting more cautious business strategies while waiting to collect back payments, with some extending beyond two years.
According to the 2024 China Corporate Payment Survey released by Coface, a leading credit insurance and risk management company, delayed payments have become increasingly common, ranging from 64 days to more than two years.
The issue of delayed payments garnered attention on social media, with reports of a businesswoman's arrest in southwest China while attempting to collect back payments from the government amounting to 220 million yuan.
Delays in payments
In response to such challenges, the Chinese government has intensified efforts to urge provincial authorities and state-owned enterprises to settle debts owed to private companies. However, despite these measures, the prevalence of delayed payments has persisted, with 62 per cent of respondents in the Coface survey reporting overdue payments, up from 40 per cent in the previous year. Additionally, 33 per cent of respondents report ultra-long payment delays (exceeding 180 days).
While there has been a slight improvement in cash-flow conditions, with the average payment delay decreasing from 83 days in 2022 to 64 days in 2023, Chinese enterprises are adopting more cautious practices. This includes implementing risk-management tools, imposing stricter payment terms, and expressing less confidence in their customers, according to a report by the South China Morning Post (SCMP).
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Reasons for payment delays to private firms
Increased competition and a slowdown in demand were cited as the primary causes of financial difficulties among customers, exacerbated by excess capacity in certain industries, reported SCMP. The report added that many material suppliers have adopted a more cautious and risk-averse approach, especially in dealings with state-owned clients, where timely payments can no longer be taken for granted. One private contractor alleged that they were owed more than $16,000 from a state-owned enterprise client from a project completed three years back.
The construction sector, in particular, continues to grapple with payment delays, with property developers facing financial pressure. Private subcontractors have been severely impacted, with significant outstanding payments leaving them unable to meet obligations to downstream suppliers and threatening business viability.
Addressing debt problem in China
Speaking to SCMP, Wang Qichang, a committee member with the Private Economy Research Centre in Zhejiang province, emphasised the need for concrete actions to address China's debt problem and create a more favourable business environment. This includes strengthening property rights protection, fostering enterprise confidence, and mitigating excessive nationalism in the business sector, which can hinder commercial development.
Junyu Tan, North Asia Economist at Coface, stated, "2023 was the year when economic activities generally normalised from the pandemic. The same went for corporate business practices regarding payment terms. As market competition and practices returned to normal, more companies took the initiative to grant payment terms. But corporates have become more cautious and offered tighter payment terms. "
"Looking ahead to 2024, 53 per cent of our respondents expected the economic outlook to improve as policy support increases, market competition eases, and inventory burdens reduce. Slowing demand in 2024 should prompt more government spending to stabilise growth," Tan added.
As China aims to achieve a five per cent economic growth target amidst various challenges, addressing issues related to delayed payments may be crucial for sustaining economic momentum and facilitating post-pandemic recovery efforts.
Policymakers may need to ramp up spending to stabilise overall demand, particularly in sectors facing significant challenges. Additionally, structural shifts, such as policy support for electric vehicles and infrastructure investments, are expected to drive optimism in industries like pharmaceuticals, automobiles, and construction.
