Australian businesses are being warned that a blowout in invoice payment times in China could have a ripple effect here, given the massive trade links between the two countries.
Figures by trade credit insurance provider Coface suggest that Chinese businesses are increasingly taking longer to pay their bills, as a trade war with the US and a general economic slowdown bite, coupled with a spike in the number of bankruptcy cases in China.
“This context has led to pressure for Chinese companies, who have resorted to using longer payment terms to sustain business,” the company said in its China Payment Survey 2019 report.
“According to our survey of 1,500 Chinese companies, average payment terms increased to 86 days in 2018 — up from 76 days in 2017 and in line with a trend that began in 2015 — with terms being longest for the automotive and transportation sectors, followed by construction and energy.”
Some 62 per cent of Chinese businesses suffered payment delays during 2018, according to the report, and 40 per cent said the length of delays had increased.
Troublingly, more than half (55 per cent) said they had experienced “ultra-long delay” of more than 180 days (around six months) on payments worth more than 2 per cent of the business’ total annual turnover. That figure was up from the 47 per cent who had experienced such payment delays in 2017.
The report’s author, Carlos Casanova, Coface’s economist for the Asia-Pacific region, told My Business that the situation “will likely” impact Australian businesses with links to China.
“Our 2019 China Payment Survey points to a deterioration in payment conditions, which will likely affect Australian companies that engage in trade with China, especially given the relevance of this market for Australian business,” Mr Casanova said.
“The impact will be most pronounced for companies with buyers in China, who might take longer to pay, provided they are not experiencing cash flow difficulties, in which case they might not pay at all.”
He also warned that credit terms in China — already longer than those in Australia — are likely to come under further pressure.
“According to our figures, credit terms are much shorter in Australia compared to China (40 days in 2018 relative to 86 days in China). In the context of a slowing economy, Chinese customers could demand longer credit terms in 2019,” the economist said.
“This might become problematic for Australian firms that may not have the adequate risk management processes in place, but still depend on China business to sustain their revenue bases.”
- Pressure is building on Chinese companies to increase the length of their payment terms, with average payment terms blowing out to 86 days (from 76 days in 2017).
- Tighter market competition and access to funding were cited as main constraints for these businesses (40 per cent and 19 per cent, respectively).
- One in five (20 per cent) businesses now offer payment terms of more than 120 days, up from 12 per cent in 2017.
- Despite this, confidence in local consumers actually improved, with 36 per cent of businesses expressing positive sentiment last year, compared with 32 per cent in 2017.
- The longest average payment times were in the automotive, transport and construction sectors.
- Average payment times fell in the retail, energy, pharmaceutical and chemicals sectors.
Average payment times in China in 2018 per sector
(Sector: Average terms in 2018, difference compared with 2017, Coface’s risk assessment)
- Automotive: 99 days, up by 13 days, high risk
- Transport: 98 days, up by 13 days, medium risk
- Construction: 94 days, up by 5 days, very high risk
- Energy: 92 days, down by 12 days, high risk
- ICT: 89 days, up by 4 days, high risk
- Metals: 88 days, up by 10 days, high risk
- Pharmaceuticals: 87 days, down by 3 days, low risk
- Textile: 81 days, up by 19 days, high risk
- Paper: 75 days, up by 13 days, medium risk
- Wood: 75 days, up by 15 days, high risk
- Chemicals: 73 days, down by 11 days, medium risk
- Retail: 66 days, down by 4 days, medium risk
- Agri-food: 59 days, up by 4 days, medium risk
Source: Coface China Payment Survey 2019.
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