China’s business owners have spent a record amount of time collecting money owed to them this year as clients, led by large companies and local governments, put off payments in the wake of an economic slowdown.

Official data show it took an average of 54 days for Chinese private manufacturers to get paid in the first three quarters of this year. That is up from 45 days in 2019 and 27 days five years ago.

The delay in debt collection has taken a toll on China’s post-virus economic recovery as private companies, an important employer, trimmed their growth plans for fear of late payments.

“The receivable problem is across the board,” said Wang Dan, a Shanghai-based economist at Hang Seng Bank China. “It suggests the economy is not in a normal shape.” She added that the receivable problem “suggests the economic recovery remains weak”. 

While business activity is recovering in the world’s second-largest economy following its successful control of the pandemic, many private companies, led by manufacturers, are grappling with payment delays following a surge in credit sales.

Chinese factories reported a 14.3 per cent rise in accounts receivable in the first nine months of this year, the fastest growth in six years, according to the National Bureau of Statistics.

“There is no shortage of orders,” said Zhang Huaqiang, owner of a machine parts factory in the eastern city of Ningbo. “The challenge is to figure out when you can get paid.”

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Mr Zhang requires clients to complete payment within three months of product delivery, but more than two-thirds of them asked for an extension this year.

Large state-owned companies are taking the lead in making late payments to their smaller suppliers. In the eastern province of Shandong, Jiaozhou Shenzhou Construction, a private builder, has since January spent seven months working for free for the China State Construction Engineering Corporation, the industry leader, on a refrigerator factory even though the contract requires progress payments.

“We have been financing the project instead of getting paid for it,” said an official at Jiaozhou Shenzhou. “This is a breach of contact.”

Local governments are also guilty of not paying on time. While Chinese provinces and cities unveiled numerous public projects early this year to revive the pandemic-hit economy, they were slow in honouring payment agreements.

That in part accounts for the slowdown in China’s infrastructure construction in recent months as cash-strapped private builders struggled to stay afloat.

“Government contracts are supposed to rescue my business from going under,” said Feng Xiaohui, owner of a construction company in Henan province. Local officials recently told Mr Feng that a Rmb20m ($3m) land-levelling project the company had completed would not be paid in full until 10 years later. “They end up making me worse off,” he said.

Analysts said the surge in late payments was mainly a result of weakening industrial profits that make it difficult for businesses to make timely payment. Chinese manufacturers reported a 2.4 per cent decline in profits in the first three quarters of this year following a 3.3 per cent drop in the whole of 2019.

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To fend off the downturn, large companies, known for their stronger bargaining power, began asking small partners to accept harsher terms.

“The best way to survive in a tough business environment is to keep cash in hand and pay suppliers as late as possible,” said Bo Zhuang, an analyst at TS Lombard.

The problem is exacerbated by cash-strapped local governments that are struggling to make payments on time. China’s fiscal revenue fell a record 6.8 per cent in the first nine months of this year as the pandemic dealt a blow to tax intake.

“It would be a stretch for the government to honour contracts when it has trouble generating income,” said Mr Zhuang.

The growing difficulty in collecting funds has prompted many businesses to cut back despite an influx of orders. David Wang, owner of a Wenzhou-based mould maker, reduced his workforce by half in August after a surge in receivables drove him into financial trouble.

“I am paying taxes and wages for revenue that didn’t translate into cash flow,” said Mr Wang. “This can’t continue.”

 

Via Financial Times