Payment situation of Chinese companies: how will it affect Singaporean companies?

Coface conducted a corporate credit risk management survey in China, in the fourth quarter of 2010. Over 1000 companies in mainland China participated in the survey. It reveals that great improvement in both credit sales and overdue payment among mainland China companies has been observed in industries such as building & construction, textile and clothing, automotive/transportation and household electric/electronics, which is largely due to the government’s stimulus package after over 1 year’s implementation.

But this might not necessarily be good news for Singaporean companies intending to extend their businesses to mainland China. The survey also revealed enterprise’ concern on 2011 economic outlook. Thanks to the high cost of raw material, industries such as building and construction, textile and clothing might face difficulties in the coming year. In the meanwhile, on the threshold of a new Five-Year Plan, the Chinese government will implement a new stimulus package, subsequently lead to a shift of the preferential policies among different industries, making the investment landscape in China a different story.

The 12th Five-Year Plan will be implemented in 2011. More than 4 trillion Yuan will be spent in the coming five-year period to provide financial support, including tax cuts and exemptions, to nine key industries - new energy, new materials, information technology, biology and new medicine, energy conservation and environmental protection, aerospace, marine, advanced manufacturing, and hi-tech services industries. The government aims to shift China from “the global factory” to “the global market”. Therefore, the new plan accents on creativity and advanced technology, to help Chinese companies depend less on foreign technology. Companies with a focus on advanced technology rather than the traditional outsourcing manufacturing model will enjoy more benefits from the new Five-Year Plan.

The Chinese government also plans to speed up urban infrastructure construction during its 12th Five-Year Plan, which in theory should benefit industries such as building and construction, transportation, iron and steel, and industrial machinery. But Jean-Claude Speitel, CEO of Asia Pacific for Coface, warns that “we should be cautious on the impact of overcapacity and rising materials cost in these sectors.” On the other hand, “with increased income of Chinese households and government’s continuous efforts to boost domestic consumption, sectors of household electronic appliances and pharmaceuticals will continue to enjoy strong growth in 2011.”

However, Japan’s recent mega earthquake adds another twist to the outlook. Large automakers like Toyota and Nissan are suffering a shortage of automotive parts. China represents 19% of Japanese exports, thus China will be affected by the situation, especially those industries that heavily rely on components produced in Japan, such as automotive, electronics and IT. The impact of the crisis may be limited if over-capacities in advanced economies could soften the shock and Japan manages to bounce back quickly.

With the new plan in place, the industries that “behaved” well last year may not be as reliable in the next year, which explains why over 30% of the surveyed companies expressed concern over the future overdue payment situation. According to Coface’s survey, industrial machinery is the least positive on the improvement of overdue payment situation in China while pharmaceutical is the most positive one. In light of the new Five-Year Plan, it is reasonable to believe that the nine industries mentioned above are more promising in the coming years. Therefore, Singaporean companies should be cautious when trading with industries such as construction, textile and clothing, but should lean more towards advanced technology, new energy, and pharmaceuticals. Under current circumstances, the automotive and IT industries should be treated with caution as well.