China’s business owners have spent a record time raising money owed them this year as customers, led by large corporations and local governments, postponed payments amid an economic slowdown.
Official data shows that it took an average of 54 days for private Chinese manufacturers to get paid for the first three quarters of this year. That’s more than 45 days in 2019 and 27 days five years ago.
The delay in collections has severely affected China’s post-virus economic recovery as private companies, a major employer, cut their growth plans for fear of default.
“The debt problem is general,” said Wang Dan, a Shanghai-based economist with Hang Seng Bank China. “It suggests that the economy is not in a normal state.” She added that the debt problem “suggests the economic recovery remains weak”.
Government contracts are supposed to save my business from ruin. You make me worse
As business in the world’s second-largest economy recovers after successfully fighting the pandemic, many private companies, led by manufacturers, are grappling with payment delays after loan sales soared.
Chinese factories saw accounts receivable increase 14.3 percent in the first nine months of this year. This is the fastest growth in six years, according to the National Bureau of Statistics.
“There’s no shortage of orders,” said Zhang Huaqiang, owner of a machine parts factory in eastern Ningbo City. “The challenge is figuring out when to get paid.”
Mr. Zhang requires customers to complete payment within three months of the product being delivered, but more than two-thirds of them have requested an extension this year.
Large state-owned corporations take the lead in late payments to their smaller suppliers. In eastern Shandong Province, Jiaozhou Shenzhou Construction, a private contractor, has been working on a refrigeration plant for seven months for free for China State Construction Engineering Corporation, the industry leader, since January, despite the fact that the contract requires prepayments.
“We funded the project instead of getting paid for it,” said an official from Jiaozhou Shenzhou. “This is a contact violation.”
Local governments are also guilty of not paying on time. While Chinese provinces and cities unveiled numerous public projects to revitalize the pandemic-hit economy earlier this year, they were slow to meet payment agreements.
This is partly due to the slowdown in infrastructure construction in China in recent months as private construction companies struggling with cash struggled to stay afloat.
“Government contracts are supposed to save my business from ruin,” said Feng Xiaohui, owner of a construction company in Henan Province. Local officials recently told Mr. Feng that a Rmb 20 million (US $ 3 million) land leveling project completed by the company would not be paid for in full until 10 years later. “You make me worse in the end,” he said.
Analysts said the rise in late payments was mainly due to slowing industrial profits, which are making it difficult for companies to make payments on time. Chinese manufacturers saw profits fall 2.4 percent for the first three quarters of this year, after a 3.3 percent decline for all of 2019.
To stave off the downturn, big companies, known for their stronger bargaining power, urged small partners to accept stricter terms.
“The best way to survive in a tough business environment is to have cash in hand and pay suppliers as late as possible,” said Bo Zhuang, an analyst at TS Lombard.
The problem is compounded by financially troubled local governments struggling to make payments on time. China’s tax revenues fell 6.8 percent in the first nine months of this year as the pandemic dealt a blow to tax revenues.
“It would be a challenge for the government to keep contracts when it is struggling to generate income,” Zhuang said.
The growing difficulty in raising funds has led many companies to cut back despite an order intake. David Wang, owner of a Wenzhou-based mold maker, cut his workforce by half in August after a surge in accounts receivable put him in financial trouble.
“I pay taxes and wages on income that isn’t reflected in cash flow,” Wang said. “This cannot go on.”