WEALTH

MICRO
HITTING THE ECONOMIC
REBOOT BUTTON
China is restructuring its industries to move up the value chain
and counteract overcapacity – but pain lies ahead
By Mahamoud Islam, Asia economist at Euler Hermes, and Greg Langley
With the world economy spluttering, economic indicators are
being constantly scanned for signs of trouble. One critical
light on one of the largest growth engines – China – has
been flickering red for some time.
Payment delays are also on the rise, with day sales outstanding
(DSO) at 88 days in 2015, 10 days more than in 2012, as an increasing
number of companies struggle to protect margins from late payments
by customers. DSO is a warning, not the cause of the economic problems.
It simply measures the health of firms according to their struggles to
collect cash for sales completed.
Looked at in the long term, China’s DSO has risen by 21 days
since 2007. This is partially explained by the development of Chinese
companies. As they have become more global, companies have adapted
to international payment standards. In 2007, Chinese companies were
paid two days later than the global average.
However, the concern is that in 2015, they waited more than 24 days
longer to be paid than the global average of 64 days. With this figure for
payment discipline expected to slacken
further in 2016, it indicates that Chinese
manufacturers are under increasing stress.
The consequence will be more corporate
bankruptcies, but this is not surprising:
Chinese companies are deep in the red and
non-state banks already reported a sharp rise
in loan defaults in the second half of 2015.
With such a blowout on payments, Euler
Hermes is forecasting a 20% jump in corporate
insolvencies for this year. Altogether, when
you add this to the actual increase from
2015, then the two-year rise in insolvencies is
expected to reach 50%.
46 • Allianz