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Credit risk a bigger worry than stock market volatility in China says Euler Hermes

By CreditMan Monday, January 11, 2016

Ludovic Subran, chief economist at Euler Hermes, the world’s leading trade credit insurer, comments on recent stock market volatility in China:

“Stock market volatility is a symptom of China’s economic issues not a cause. A bigger concern is the impact on credit risk and payments risk in the global supply chain as the Chinese economy adjusts.

“We predict corporate insolvencies in China will increase by +20% again in 2016, following a +20% increase last year. An improvement in credit conditions domestically and a gradual increase in global demand (both domestic and external) this year suggests the increase in insolvency should be contained in 2016.Still, insolvencies in 2016 (3920) will remain below the 2009 level (4448).

“Sectors at risk include: construction, metals and mining, low-end manufacturing and export-related industries. To date, only some sectors in the higher-end segment and within government targets are showing signs of resilience (high-tech, chemical and commodity processing). The construction sector is particularly struggling as downward price pressures prevail with large overcapacity and weak demand prospects.

“Primary commodity for manufacturing such as metals and mining are experiencing a perfect storm: lower commodity prices, lower demand from domestic industries (such as construction) and lower external demand. We also see increasing risks in low-end manufacturing and sectors driven by external demand (textile and low-end electronics).

“The gap between delivering goods and being paid for them, called Days Sales Outstanding (DSO), suggests companies continue to rely on extended credit terms. In China, typical DSO increased significantly (+22 days between 2007 and 2015 to 69 days in 2105), as Chinese firms are suffering from the country’s economic slowdown and passing on payment pressures to their own suppliers and clients.

“Financial volatility is set to remain but systemic risk will be contained. Systemic risk linked to the stock market crash is not plausible as financial markets in china are not deep enough: market capitalization of major stock exchanges is lower than 50% of GDP compared to over 100% for the Tokyo and New York stock exchanges.”