Chinese businesses at risk from their Government's economic policy warns Coface

The UK Government has just hosted a summit aimed at fostering trade ties with China1. However, Coface believes the Chinese Government's wage policies designed to increase household consumption could place a further squeeze on private sector companies leading to a wave of bankruptcies at a time when orders are down and financing is 'increasingly scarce and risky'. It advises UK businesses who want to take advantage of the trading opportunities in China, to take precautions to protect themselves against the possibility of bad debt.

In the company's latest Country Risk Overview, Coface economist Constance Boublil assesses the impact of Chinese economic policy on companies in the private sector2 which accounts for 60% of national wealth and 80% of job creation. In addition to the slowdown in retail sales and orders, she explains companies' access to credit has been severely limited because of strict quotas on bank loans leading many to resort to informal sources of funding such as 'shadow banking' where interest rates are up to four times higher than those charged in the official banking sector.

At the same time, Boublil predicts that the increase in the minimum wage in China, which is expected to rise by 13% p.a. between 2012 and 2015, will affect companies' margins and lead to bankruptcies because these additional costs cannot be reflected in prices without the risk of losing market share. She points out that the National Bureau of Statistics has reported that companies' profits have fallen by more than 2% in April 2012, year on year.

Grant Williams, Risk Underwriting Director, Coface in the UK and Ireland said: "While China has great potential for UK exporters seeking markets outside the Eurozone, there is a risk that the Government's efforts to stimulate domestic demand through wage increases, combined with its strict quotas on bank loans, could squeeze Chinese entrepreneurs at a time when they are already vulnerable and lead to a string of defaults."

"Coface currently gives China a country risk rating of A3, meaning that despite quite strong financial fundamentals, deficiencies in the business climate and the evolving economic context might lead to companies defaulting. Given the factors highlighted in our report, we advise UK companies who want to do business in China to research their trade sector and prospective trading partners thoroughly and to insure themselves against the possibility of bad debt."