Credit insurer Euler Hermes believes domestic consumption in China will support the economy but volatility is delaying business payments.
Euler Hermes expects financial volatility to remain and systemic risk to be contained in China this year as the economy weakens from its stellar past growth record.
GDP growth of 6.5% is expected - the lowest level for 15 years. There are several challenges within the economy: the construction sector is struggling to cope with downward pricing, weak demand and overcapacity; lower commodity prices and demand are hitting manufacturing of metals and other materials; external demand for textiles and electronics is also falling.
As a result insolvencies are expected to increase around 20% this year to around 3900 cases after a 25% increase in 2015; this is expected to contrast with a decline of insolvencies of 2% in the US and 5% in Europe.
The total days outstanding of paying for goods increased to 81 days in China in 2015, up from 77 days in 2014. Whereas in 2007 Chinese companies used to pay bills nine days earlier than the world average, they now wait ten days longer than their international peers.
Chinese companies have been suffering from a regulatory crackdown on shadow banking and an overall economic slowdown. This means intercompany credit is more important but later payments help feed the delaying of the monetary cycle; this could lead to cash flow problems.
On the positive side Euler Hermes said the export market is stable and non-price competitiveness has increased through innovation and better positioning; a weaker currency will improve its net trade position. China is attempting to rebalance the economy to improve higher domestic demand which should also help imports.
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