Current Trends for Debt Collection in China
By Megan Tappe and Maarten Roos
In today's challenging economic environment, more clients are seeking support with debt collection activities. One common service we provide is sending detailed demand letters (in China, referred to as lawyer’s letters) to the debtor, setting the stage for further legal action if payment is not made by a specific deadline. Ultimately, if a debtor remains unwilling to pay, filing a civil lawsuit becomes the only option.
According to the World Bank’s “Doing Business” reports, China ranks among the best for enforcing contracts. Nonetheless, international companies face significant challenges in doing so. A key advantage for creditors in China is the ease of freezing bank accounts and other assets pending the outcome of a lawsuit.
So, what is happening in practice? The 2024 China Corporate Payment Survey & Economic Outlook, issued by Coface, provides a comprehensive analysis of current credit management and payment practices among Chinese companies. Based on a survey completed in 2023, this report highlights key trends, sector-specific practices, and economic sentiments, shedding light on the evolving landscape of corporate payments in China.
Increasing Credit Sales Amidst Normalcy
The 2023 survey reveals a notable shift: 79% of respondents offered credit sales, a significant increase from 50% in 2022. This surge reflects a return to pre-pandemic market practices. Companies cited market competition, customer liquidity issues, increased confidence in customers, and third-party risk mitigation as key reasons for extending credit terms. However, this trend is accompanied by shorter payment terms, averaging 70 days, down from 81 days in 2022, yet still higher than regional counterparts.
Sector-Specific Payment Practices
Payment terms vary significantly across sectors. The construction and metals industries are the most generous, while the transport and wood sectors remain stringent. Despite shorter payment terms, the chemicals and construction sectors extended their terms by 7 and 2 days, respectively. These adjustments highlight the diverse credit landscapes within different industries.
Payment Delays: Frequency and Duration
While more companies reported payment delays (62%, up from 40% in 2022), the duration of these delays has decreased significantly from 83 days to 64 days. This improvement indicates better cash flow management and a healthier financial cycle, with days sales outstanding (DSO) reducing from 164 days to 133 days. However, the agro-food sector experienced a slight increase in payment delays.
Non-Payment Risks and Economic Optimism
Non-payment risks have diminished, with the proportion of companies experiencing ultra-long payment delays (ULPDs) over 2% of turnover dropping from 36% to 33%. Despite this improvement, the textile and construction sectors continue to face the highest non-payment risks. Overall, companies remain optimistic about 2024, buoyed by anticipated policy support. While fierce competition remains a significant risk, it is expected to moderate, though concerns about a demand slowdown persist.
Conclusions
The 2024 China Corporate Payment Survey by Coface paints a comprehensive picture of evolving credit and payment practices in the Chinese corporate sector. With increasing credit sales, shorter payment terms, and improved cash flow cycles, the report suggests that businesses are adapting to a dynamic economic environment.
While the trend may be relatively positive, many of our clients continue to face difficulties in collecting debts and have no choice but to enlist our support to convince debtors to pay.
R&P’s dispute resolution team supports international companies to deal with debt collection and other disputes in China. Our litigators advise on disputes and represent clients in Chinese courts and arbitration. For questions or support, please reach out to Maarten Roos ([email protected]) or your usual contact at R&P.