China doesn’t affect me. Are you sure?

Earlier this month we highlighted the marked increase in past due receivables being held by companies in the Eurozone and now this past week Reuters reports that as China’s economy continues to cool, companies are waiting longer and finding it harder to get paid for goods and services they’ve already sold, leading to record amounts of receivables – and potential write-offs – on corporate balance sheets.

At Longyuan Construction Group Co, an east China builder of high-rise offices, apartments and highways, receivables last year inched up 4.9 percent to 4.1 billion yuan ($657.3 million), while on average collection times extended to 95.2 days, compared with 76.3 days for 2011.

Slow collection of money owed is causing Longyuan to delay its own payments to steel and cement suppliers, Zhang Li, the company’s board secretary, told Reuters, in a ripple effect that is being repeated across the economy.

A Thomson Reuters survey of data on China’s more than 2,300 stock market-listed firms illustrates the impact on corporate payments, with company receivables on average reaching $160.49 million at the end of last year, more than double the $65.9 million average at the end of 2009.  Over the same period, the median collection time for billings crawled up from 71.4 days to 90.42 days. It was the first time China’s market-listed firms averaged more than 90 days in a decade.

“It’s a pretty loud warning bell,” said Paul Gillis, an accounting professor at Peking University’s Guanghua School of Management. “Companies cannot pay-off their receivables in a slowing business cycle. Some of these receivable may not get paid, which means you’ll see a lot of write-offs in the future.”

Average collection periods for receivables extended to more than 196 days for electrical equipment makers, 188 days for companies in the building products’ sector and more than 171 days for machinery manufacturers, Reuters data shows.

“Credit is tightening, funding costs are higher, and companies are delaying payments,” said Ivan Chung, Moody’s Investors Service’s senior vice president for Greater China credit analysis.

While apologists of China’s collapse have been quick to point out that China’s credit collapse would be largely a domestic issue, with little foreign creditor exposure at either the public debt, or private – corporate – debt levels, one thing nobody can deny is that if and when Chinese trade routes grind to a halt, the downstream impacts would be devastating, and spread like wildfire as offshore supply chains seize up.

Although many of us may be operating purely in a local or domestic market what about your customer’s customer’s, customer?  Of that we cannot be so sure being 3 degrees separated.  All that we can be sure of is that we all have a certain degree of exposure to this global risk and that the potential for contagion is real.

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