Cooling global economy makes Chinese exporters hedge their bets

SHANGHAI - Feeling the chill from the US subprime crisis, Chinese exporters such as Zhejiang New Oriental Fastener Company no longer take it for granted that their customers will pay them.

By (AFP)

Published: Sun 29 Jun 2008, 5:40 PM

Last updated: Sun 5 Apr 2015, 1:13 PM

The company, whose 600 staff produce screws, nuts and bolts by the millions, has found that in an age of uncertainty it has to rethink the nuts and bolts of global trade.

"With the subprime crisis, each of our clients has become potentially exposed to unpredictable risks such as bankruptcy," said Xiang Guihong, sales manager at the company, which focuses on North American and Australian markets.

Xiang said his company used to have "great faith" in its regular overseas customers, but early this year it started to buy credit insurance for all export orders to guard against possible payment defaults.

"As late as last year we felt no need for such a practice. Now we understand that it will help our credit risk management," Xiang told AFP.

Xiang said the company was particularly affected by the gloomy US property market because its products are widely used in the construction of buildings and infrastructure.

Based in Zhejiang province in eastern China -- a major export powerhouse -- the company saw shipments to the United States slump more than 30 percent in the first five months of 2008 from a year earlier.

It is stories like this that help explain why in the first five months of this year, China's overall trade surplus declined 8.6 percent from the same period a year ago to 78 billion dollars.

This has served as a wake-up call for Xiang, and thousands of other Chinese businessmen, who traditionally have under-emphasised the need for hedging against customer default.

"There is underestimation of the credit risks in Asia in general and in China in particular," said Jerome Cazes, chief executive of Coface, a Paris-based trade insurer.

Many local firms simply rely on trading records and site visits for credit evaluation.

"The subprime crisis is now impacting the real economy, meaning that the B2B (business-to-business) credit crisis kicked in January 2008 and will continue at least for the full year 2008," he said.

According to Xiang, New Oriental, which had allowed for payment terms as long as 60 days in the past, now requires its US clients to pay for the goods within seven to ten days after delivery.

The pressure is passing upwards through the chain to New Oriental's domestic suppliers in a ripple effect.

"Steel makers and steel trading firms only accept cash for payments," he said. Our working capital is so tight that if we had a large amount of account receivables, we'd run out of money needed to buy raw materials for new orders."

This is a situation felt by a large number of Chinese exporting companies, according to Coface.

"Domestic companies exporting to the US are affected by payment incidents in the United States and in turn cannot pay their suppliers in China," said Richard Burton, the insurer's regional managing director for Greater China.

Economists in China agreed. "It's certainly a very real problem," said Li Yushi, a researcher with a think tank under the Ministry of Commerce.

Li said Chinese companies may need to prepare themselves for a poorer credit environment in domestic trading in the second half of the year if export growth continues to slow.

"For this year, exporters here are really faced with troubles both at home and abroad," said Guo Mu, a trade official with the official Zhejiang Foreign Trade and Economic Cooperation Bureau.

"We are telling them to make clearer credit investigation on their foreign clients before scrambling for orders. They need to think twice if they feel uncomfortable about potential losses," he said.

More news from Business