Chinese Rate Cut and Payment

China offers a prime example of export-led growth that has benefited from learning by doing and by adopting foreign know-how, supported by a complex industrial policy. Arguably, a modern version of mercantilism has been at work. The Global Crisis put an abrupt end to China’s export-led, high growth and large current-account surplus trajectory. In the US, the private sector was forced to de-leverage and lower demands for imports. Other crisis-hit developed countries also cut back on imports. Consequently, the Global Crisis and its aftermath induced rapid Chinese internal balancing, reducing the scope of future reserve hoarding.

In an attempt to revive the Chinese economy, the People’s Bank of China clipped interest rates for the sixth time since November as well as reduced its reserve-requirement ratio for banks. The country’s benchmark lending and deposit rate was cut 25 basis points, while its reserve-requirement ratio for banks dropped 0.5 basis points.

"The idea that this signals even greater weakness in the Chinese economy is flawed, but so is the idea that rate cuts represent a solution to slowing growth,”said Leland Miller, president of China Beige Book International, in an email to NACM. “When firms don't want to borrow, which is the case now, stimulus doesn't work. So while this is certainly a trading event, its effect on the economy will be negligible."

Credit insurer Atradius also released a new report this week that focuses on payment practices in China. It states that 62% of businesses said domestic business-to-business (B2B)“customers have slowed invoice payment due to liquidity problems over the past year.” On average, domestic B2B credit-based sales are 41.8% of local sales, while abroad B2B credit-based sales are 34.2% of the total value of exports. Both figures are notably lower than the average of the other Asia Pacific countries surveyed.

The statistics “confirm that Chinese respondents prefer payment in cash, cash equivalents or on other terms other than chinese trade credit, particularly in transactions with their foreign B2B customers,” the report notes. “This suggests an inconsistent perception of payment default risks arising from domestic and foreign B2B trade.”

On average, domestic B2B customers are given 37 days to pay invoices and foreign B2B customers receive 41 days. Late payments occurred almost as frequently domestically as abroad, and nearly 94% of respondents experienced late payments from their B2B customers over the past year. “The domestic insolvency environment in China is expected to deteriorate in the coming months, as economic growth is cooling down,” the report says.