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French credit insurer bullish on China growth, despite risks

Coface chief touts financial protection for companies seeking growth in Asia

China's escalating trade fight with the U.S. has hurt domestic consumer sentiment and slowed the economy, making it riskier for foreign companies to do business with Chinese counterparts.   © FeatureChina via AP Images

TOKYO -- International trade is bound to expand despite the U.S.-China trade war, but navigating it is becoming more difficult and requires better financial protection, according to Xavier Durand, CEO of French credit insurer Coface.

The number of defaults, payment delays and bankruptcies in China has been surging as the government's effort to reduce debt has soaked up liquidity. Coface believes its credit insurance and information service can help companies do business with Asia, which, according to the International Monetary Fund, still accounts for two-thirds of global growth.

"China is still the biggest growth engine of the world, although we say it is slowing down," Durand told the Nikkei Asian Review. That poses a challenge to companies trying to expand, especially overseas.

"You have to trade globally. You cannot be happy dealing with the same people all the time. Even a midsize company has to trade. You have to look at local and global markets. You cannot stay in your little comfort zone," said Durand.

Coface warned of China's weakening economy in a report published in late March. The country's corporate bond defaults quadrupled in dollar terms in 2018, compared with the previous year, reaching $16 billion. The average payment period rose to 86 days in 2018, up from 76 days in 2017. Last year, of those companies more than 180 days behind in paying their debts, 55% had arrears worth more than 2% of their annual turnover. That was up from 47% in 2017. Most delinquent loans are in fact never repaid, the insurer says.

"This is a telling sign that pockets of stress continue to be present in the Chinese economy," according to the March Coface report, as the government's deleveraging effort has reduced liquidity. The escalating trade tensions with the U.S. "eroded consumer sentiment, resulting in weaker domestic consumption," it said.

Xavier Durand, CEO of Coface, says his company's business is to help clients manage risk. (Photo by Eri Sugiura)

Durand said his company has an important role to play amid growing uncertainty in the world's second-biggest economy. "The confrontation between the U.S. and China is something which will last for some time, and is an expression of a larger and more complex struggle between the superpowers," he said. "The world is becoming complex, and it is difficult for a company to know risks on their own. Our business is to manage these risks."

Some analysts suggest that risk is too high. Nathan Chow, an economist with Singapore's DBS Group Holdings said in a report that the "unprecedented wave of corporate bond defaults last year" will continue in 2019, adding, "Given the reduced risk appetite and huge maturing volume, the outlook is poor."

Kenneth Ho of Goldman Sachs said in an April note that foreign investors currently own just 2% of China's bond market, saying their reluctance to conclude deals with Chinese companies was partly explained by "insufficient market liquidity."

Coface has a 70-year history and insures risks worth 540 billion euros ($606 billion) in 200 countries. Its clients are mostly big European companies, such as automakers, retailers and luxury brands exporting to China. Most of its turnover is concentrated in Europe. The Asia-Pacific region accounted for a little less than 7% of the total in fiscal 2018.

"A lot more market penetration and awareness should be made in Asia, with our infrastructure of people and systems monitoring risks at all times," said Durand, who expects the Asia-Pacific region grow faster than the rest of the world, thanks to its population and economic growth.

Durand said Japanese companies interested in China and other emerging markets are a promising growth market in Asia, where credit insurance is relatively new and unknown.

According to the World Trade Organization, Asia made up 34% of global exports in 2017, compared with 38% for Europe and 14% for North America. Coface hopes to see its business in Asia grow to a size more commensurate with the region's share of the global economy. "As markets mature, that's what you'd expect over time," Durand said.

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