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Chinese corporate failures pegged to rise

HONG KONG -- Corporate insolvencies are set to rise in China next year for the first time since 2008, according to French credit insurer Euler Hermes.

     Euler, which studies creditworthiness to insure companies against the risk that customers will fail to pay their bills, projects that Chinese insolvencies will reach 2,555 this year and then rise 5% next year. China and Hong Kong are the only Asia-Pacific markets of the eight tracked by Euler where it expects insolvencies to rise amid the fragile global economic recovery.

     Ludovic Subran, group chief economist and director of economic research, said the 5.4% fall in the Shanghai Composite Index on Dec. 9 was "not a good sign," showing a lack of confidence in corporate conditions in China.

     "The Chinese market is undeniably presenting warning signals at every level, from macro to micro," Euler said in its 2015 forecast.

     By Euler's estimates, incidents of nonpayment by Chinese companies have more than doubled this year. The food industry is the worst affected, with non-payments up 473%; the chemical sector is next worst, at 214%; the large electronics industry follows with a 54% rise.

     When they do pay their bills, payments are taking longer. Euler estimates the average settlement time for Chinese companies this year at about 90 days, a week longer than last year and more than two weeks longer than the global average of 75 days. Upstream manufacturers are among the tardiest, Subran said.

     Euler has seen improvement on one front: Chinese companies' past due payments have fallen an estimated 22% this year after rising 15% in 2013. However, Subran said this swing likely relates to the rise in nonpayments, as companies that had previously given Chinese customers more time to pay began to give up hope. Indeed, past dues are up an estimated 36% for construction companies and 10% for electronics producers.

     With foreign companies waiting longer on their Chinese customers, Euler in July began selling credit insurance to Chinese exporters doing business overseas in partnership with China Pacific Insurance (Group), after Beijing allowed private insurers into that market.

     The cloudy outlook is casting a shadow beyond China's shores. Insolvencies are up an estimated 25% in Singapore this year, with commodity traders especially affected, Subran said. Euler projects insolvencies will rise 5% in Hong Kong next year.

     Subran, however, expects China will offer more "mini" stimulus measures -- liquidity injections, infrastructure investment, and easier lending for home buyers, farmers and small companies. "We think there is this middle way" between no stimulus and a reprise of the huge 2008 spending spree, he said.

     He forecasts that China will end 2014 with 7.4% growth in gross domestic product, slipping slightly to 7.3% next year. But he's optimistic policymakers understand the challenges the economy faces. "China has a clear picture of where China needs to be in 20 years," he said.

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