Feeling the chill from the US subprime crisis, Chinese exporters such as Zhejiang New Oriental Fastener Company (浙江新東方緊固件公司) no longer take it for granted that their customers will pay them.
The company, whose 600 staff members 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 customers, but early this year it started to buy credit insurance for all 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,” he said.
Xiang said the company was particularly affected by the gloomy US property market because its products are widely used in construction.
Based in Zhejiang Province — a major export powerhouse — the company saw shipments to the US slump more than 30 percent in the first five months of this year from a year earlier.
Stories like this 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 US$78 billion.
This has served as a wake-up call for Xiang and thousands of other Chinese businesspeople, who have traditionally under-emphasized 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.
Xiang said 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 10 days after delivery.
“Steelmakers 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 exporting Chinese companies, Coface said.
“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.
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