Chinese export enterprises must guard against a new round of international credit risk

"The impact of the US subprime mortgage crisis continues to ripple across the globe, triggering a new phase of credit challenges in the global economy and trade. Coface Holdings CEO Jerome Cazes recently commented on the evolving economic landscape and announced the expansion of China's export factoring services, aimed at helping Chinese companies manage growing international credit risks." On June 5th, Kaijie, the founder of the International Credit Union and a key figure in the global credit insurance industry, gave an exclusive interview in Shanghai. During the conversation, he outlined three key strategies for navigating the current economic climate. **A New Credit Crisis Has Begun** "In the past 40 years, the world has faced five major credit crises. With the outbreak of the US subprime mortgage crisis, we are now entering a new round of financial instability," Kaijie said. He emphasized that managing global credit risk is now a top priority, especially for Chinese companies. He pointed out that 2008 is expected to be a year of heightened credit risk, with businesses facing multiple challenges: tighter bank lending, slowing demand in developed markets, and rising raw material costs. According to Coface data, the global corporate arrears index increased by 45% in the first four months of this year. Kaijie warned that the financial system’s credit crisis could lead to a real economic downturn. In response, Coface has raised its global credit insurance rates by 10%. However, he noted that the company adjusts its rates based on macroeconomic conditions. Over the past five years, Coface has consistently reduced its global credit insurance rates by an average of 7% annually. Despite the global turmoil, Chinese companies have so far been relatively insulated. But as China’s economy becomes more integrated into the global market, many exporters are now encountering credit risks linked to the US subprime crisis. Kaijie warned that more Chinese exporters may soon face payment issues from their foreign partners due to the crisis. Additionally, domestic competition and overcapacity are extending billing cycles. If the domestic market weakens further, this could worsen payment problems. "To survive this crisis, Chinese companies must strengthen their credit risk management systems," Kaijie advised. He estimated that this round of credit stress could last up to 18 months, making robust credit management essential for handling accounts receivable effectively. **Expanding Investment in China’s Factoring Market** The second key initiative is the launch of Coface’s export factoring business in China. This service allows exporters to sell their invoices, bills of exchange, and shipping documents to a factor (typically a bank) after goods are shipped, enabling them to receive immediate financing. Coface’s export factoring service includes non-recourse trade financing and credit risk protection, helping companies manage their receivables more efficiently. China is the 23rd country where Coface offers such services. Kaijie highlighted that China’s export factoring market has seen rapid growth, with significant untapped potential. While Asia accounts for 35% of global trade, only 13% of it involves factoring. Coface aims to support trade volumes of 8 billion euros (approximately 85.7 billion yuan) in Greater China over the next five years. To enter the export credit insurance market, Coface has partnered with China Ping An Property Insurance Co., Ltd. This collaboration is part of a long-term strategy, leveraging Ping An’s market presence and network to provide receivables guarantee services to Chinese companies. Kaijie confirmed that both Coface and Ping An are prepared to enter the export credit insurance market as soon as regulatory restrictions ease. As of the first quarter of this year, Ping An has provided insurance support for over 100 billion yuan in sales, backed by Coface’s expertise. **Launching a New Credit Rating Service** In addition to factoring and insurance, Coface is also expanding into credit rating services. Recently, the company announced plans to pilot credit rating services in China and Japan, marking its third major move in Shanghai. Compared to traditional rating agencies like Standard & Poor’s and Moody’s, Coface’s ratings are more cost-effective and can be kept confidential upon request. The company tracks credit data for over 50 million companies in China, offering comprehensive corporate credit records. Coface also produces the World Trade Credit Risk Assessment, a quarterly report that evaluates credit risk across 150 countries and regions. This tool helps major industries understand and respond to changing trade arrears trends. In early April, Coface downgraded the US national trade risk rating, citing a sharp increase in defaults across various sectors, not just real estate. However, despite challenges like currency appreciation and inflation, China has not seen a significant rise in corporate defaults. Therefore, Coface has no plans to adjust China’s trade risk rating for now. It is worth noting that at the end of May, Coface lowered the risk ratings for seven industries, including air transport, construction, automotive, paper, retail, electronics, and textiles.

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