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

The ongoing impact of the U.S. subprime mortgage crisis has triggered a new wave of credit turmoil across the global economy and trade. Jerome Cazes, CEO of Coface Holdings, commented on the evolving economic landscape and announced the launch of China’s export factoring services, aiming to help Chinese companies manage the growing credit risks stemming from the crisis. On June 5th, Kaijie, founder of the International Credit Union and a key figure in the international credit insurance industry, spoke exclusively with reporters in Shanghai, outlining three critical steps for China's response to the current financial challenges. **A New Credit Crisis Has Begun** "In the past 40 years, the world has faced five major credit crises. With the U.S. subprime mortgage crisis, we are now entering a new round of credit instability," said Kaijie. He emphasized that managing global credit risk is a top priority, especially for Chinese businesses. Indications suggest 2008 will be a year of heightened credit risk, with companies facing multiple challenges: tighter bank credit, slowing consumer demand in developed economies, 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 broader real economic downturn. In response, Coface has raised its global credit insurance rates by 10%. The company adjusts its rates based on macroeconomic conditions. Over the past five years, Coface has annually reduced its global credit insurance rates by an average of 7%. Despite previous resilience, Chinese companies—especially those in export sectors—are now beginning to feel the ripple effects of the U.S. subprime crisis. Kaijie noted that more Chinese exporters may soon face payment delays from their foreign partners. Additionally, domestic market competition and overcapacity are extending billing cycles, which could worsen if the domestic economy weakens. "Chinese companies must strengthen their credit risk management practices," Kaijie advised. He believes this crisis could last up to 18 months, making robust credit risk management essential for handling accounts receivable issues effectively. **Expanding Investment in China’s Factoring Market** The second initiative involves launching Coface’s export factoring business in China. This service allows exporters to sell goods on deferred payment terms and immediately transfer invoices, bills of exchange, and shipping documents to a factor (typically a bank) to receive immediate funding. Coface’s export factoring offers non-recourse financing along with credit risk protection and helps manage unexpired invoices. China is the 23rd country where Coface provides factoring services. The export factoring market in China has grown rapidly, with significant potential for further expansion. While Asia accounts for 35% of global trade, it only represents 13% of factoring activity. "We hope to support trade volumes of 8 billion euros (about 85.7 billion yuan) in Greater China over the next five years," said Kaijie. Given China’s monopoly in the export credit insurance market, Coface has partnered with Ping An Property & Casualty to offer short-term domestic trade credit insurance. This collaboration is part of a long-term strategy to leverage Ping An’s market presence and provide receivables guarantee services. "Once regulators open the export credit insurance market, we will enter immediately," Kaijie added. As of the first quarter of this year, Ping An had provided insurance support for over 100 billion yuan in sales, backed by Coface. **Launching a New Credit Rating Service** In addition to credit insurance and factoring, Coface is also expanding into credit rating services. It recently announced plans to pilot credit rating operations in China and Japan, marking the third step in Kaijie’s agenda. Compared to agencies like Standard & Poor’s and Moody’s, Coface offers lower fees and can maintain confidentiality as per client requirements. The company tracks credit data for over 50 million Chinese companies, providing comprehensive credit records. Coface also produces the World Trade Credit Risk Assessment, updating it quarterly based on macroeconomic indicators. This report assesses credit risks across 150 countries and regions, reflecting changes in trade arrears levels. Earlier this year, Coface downgraded the U.S. national trade risk rating due to a sharp rise in defaults, not just in real estate-related sectors but across various industries. However, despite challenges like currency appreciation and inflation, Coface has not adjusted China’s national trade risk rating. It noted that there has been no significant increase in Chinese companies defaulting on payments. In May, Coface also lowered the risk ratings for seven sectors, including air transport, construction, automotive, paper, retail, electronics, and textiles.

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