Find the latest episode of "The Uncertain Hour" here. Listen
COVID-19

In China, chasing debt after the COVID-19 lockdown

Jennifer Pak Jun 23, 2020
Heard on:
HTML EMBED:
COPY
A recent survey showed 66% of Chinese firms had clients delay payments last year. Then the pandemic hit. Charles Zhang/Marketplace
COVID-19

In China, chasing debt after the COVID-19 lockdown

Jennifer Pak Jun 23, 2020
Heard on:
A recent survey showed 66% of Chinese firms had clients delay payments last year. Then the pandemic hit. Charles Zhang/Marketplace
HTML EMBED:
COPY

Factory equipment supplier Wang Xiaojian came out of China’s economic shutdown from the COVID-19 virus relatively unscathed.

The 40-year-old runs a company in Shanghai that provides pumps and pipes to food and pharmaceutical factories. Wang has not laid off any workers and said business has been pretty much back to normal since March.

One thing that has changed is that he now chases his clients to pay their overdue bills weekly rather than every three months.

“About a third of my clients do not pay on time. This was happening even before the pandemic hit,” Wang said. “Some won’t transfer the money unless I remind them.”

According to a study released in early June by credit insurance firm Coface, 66% of companies in China surveyed said they experienced payment delays in 2019, which is up from 62% in 2018.

Businessman Wang Xiaojian likes to send clients an overdue invoice and follow up with a phone call. He said in China it is best to be gentle when chasing debt. (Jennifer Pak/Marketplace.)
Businessman Wang Xiaojian likes to send clients an overdue invoice and follow up with a phone call. He said in China, it is best to be gentle when chasing debt. (Jennifer Pak/Marketplace.)

“We currently don’t have a survey for North America, but the figures [for payment delays] are higher in China than they are … in other European countries,” said Carlos Casanova, author of the Coface study and the firm’s Asia economist in Hong Kong.

“If a company doesn’t pay you in 180 days, 80% of the time they don’t pay you at all.”

Of the 1,000-plus firms surveyed by Coface, 27% of them reported that more than 10% of their annual turnover in 2019 was tied up in payment delays of more than six months, which could create cash flow risks.

Chinese people care a lot about relationships. If I chase my clients too aggressively [to pay their overdue bills], it might hurt their self-esteem.

Shanghai businessman Wang Xiaojian

Fabric trader Zhang Baoguo, 37, in eastern Zhejiang province, was in the same situation heading into the pandemic.

“In 2014, payments would arrive one month after we delivered. That became 45 days, then three months. Now payments take six months or more,” Zhang said.

He keeps working with these clients because the business environment has not been as good in the downturn of the past few years. There is too much competition and less easy credit.

Zhang Baoguo (right) and his daughter pose in front of samples of fabric, which are usually destined for overseas markets like the U.S. but all of his overseas clients cancelled their orders because of the pandemic. (Courtesy of Zhang Baoguo)
Zhang Baoguo and his daughter pose in front of samples of fabric. The samples are usually destined for overseas markets like the U.S., but all of his overseas clients canceled their orders because of the pandemic. (Courtesy of Zhang Baoguo)

“Big brands won’t give us a down payment. There is overcapacity in the textile industry, and if I don’t accept their payment terms, other firms will. Then that will put small players like me out of business,” Zhang said.

Plus, leading up to the pandemic, all his clients paid eventually.

“My clients only need to pay back a portion of the overdue payments at a time, because as a fabric trader, I can also buy from my suppliers on credit. This is the pattern in the industry,” Zhang said.

That pattern has become riskier as China’s economic growth has slowed in recent years and the United States and China are locked in a trade war. Add the impact of the pandemic, and 2020 is working out to be a very challenging year for Chinese companies.

“Growth [is] expected to drop to 1% in 2020. That is quite unprecedented,” Asia economist Casanova said.

“Pockets of stress continue to be present in the Chinese economy, calling for even more insolvencies in 2020,” he wrote in the June report.

The COVID-19 crisis has wiped out overseas orders from Japan, South Korea and the U.S. for fabric trader Zhang. He has laid off one employee and downsized his office space.

Zhang said he has some domestic orders that should keep him afloat, though he admits, ruefully, that these days he has a lot more free time to go fishing.

Like many Chinese people, he has savings and has already paid off his home mortgage and car loan.

As for factory equipment supplier Wang, he is more proactive about chasing late payment during the pandemic.

“I told my staff that if they can’t collect overdue payments, I will deduct the money from their year-end bonus,” Wang said.

It is a way to put pressure on his staff to take payment delays seriously.

In the 16 years since he’s been in business, Wang said he has only had one client default on payment.

Wang took the firm to court and won. The company has since declared bankruptcy, and Wang still has not seen any money he is owed.

For Wang, doing business in China is all about what the Chinese refer to as ‘guanxi’ or personal trust and connections.

“We operate on mutual trust. Contracts are useless. The courts can’t do much for us either,” Wang said.

However, Wang said he cannot push clients too hard to pay their overdue bills.

“Chinese people care a lot about relationships. If I chase my clients too aggressively, it might hurt their self-esteem,” he said.

For him, it is best to have an excuse when chasing debt. A great time to do it in China is the end of the lunar year because businesses need to close their books.

This practice is so widespread that it is common to hear people chasing debt or being asked to pay up on public transport.

You need to send me an invoice for 93 days. How much money is it per day? What is the total?” a man at the Shanghai Hongqiao railway station shouted into his phone back in January, ahead of the Lunar New Year and just days before the pandemic shut down much of China’s economy.

“You only sent me a picture of your bank card. How do I know how much money I owe you?”

His partner stood next to him punching numbers into a calculator.

“A contractor wants us to pay him, but we also need others to pay us,” he said without giving their names for fear that their clients would get mad and not pay up.

The two men said they have more than a million yuan ($140,000) in unpaid invoices and are chasing their clients by phone.

Humor can help the process, too.

Businessman Zhang Peng sells lights. He posted a video on the Douyin app, which is the Chinese version of TikTok.

“Dear clients who owe me money, please send your payment to me,” Zhang said in the video and pointed the camera to a bowl of rice topped with a household-brand chili sauce by Lao Gan Ma.

“Take a look at this: Without money, I can only afford to have Lao Gan Ma chili sauce on my rice. I have no money to buy pork and vegetables. Please send your payment to me as soon as possible!”

Additional research by Charles Zhang.

COVID-19 Economy FAQs

What’s the outlook for vaccine supply?

Chief executives of America’s COVID-19 vaccine makers promised in congressional testimony to deliver the doses promised to the U.S. government by summer. The projections of confidence come after months of supply chain challenges and companies falling short of year-end projections for 2020. What changed? In part, drugmakers that normally compete are now actually helping one another. This has helped solve several supply chain issues, but not all of them.

How has the pandemic changed scientific research?

Over the past year, while some scientists turned their attention to COVID-19 and creating vaccines to fight it, most others had to pause their research — and re-imagine how to do it. Social distancing, limited lab capacity — “It’s less fun, I have to say. Like, for me the big part of the science is discussing the science with other people, getting excited about projects,” said Isabella Rauch, an immunologist at Oregon Health & Science University in Portland. Funding is also a big question for many.

What happened to all of the hazard pay essential workers were getting at the beginning of the pandemic?

Almost a year ago, when the pandemic began, essential workers were hailed as heroes. Back then, many companies gave hazard pay, an extra $2 or so per hour, for coming in to work. That quietly went away for most of them last summer. Without federal action, it’s mostly been up to local governments to create programs and mandates. They’ve helped compensate front-line workers, but they haven’t been perfect. “The solutions are small. They’re piecemeal,” said Molly Kinder at the Brookings Institution’s Metropolitan Policy Program. “You’re seeing these innovative pop-ups because we have failed overall to do something systematically.”

Read More

Collapse

Marketplace is on a mission.

We believe Main Street matters as much as Wall Street, economic news is made relevant and real through human stories, and a touch of humor helps enliven topics you might typically find…well, dull.

Through the signature style that only Marketplace can deliver, we’re on a mission to raise the economic intelligence of the country—but we don’t do it alone. We count on listeners and readers like you to keep this public service free and accessible to all. Will you become a partner in our mission today?

Your donation is critical to the future of public service journalism. Support our work today – for as little as $5 – and help us keep making people smarter.