China rate increases blow to Chinese Suppliers (and Their Buyers)

There have been many propositions over the last few years to help finance Chinese suppliers.  Many of the propositions followed a similar model – target clients that have a high concentration of imports from China. 

Through some form of supplier early payment program, the exporter receives customer credit protection and immediate cash for receivables upon shipment and importers receive extended open account terms and payment flexibility.  The finance company will purchase from exporters, without recourse, for 100%, less discounts, accounts receivable due from small to medium importers.  Usually embedded in these agreements is the Importer or Buyer must be willing to confirm its obligation to pay for the goods without off set, counterclaim or deduction based upon prior supplier performance.

Now, the WSJ reported that Chinese company are paying more to borrow. In fact, some business will be paying significantly more.   Consider some facts from the WSJ article:

 Driven by a surge in borrowing in recent years, Chinese companies amassed an estimated $12.1 trillion worth of debt at the end of last year, according to Standard & Poor's. That compares with an estimated $12.9 trillion for U.S. businesses, now the world's most indebted. The ratings company estimates that debt at Chinese companies is poised to exceed the U.S. total this year or next.

"The leverage in the corporate sector is already very high and does pose a latent risk to the entire economy," said Shuang Ding, an economist at Citigroup. Challenges for companies are mounting as the government tightens credit and investors demand higher yields to fund borrowers.

For the Export-Import Bank of China, which helps finance the vast flows of goods into and out of China, the coupon rate on its three-year bond rose to 5.44% in this month from 4.80% in late October and 3.62% in late February 2013.

Rising money-market rates and bond yields have also translated into higher rates on bank loans, which account for the bulk of corporate lending in China. Smaller, private firms have been hit the hardest.   We can only imagine how hard.  And this can translate into high risks for Buyers that import from Chinese companies.  Buyers beware.

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