How Are the Developments in China Influencing Credit Management?

Recently there has been a lot of discussion, especially among politicians, about the need for the German economy to reduce its dependence on the Chinese market. In the list of countries Germany exports to, China ranks fourth, after the USA, France and the Netherlands. The starting point for this argumentation is, on the one hand, the increasingly restrictive developments within China through party and state policy. And on the other hand, for non-Chinese companies, the more difficult conditions for entering and trading on the Chinese market caused by increasing protectionism as well as other factors.

For the Chinese economy as a whole, it can be seen that the gross domestic product, which before 2020 had an annual growth rate of more than six percent, but with a downward trend, has now slipped significantly below this level. GDP growth is only expected to be between three and five percent in the coming years. As a result, the Chinese market will become more difficult for German exporters. Broad increases in turnover will be very hard to achieve. Potentially likely is that there will be aggressive competition from Chinese industry, which will be supported by the state in order to compensate the Chinese labour force for the slowing growth.

Isolation and decoupling, however, are not in China's interest. In the past three years alone, Chinese exports have grown by around 45% and this will continue to be necessary if China is to avoid sliding into a recession in the medium term. And the six leading Western states account for 40% of Chinese exports, Germany alone more than three percent.

How China has become the market leader in particular industries can be seen, for example, in railway vehicle production. Around 15 years ago, high-speed trains were first exported to China. In the meantime CRRC Ltd. has become the largest producer of railway vehicles in the world and offers its products competitively worldwide, including high-speed trains.

The photovoltaic industry has been heavily subsidized by the Chinese government. It now has a dominant position on the global market.

In the last quarter, BYD achieved the highest number of sales of electric vehicles worldwide, although the Chinese market dominated the figures. Chinese companies are also among the leaders in battery technology.

The Chinese have cleverly bought into technology companies in the component and mechanical engineering sectors. The automation company Kuka is one example that will lead to more and more products in this area coming from China.

On the other hand, Chinese investors do not hesitate to allow taken‑over companies that get into financial difficulties to go bankrupt. A recent example is the automotive supplier Allgaier. The Chinese investor has, however, been able to secure relevant competencies in toolmaking and process engineering from this company.

Additionally, the Chinese control a high proportion of the global extraction of rare earths, which are important for digitalization and the development of sustainability.

Nevertheless, there are problems, especially in the Chinese home-building industry. After excessive construction activity there are many empty blocks of flats owned by large Chinese housing companies with financing difficulties.

So what does this mean for German businesses, whose exports to China have risen in recent years?

Weakening economic conditions tend to lead to increasing liquidity problems. This also applies to Chinese companies as customers. Later payments and more defaults caused by insolvency will be the result. It will become even more important to secure this business.

In the automotive industry, the trend towards electromobility will strengthen competition from the Chinese. Previous market-leading positions will be lost, especially by high-volume producers. The suppliers will be affected even more than the manufacturers. Here, it will be necessary to analyse exactly which suppliers in the automotive industry are well-positioned for the future in order to cope with these changes.

German mechanical engineering and production equipment manufacturing companies will not be able to achieve additional sales on the Chinese market as they have done in the past. It would already be a success if existing sales could be approximately maintained. It is therefore important to analyse whether companies can open up alternative markets or adjust their capacity.

Equally, there will be changes in the chemical industry. Companies in this area should be monitored carefully.

The question is whether these effects can be compensated for by investments in sustainability technology by industry and private households in which German engineering can create competitive advantages. This investment will be necessary, for example, to prevent energy-intensive industries from suffering permanent cost disadvantages in global competition.

For credit managers, this means focusing intensively on customers in the affected sectors, checking the stability of these companies' positions and analysing whether the necessary adaptation is taking place successfully and whether there is sufficient agility. In doing so, I wish you a precise view at all times!