China's Outlook

Red Dragon Down

lights reflected in a puddle Bloomberg
A drop in optimism in China – and its trading partners.
  • Why it matters

    Why it matters

    After France, China is Germany’s most important trading partner – 7 percent of all German exports go there – meaning the slowdown will affect Germany too.

  • Facts


    • A new study predicts 300,000 companies will go under because of China’s declining economy.
    • German companies will not only be hit by China’s troubles, but also by effects of the Volkswagen crisis.
    • Overall, though, German businesses are mostly on firm ground after market adjustments in recent years, according to Paris-based credit insurer Euler Hermes.
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Bad news for entrepreneurs: The number of commercial bankruptcies around the world could increase or remain level in 2016. It would mark the first time after six years that the rate of insolvencies hasn’t declined.

That is the conclusion of experts from the credit insurer Euler Hermes in a study provided to Handelsblatt which predicts 300,000 companies will go bankrupt around the world. Germany’s export-reliant companies will be among the first to feel the crunch.

The reason is China’s economic downturn, which could lead to a dramatic rise in bankruptcies in the Asian powerhouse. The pace of China’s economic growth has dropped and the country is struggling to meet its target for 2015 of 7 percent. The economy is expected to grow at the slowest rate in the past 25 years.

“(China) has experienced a change of heart in its previous clear commitment to developing into a service-oriented society,” explained Ludovic Subran, chief economist at the Paris-based Euler Hermes.

“The Chinese government is ready to allow weak companies to go bankrupt, and it will lead a downward spiral.”

Ludovic Subran, chief economist at Euler Hermes

As a consequence, he said, unstable firms will no longer get government support.

“The Chinese government is ready to allow weak companies to go bankrupt, and it will lead a downward spiral,” said Mr. Subran. “It affects not only firms in China, but also companies from Singapore and Hong Kong, where many Chinese products are marketed or shipped.”

These are worrying signs for Germany. After France, China is the most important trading partner for German companies. About 7 percent of all German exports go there, especially from the automotive and machine construction industries.

German carmakers, for instance, send a quarter of their exports to China. In the mechanical engineering sector, the figure is 37 percent.

Signals of potential danger flashed this year. One warning was in the payment behavior of Chinese firms, which worsened by two days, according to Thomas Krings, chief risk officer at Euler Hermes. He believes exporters will need steady nerves in 2016, because Chinese payments will be delayed on average another four days.

Insolvencies are expected to increase by 20 percent – the biggest increase anywhere in the world. Already news of commercial bankruptcies in Asia is making headlines. In the last few days, for example, the China Shanshui Cement Group announced it would soon have to shut down.


Closing shops in China picture alliance DPA alex hofford
Faced with fewer customers, a store in Hong Kong shuts its doors. Source: Picture Alliance, DPA, Alex Hofford


German companies, meanwhile, can also expect to be hit by effects of the emissions scandal at Volkswagen, Europe’s largest carmaker and the second-largest in the world.

“In our opinion, about 50 firms are dependent on VW,” said Mr. Subran. “If a company has only a single customer – and that customer comes to experience difficulties – then, of course, risk increases for that company as well.”

That applies outside the automotive industry as well. For example, budget reductions impact companies that perform cleaning services or have taken over travel bookings. They now have to try to find other customers – and to survive.

“Nonetheless, I consider the risks caused by the VW crisis to be limited,” Mr. Subran said.

In his appraisal, many companies in Germany are still on firm ground after market adjustments in recent years.

Still, he recommended that companies give more thought in the future to whom they do business with – and under what circumstances.


Kerstin Leitel writes about banks and the insurance industry for Handelsblatt. To contact the author:

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