CHINA DEBT WOES THREATEN GLOBAL SUPPLY CHAINS

China Debt Woes Present a Growing Threat to Supply Chains, Report Says

The Chartered Institute of Procurement and Supply warns that actions by China’s central bank may raise the potential for defaults and disruptions

ENLARGE

CIPS recommends companies communicate more with suppliers in China and set up alternatives at each tier of their supply chains. Above, a textile factory in Suzhou, China. Photo: Reuters

By

Brian Baskin

July 27, 2015 1:38 p.m. ET

3 COMMENTS

China’s troubled debt market is a growing threat to global supply chains, according to a new report from the Chartered Institute of Procurement and Supply.
Companies doing in business in China could see suppliers fall into disarray overnight if the People’s Bank of China moves to rein in the debt market, either through monetary policy or by allowing more borrowers to default, said John Glen, a CIPS economist.
Even suppliers with good credit could be forced to cut costs or delay shipments if they are able to borrow less, he said. “There’s probably going to be … a significant amount of defaults, and what you have to make sure of is that default doesn’t cause dislocations in your supply chain,” Mr. Glen said.

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The Chinese economy is grappling with slower growth and a stock market plunge that has seen the Shanghai Composite Index fall nearly 30% in just a few weeks. That’s complicating efforts by China’s central bank to channel lending toward boosting growth while reining in bad loans and the amount of cash heading into the country’s stock markets.

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China was the top factor behind a jump in the CIPS risk index to its highest level since late 2013, when Europe’s economic and credit problems drove uncertainties for supply chain managers to a 20-year high. The index, scheduled to be released later this week, rose to 80.1 in the second quarter, from 78.7 in the first three months of 2015.
CIPS put China’s contribution to global supply chain risks on par with India, which is typically viewed as a more dangerous place to do business.

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The biggest risk to Western firms is that small manufacturers deep in their supply chains buckle as credit tightens, Mr. Glen said. Such companies typically are less transparent about their finances and may only deal with other Chinese suppliers, making it harder for Western companies to monitor them. But if they fail, it can interrupt supplies to companies higher up the chain.
In its report, CIPS recommends companies doing business in China communicate more with suppliers there and line up alternatives at each tier of their supply chains. That way, if one company fails another can quickly step in. Commodities producers, which often deal directly with debt-laden Chinese buyers, also need to make sure they are properly insured against default, Mr. Glen said.