I know nobody wants to hear this and I know this is going to get me hate mail from those whose livelihoods are tied to China’s boom, but I am seeing all sorts of bad news on the horizon with China’s economy.
A client meeting yesterday was the last straw. The client I met with is very sophisticated, very large, and, most importantly, very experienced. The client is a very large commodity seller who sells massive amounts to China. This company typically sells its product to Chinese private companies that use letters of credit. Prior to 2008, this client’s Chinese customers pretty much always paid. Then in 2008, they started contesting the letters of credit and seeking lower prices than the prices to which they had agreed. Soon after that, they started rejecting the shipments entirely. My client told me that in the last 3-4 weeks, nearly all of his non SOE (State Owned Entity) Chinese clients have contested the letters of credit and have sought prices to be lowered by around twenty percent. The Chinese companies seeking these discounts are confessing that they cannot get loans and without loans they cannot pay so much.
If it were just that, I might chalk it up to problems in one industry, but it is not just that. Chinese companies that are going out of business or believe they are going out of business have an annoying tendency to ship bad or fake or no product at all. In 2008, pretty our China lawyers would just about every week get calls from companies saying the product they had ordered was not coming. We handled one case where a company bought about a million dollars of fish and received containers of cheap bricks surrounded by fish. That fake shipment was the dying gasp of a company that had ceased to exist. We have started to get those same sort of calls in large numbers again. Internally, we call them “bricks for fish” deals.
We are also seeing it on the flip side with Chinese companies buying product from our U.S. clients or even trying to buy U.S. companies outright. The numbers are small, but we are seeing an increase in Chinese companies that paid a deposit simply walking away from their deals.
What are you seeing out there? Is it really this bad, because it sure feels like it?