Fears over state of Chinese economy increase supply chain risk

Paul Snell is managing editor at Supply Management
2 August 2015

Concerns over the financial health of Chinese businesses have pushed supply chain risk up for the third consecutive quarter, according to the latest CIPS Risk Index.

Worries a speculative equity bubble is about to burst, and that state lenders have been supporting employment by lending to struggling businesses, meant the index rose to a figure of 80.1 in the second quarter of 2015. This compares with a reading of 78.7 for the first three months of the year, and the highest since the end of 2013.

Andrew Williamson, global leader and leading economist at Dun & Bradstreet which co-produces the index, said: “We became increasingly concerned in April that corporate finances in those industries that clearly have excess capacity were becoming increasingly distressed. Local governments have been propping up employment by pressuring banks, further exacerbating legacy financial misallocations in the country.

“While those industries serving consumers continued to do well in Q2, the recent rout in equity markets in China may provide further economic stresses in the country.” The consequences have been Chinese firms paying late or not at all, and suppliers cutting costs and delaying shipments as they struggle for cash. Buyers were urged to increase communication with suppliers to highlight potential problems earlier.

CIPS economist John Glen said: “The increasing trend in global risk that was observed towards the end of 2014 and predicted to increase in the early part of 2015 has materialised.

“A reduction in the growth rates of the emerging economies of east Asia coupled with the continued economic malaise of the Eurozone have contributed to an increase in the overall risk index. Volatility in oil prices and as a result, FX rates, has also impacted the risk inherent in main oil-producing economies.”

Supply chain risk rose in eastern Europe and central Asia, Asia-Pacific, sub-Saharan Africa and Latin America, but fell in Western and central Europe, the Middle East and north Africa. It was stable in North America. Some 13 of the 132 countries covered experienced a rise in operational risk.

Other threats highlighted by the index included a lack of progress on the peace agreement in Ukraine, lukewarm economic growth in South America, and the lifting of economic sanction against Iran in December which will push down commodity prices and put pressure on suppliers at the end of supply chains.

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