As the coronavirus pandemic began its sweep across the world in 2020, it sent shockwaves through global supply chains. When Chinese factories closed in January and February to help stop the spread of the virus, it forced the US businesses that relied on them either to shift manufacturing elsewhere or simply wait.
But in addition to the logistical disruptions it created, the pandemic shutdown in China had another, less-obvious effect on US companies with Chinese suppliers: it hurt their credit. The credit risk of these businesses rose and fell as Chinese factories shut down and reopened, according to George Washington University’s Şenay Ağca, Chicago Booth’s John R. Birge, Chinese University of Hong Kong PhD student Zi’ang Wang, and CUHK professor Jing Wu. They find a similar pattern for US companies with Chinese customers during the pandemic.
The findings demonstrate one way that suppliers influence their partner companies, for better or worse. Doing business with suppliers in another country can expose a US company to increased risks, but it can also provide a buffer against local shocks, the researchers find.
As a business owner, “you may think that what happens in China or Latin America is just isolated to that country, that those events aren’t affecting your access to credit,” Birge says. “But what this study says is that, no, actually they do. Things that happen to your suppliers in China can also affect your credit as well. These events can affect the health of your business. It’s showing the importance of those suppliers to businesses.”
To study the relationship between supply-chain activity and partner companies’ credit risk during the pandemic, the researchers analyzed the credit-default-swap spreads of 545 US companies with Chinese suppliers between January 2020 and April 2020. In a credit default swap, the seller agrees to compensate the buyer if the underlying entity defaults. The researchers used credit-default-swap spreads as a gauge of companies’ credit risk.
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Financial Contagion Spreads through Supply ChainsAs Chinese factories shut down in early 2020, the credit risk of US companies with Chinese suppliers increased by an average of 6–7 percent. Then, when Chinese production resumed in March and April, the US companies’ credit risk decreased by 16–29 percent. This suggests that companies may benefit from having a geographically diverse set of supply chain partners, Birge says.
Household demand also played a role in how supply-chain activity affected credit risk in some industries, the researchers find. For example, when Chinese suppliers shut down during the pandemic, the fact that US demand for consumer goods and electronics remained high mediated some of the credit effects for producers hurt by the supply disruption but buoyed by strong demand. Similarly, when suppliers reopened but US household demand was flagging, that affected the credit picture.
Companies with bigger debt levels relative to their assets and greater competition were more sensitive to supply-chain disruptions, whereas those with more cash on hand and growth opportunities were less affected. And because every link in a supply chain involves potential disruption, lengthier supply chains amplified the credit-risk swings of partner companies, the researchers find.
Overall, the findings offer insights for corporate leaders as they seek out—and extend—credit. If a company’s suppliers or customers are far from its base, events in those regions have credit implications. Moreover, if a company has a supplier that is nearby but that company has important ties to other regions, that supplier’s creditworthiness could be affected by adverse events. “Managers,” says Birge, “should be aware of both the effects on their own credit access as well as the potential impact from their partners.”
Şenay Ağca, John R. Birge, Zi’ang Wang, and Jing Wu, “The Impact of COVID-19 on Supply Chain Credit Risk,” Working paper, June 2021.
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