"While China has the surplus, the profits flow to Europe and the United Sates," China's Minister of Commerce Bo Xilai recently pointed out.

In Information Times, an industry insider was quoted as saying the average net profit ratio of major exporting industries is below 5 percent.

"It is true," Xu Qing, an international trade manager with a Guangdong exporter told Beijing Review. Xu said the gross profit ratio of metals exported from her company, such as aluminum sheet, is only 5-6 percent.

While profits are flowing into developed countries, Chinese exporters are also suffering from long overdue international accounts, many of which turn to bad debts.

This wouldn't seem to be much of a problem if those debts could be written off at tax time. And the debts wouldn't be so damaging if profits were higher. In fact, bad debt is outpacing profits for many exporters.

According to Ma Enzhong, Deputy Secretary-General of the National Office of Rectification and Standardization of Market Economic Order under the MOFCOM, the ministry's sample survey result from 2005 shows that the bad debt ratio for Chinese exporters was as high as 5-10 percent, with average default periods over 90 days. In the United States during the same period, the bad debt ratio for exporters was only 0.25-0.5 percent, while the average default period was seven days.

"The trade volume is calculated by Chinese customs according to the declared amount," said Lu. "But nobody knows when the exporters can actually get paid."

China's total export value in 2005 was $762 billion. Multiplied by 5 percent, the total default payment in 2005 was $38.1 billion, accounting for one-third of the trade surplus that year.

Bad debt aftermath

From his five years of experience in debt collection, Lu has concluded that overdue international accounts may be devastating exporters in two ways.

The first is that one case of bad debt may devour the total profits made by a company over a period of years.

According to the estimation of MOFCOM trade experts, the overdue international accounts of China total $100 billion, with an increase of $10 billion bad debts each year.

To simplify this, if bad debt last year was $10 billion and average profitability was 5 percent, Chinese exporters had to export around a total of $200 billion worth of goods to break even.

"This means the profits from the $200 billion in exports was made in vain, as those profits must be used to cover the bad debts generated by the $10 billion in exports. However, the trade surplus of last year was only about $180 billion," Lu explained.

"You can't imagine how many small and medium-sized companies have been stuck in a debt dead end and vanished," said Lu. "People tend to remember success stories but not many about the losers."

Lu provided figures from an exporting company in Zhejiang, a province in east China flooded with small exporters. The total export value of the company was $5 million with a profit margin of around 2 percent. Due to the lack of credit risk awareness, the total default of international accounts receivable was around $100,000. The company thought the delinquent amount was rather small compared with its total exporting volume. However, its profit margin was only 2 percent, which means that all the profits from exports last year were used to recover the loss generated by the seemingly tiny amount of overdue accounts. The company, in effect, labored hard a whole year for almost nothing.

The second consequence of bad debt is the potential financing cost for exporters.

"Exporters may go into rapture if their accounts receivable is recouped after two or three months of default, as if they have lost nothing," Lu Yue said. "However, though thrilled they are getting paid, Chinese exporters often forget to count the financing cost and bank loan interest toward their business cost."