Before we can describe the current status of credit management in China, we need to look at the cultural differences between China and the 'West', as these have a large impact on its development and immediate future in China.

Cultural Differences

That there are cultural differences between China and the West is clear. To better understand these differences and the role they play in transacting business, here is a brief ‘West versus East’ comparison.

the West bases its view on economics; the East relates matters to sociology.
the West bases developments on facts; the East focuses on people.
the West has the tendency to judge and make decisions based on the future; the East gives greater consideration to the past.
the West focuses on financial capability; the East focuses on security.
the West generally exhibits dynamic behavior; the East tends to value static characteristics.
in the West business decisions are based on available financial information and contracts; in the East these decisions rely more heavily on trusting a relationship.

Guanxi The term often used to express the cultural differences that affect doing business in China is guanxi. Guanxi describes the interplay of a complex network of personal and social relationships. It can be understood in terms of it not being just what you know, but also whom you know. This is still a central concept in Chinese society. Doing business internationally, however, is very different. It needs to be less about trust and more about assessment and legally binding agreements.

This concept of guanxi, however, is not completely foreign to the western mind.

Looking back to the time when my grandfather was growing his business, he also relied on personal relationships, trusting those living in his village while being somewhat reserved with those coming from elsewhere. Of course, this has changed considerably since my father's time. I expect it will also eventually change in China.

It should be stressed that one culture is not better than the other, just different. The characteristics, however, will become more universal given the continuing process of globalization. Certain differences will, of course, always remain.

Credit Practices

Credit management is still in its infancy in China. A lot has changed in the last few years, but Chinese credit practices are far removed from those in the US or many European countries. It is interesting that, in those countries where credit management is well developed, English is either the mother tongue, or is spoken very well. This is not so strange, actually, as the United States is regarded as the nation where credit management was ‘invented’.

A primary objective of the Chinese Government is to grow its national products and services. The Government recognizes that one obstacle to success is the high level of securitization (i.e. letters of credit, bank guarantees etc.) involved in dealing with Chinese companies. This complicates free trade and makes it more expensive. In the West with its more open market system, a good deal of business is done on open account. Recognizing that making dealing with Chinese firms less complicated and expensive is the way for China to become a more significant part of a global business environment, the Government is encouraging Chinese companies to set up credit policies, implement credit procedures, and utilize credit systems to better manage the ‘order-to-cash’ process.

One way to encourage Chinese organizations to become more "savvy" about credit risk, is through organized credit conferences. The 6th China International Credit & Risk Conference organized by the China Council for the Promotion of International Trade (CCPIT) is one such forum. This conference will be held in Chengdu, China in September 2009. About 600 people will gather to listen to and discuss a great variety of credit related topics, presented by experts from all over the world.

Other such events are organized at the local level. These range from small gatherings and promotional events to consultancy projects that allow parties to actively support, and sometimes subsidize, companies that adopt Western credit principles.

Challenges

Due to the size of the Chinese market and the large number of companies (especially Small and Medium Sized Enterprises [SMEs], which numbered an estimated 42 million in 2008), it will be some time before the level of credit management reaches that common in the West.

One of the biggest challenges in achieving significant improvement is reaching the managerial level. Organizational structures in China are predominately ‘flat’, meaning the number of 'middle' managers is relatively small. It is not common to see organizations of approximately 100 employees managed by a single person, who is also the company president.

As a result, the decision to move closer to the credit management policies of the international business community and invest in credit implementation lies with just a single person in many cases. And, adopting these 'Western' methods and processes also often means they will have to invest in a financial system as well.

Chinese Sign - In Learning We Trust The size of the Chinese organization is the determinator in many cases. Large Chinese entities, comparable to the multinationals in the West, do have good credit management operations. Representatives of these companies are contributing to the development of credit management in China.

In general though, credit management education is lacking. While there is a growing number of students interested in the subject, most of them are looking for an internationally recognized diploma which, at this time, does not exist. There are some local sources for credit management education, but the teachers often lack practical experience. In fact, many have never actually worked in the field.

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Part Two of this article, will consider the status of credit information and collections and litigation in China.

The writer does emphasize that his article is based upon personal experience gained in dealing with Chinese entities - within and outside Chinese territory - for over 25 years. It also includes information from several market studies.

William F.M.J. Bastiaan, CICE, is Director Global Markets of ABC-Amega Inc. and his responsibility includes marketing collection and receivable management services in Europe, Middle East, Africa and Asia.

His experience also includes more than twenty years of service with DSM, a global chemical firm, where he held the positions of Credit Department Manager and Global Credit Risk Manager. Since 1986 he is member of FCIB, a prestigious association of U.S. and European executives in finance, credit and international business. He was their first European chairman and has been serving on their Board of Directors and/or Advisory Council for over 13 years.

He is one of the founding members of the Board of Directors of Creditreform China, a credit services provider based in Shanghai, an international source for credit reports, receivable management, consultancy services and education with a focus on China.

Fluent in several languages including Dutch, German and English, William has published articles in trade journals and credit magazines, in addition to participating in international forums and conferences. He also holds the designation of Certified International Credit Executive (CICE).