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Originally published:
Jun-29-2005
Credit and Collection Challenges
When Doing Business in China
In 1978, China began an economic transformation that has had profound global impact. The market-oriented reforms it has implemented over the past two decades have resulted in the largest reduction of poverty and one of the fastest increases in income levels ever seen. China today is the sixth-largest and fastest growing economy in the world. In 2004, its $1.65 trillion economy was about one-seventh that of the U.S.
China’s rapidly expanding economy and 1.3 billion population holds huge potential for business, and most global companies are either already involved in the Chinese market or have plans to enter soon.
While the country is moving in the direction of opening up its economy and beginning to conform its business practices to the standards of the “West”, two areas of credit management – credit risk assessment and debt collection – still offer significant challenges for companies selling into China.
Credit Risk Assessment
The major difficulty here is a lack of adequate, reliable information. Business relationships in China have traditionally been based on a subjective level of trust developed between buyer and seller. Thus, objective, quantifiable measures of creditworthiness are only now beginning to play a significant role in business culture.
Some of the main challenges:
- There is no culture of transparency.
- Filed data is not necessarily trustworthy.
- The corporate auditing structure is poor, and the quality and integrity of Chinese auditors is sometimes questionable.
- Local credit investigation services tend to be superficial. While resourceful in data collection, there is no standardized credit rating criteria, and the quality of work from one service to the next varies widely.
- Banks often favor their clients when providing credit references, and credit investigation is not within a bank’s permitted business scope.
- Accounting practices in China are different from those in the West.
- While companies do have to submit financial statements to the government on an annual basis, audited financial statements often do not reflect the company’s true financial status.
Due to the limitations of credit information as listed above, it is advisable to use multiple sources for a comparative analysis when considering the creditworthiness of a Chinese business entity. Sales reps are a good source of first-hand information on potential buyers. A centralized internal credit portfolio management system should be maintained that facilitates information sharing between sales and management.
Sources of Credit Information in China
Governmental:
- Industrial and Commercial Administration Bureau – company registration records, investment information and audited financial statements
- Taxation Bureau – audited financial statements, tax records and investigation
- National Statistics Bureau – information on large companies
- National Security Bureau – offense records
- Courts – litigation information.
Commercial:
- Banks (keeping in mind the caveat listed above). Unfortunately, Chinese national banks have not historically maintained a national database of companies or shared credit information. However, the People’s Bank of China, China’s central bank, recently began sharing and maintaining customer credit information with eight other major Chinese commercial banks. This endeavor will certainly have a positive impact on the quality of credit information available on Chinese corporations.
- Chinese auditors – good sources of inside information for larger companies
- Credit reporting agencies – with caveats as listed above
Debt Collection
Unfortunately, in China, amicable collection between creditors and debtors is not always possible. Small and medium sized companies generally don’t have sufficient equity and working capital to pay all of their creditors on time (note: typical DSO in China is 125 days). As a result, they stall payment as long as possible. And, with larger companies, unless your product is so valuable or so unique that it cannot be produced by other companies, competition is fierce. It is definitely a buyer’s market.
If you can’t work something out with your buyer, what is your recourse? Since collection agencies are banned by Chinese law, attorneys must be used. Regrettably, however, there is a lack of standards within the legal profession. China produces thousands of law graduates every year, yet the industry is immature and not well regulated by either the government or voluntary organizations like the Commercial Law League of America. Neither are there Law Lists to ensure standards or provide bonding.
So, what are some solutions to successful receivable management in China?
First, take late payments seriously. Maintain a policy of stopping shipments, enforcing late payment penalties and, if necessary, taking legal action against Chinese debtors. One large equipment manufacturer and lessor has installed GPS systems in their machinery shipped to China. If the lessee doesn’t make his payments, they remotely shut down the equipment!
Second, find resources you can trust to guide you through the legal system and who can recommend qualified, effective and reasonably priced attorneys. The Chinese legal system, while expensive, is actually quite efficient, if you have the right representation. In the case of bad debts, the legal process normally takes just 6 months to reach a judgment. Since the central government watches these issues, local government pays close attention to cases involving foreign companies to ensure they are handled fairly and expeditiously.
Third, arbitration awards are enforceable in China and, therefore, represent a good avenue for recovery. However, the statute of limitations for recording such awards is only six months. Awards that have not been recorded with the Chinese courts within that time become unenforceable. The only recourse, then, is to return to the debtor and begin the negotiation process over again.
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ABC-Amega Inc. provides commercial collection services in 200+ countries worldwide. With offices in Shanghai and Beijing, ABC-Amega has special expertise and extensive contacts in China, as well as the rest of Asia. For assistance with commercial collection matters, call 1-800-732-0206 or email info@abc-amega.com.
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