Credit Management in China – The Do’s and Don’ts

ORANGEFIELD ICS

Guest article by: William F.M.J. Bastiaan, board Member of Creditreform China (www.creditreform.cn) and Marcel Wiedenbrugge, director of WCMConsult (www.wcmconsult.com)

Credit (risk) management in China still is in its early days, although a lot has happened over the last couple of years. It will take at least two more generations before one can start their credit management standards with common practice in Europe or the USA.

Chinese companies are starting to understand that in international business, transparency is an important requirement as it builds confidence and trust. However, one still is far from managing their ‘order-to-cash’ process on a level, as one is used to in the West.

Except for large internationally active Chinese entities, most see credit as a pure administrative function and will have to adjust their operations and mindset. However, this will not be an easy task as there is no proper credit management education available.

Credit Information

It is essential to gather credit information about any potential business partner, but many Chinese companies still do business based on vague promises and are often cheated.

Although there are several suppliers of credit information active in China, the quality of provided information can differ significantly. Acquiring data from any so-called intermediary is often driven by price and the seller’s only interest is to turn reports into cash, whatever the quality. Therefore it should be an important criterion that the provider also compiles the credit information report!

For any credit information providers it is difficult to get reliable information while it is considerably more expensive than in Europe or the USA.

Contrary to what one might expect, in China most company data are not centrally managed and an information provider has to contact many different sources to be able to compile a proper report. It is recommended to only work with information providers who use data that originates from Chinese authorities.

Doing business in China is still strongly related to personal relationships. Chinese companies, however, realize more and more that doing business in today’s global economy carries more risk than in the past; so Chinese companies are gradually ‘forced’ to adopt credit (risk) management principles if they want to do business internationally.

Another reason, motivating Chinese companies to implement a professional credit management policy, is the need for cash. Similar to the West, banks in China have become stricter in providing loans and companies are forced to better manage their assets and credit risks.

Debt Collection

In the West, there is a systematic, more aggressive approach towards collections. As soon as an account becomes delinquent a predetermined routine of follow up starts, designed to capture the past due payment. The approach is more assertive and carries implications for future dealings with that specific customer.

In China one takes a more passive attitude. In fact, most Chinese business people are not comfortable addressing overdue accounts. As a result, businesses have no established policies or systems for dealing with delinquencies. Their tendency towards avoiding confrontation results in poor follow up, with an adverse effect on cash flow. One prefers to wait, hoping that the matter will resolve and often thinks that, as long as the delinquent account is on the balance sheet, there is hope.

Using specialised collection agencies is relatively new to the Chinese. However, this approach or strategy is gaining popularity as using such party prevents suppliers from losing face. Unfortunately many Chinese companies lack the experience of selecting the better partner, and tend to go for the cheapest offering rather than the most effective agency.

Last but not least it is important to realize that a collection agency is legally only allowed to mediate! Only a law firm can enforce the payment of a debt. It is therefore best to look for a legal partner who is specialized in debt collection.

Legal

With regard to litigation, the Chinese law and court system is reasonably adequate. Unfortunately this does not mean that taking the decision to litigate is an easy one. Chinese, in general are afraid of lawsuits, as they don’t fully understand the legal process and possible consequences.

In the West, an attorney is selected based on his or specific skills. In the East, the selection is based on the relationship one has with an attorney, regardless of any specialized knowledge of the matter to be brought to court.

The ‘in-house’ process also differs. Whereas it in the West is about being practical and willingness to settle, in the East one tends to be reluctant to make a decision, trusting the ‘system’ to solve issues, and thus is not looking for a settlement.

The post-judgment remedy is relatively effective and arbitration is seen as a popular alternative dispute resolution mechanism. Although this is encouraging, one should not forget that there is a lack of sufficient professional legal services, and local protectionism still exists.

Chinese court costs are still low in comparison and should not stop one from litigation. However, it is up to the judge to determine who will have to pay for the litigation costs. Nowadays, litigation procedures in China can be very efficient and relatively little time is needed to get to a verdict. Also, the execution of the verdict is not that difficult anymore and it is relatively easy for an attorney to get the required permission from SAFE (State Administration of Foreign Exchange) to transfer the funds abroad.

Keep in mind that a verdict of a foreign court is not enforceable in China! To avoid wasting time and money, best is to adjust the conditions of sale and make Chinese law applicable. Furthermore it is also important to mention the jurisdiction of a city like Shanghai to avoid possible effects of protectionism, as this occurs in smaller or more rural cities.

As for the choice of a law firm, choose a firm who has specialized in debt collection. A good debt collection firm will mediate, perform amicable collection as well as pursue litigation.

One last thing needs to be mentioned here, in China a lawyer is held personally responsible for all he or she undertakes. In case of any wrongdoing it might quickly end the attorney’s career and put him or her out of business forever. From a Western point of view this actually is quite a comforting thought.

Conclusion

Wrapping up, we would like to summarize some of the major do’s and don’ts in doing business in China or with Chinese companies from a credit perspective.

  1. Be prepared: know you customers inside out and especially who the decision makers are. Focus on the relationship.
  2. Be patient: invest time in building the relationship and trust
  3. Currency: continue to trade in Euro or USD
  4. Terms and conditions: try to keep it simple and make sure that they are understood by your Chinese customer
  5. Law: apply Chinese law in the terms and conditions and choose a major city as your jurisdiction
  6. Collection partners: choose your partner based on performance, not based on promises.
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