Trading with China - One size doesn't fit all
Opening up the market to Western businesses coupled with increased levels of consumerism and the Government’s desire to grow trade with the West has, over the past 30 years, stipulated a dramatic level of interest in China, prompting some commentators to coin the phrase “the new Goldrush” to describe the clamour for a presence n this ‘new territory’.
However, as with all new ventures and business opportunities, there is an inevitable degree of risk associated in developing a profitable presence within the Chinese market. Quite apart from the cultural aspects and the unfamiliar business etiquette practices, which can be readily overcome, there are some more fundamental differences which pose a serious risk to any business that does not seek a range of sound professional advice.
China has 34 separate provinces (province level administrative units) and it is recognized that each has its own localized variations on procedures and practices when conducting business, which gives rise to the generally accepted rule that “One size does not fit all in China.” Consequently, it can not and should not be regarded as a homogeneous single market, and the local variations must form a key part of any business plan.
This diversity also provides an indication of the complexity and depth of knowledge required to develop trade effectively with China. Commercial law and the judicial system is still evolving in many parts of the country, albeit at a characteristically rapid pace, which helps provide western companies with a more familiar trading environment and an improved level of contractual protection.
New legislation, in many cases based on European and North American principles, is being introduced on a regular basis, so it is absolutely critical that information used to develop business plans is verified an updated at regular intervals, perhaps two or three times per year.
Undeniably, the most effective and robust indicators of success are those based on the financial measures of turnover, profit and ROI, which is where the opposing forces of risk and opportunity come into the sharpest focus for most companies. Yet businesses and financial risk can be minimized by seeking informed professional advice to help protect investment and trade as well as safeguarding credit when trading with Chinese businesses.
Check Credit worthiness
Before sealing a business contract, always undertake a detailed creditworthiness check on any potential Chinese business partner through a bank or specialist credit management company. In China, it is necessary to look beyond a buyer’s account as it is common for companies to legitimately have three sets of financials – one for the tax department, one for the bank and one for its owners, often with little correlation between the three sets.
Financial information on the former state-owned companies can be sparse and, in some cases, of dubious accuracy, while small Chinese firms are often family owned with undisclosed inter-family debts and loans.
Confirm terms of Payment
Ensure that the exact terms of payment, performance standards and timelines are stated unambiguously in writing within the contract. Also verify the correct name of the buyer, together with the registration number to confirm that they are legally entitled to enter into the contract.
Beware of Terminology Differences
An invoice, for example, is known as a payment note in China, whereas a Chinese invoice is, in fact a receipt.
Letters of Credit
Letters of credit are the most popular form of payment when conducting business in China. In addition to the Bank of China and several other reliable state-owned banks, most Chinese commercial banks also have the authority to issue LOC’s for imports. It is critical that the terms of the LOC are compiled with and all documents are presented in exactly the correct form to the bank to avoid payment delays or losing the LOC security and being forced to convert to an open account transaction.
Retention of Title (ROT)
ROT clauses are legally valid according to Chinese contract law and should be stipulated in writing. An ROT is insolvency resistant, but protection in case of acquisition by a third party in good faith is not yet regulated by the law, so it is essential to have a readily available and recognized means of accurately identifying the goods supplied.
There are various types of payment guarantee, but it is vital that their wording is checked with a local lawyer to ensure the guarantee can be called with the need to obtain judgment against the original debtor.
More detailed information on trading with China, including the latest detailed country report and other key business intelligence, is available from www.atradius.co.uk