Knowing how to collect debt in China is like navigating your way through this vast and foreign country, says Tony Au.Only if you understand it and the people, you can go everywhere. If you don’t, it will be a major challenge that may cost your business dearly
China imported an estimated $1.327trn in 2010, making it the world’s third largest importer. Trade with China has many anomalies which aren’t obvious to Western businesses, creating financial challenges, if not major risks. There is the Chinese attitude to payment practices which we accept as usual within the West, most notably collections. But here is the thing: collections do not officially exist in China.
To understand why this is the case one needs to go back to 19th Century China. Back then, a visit from a debt collector could be a life changing event. As a result, the Chinese government imposed a law prohibiting collections. This law is still in place today, and while debt collection doesn’t officially exist, companies do provide debt collections services. These collection businesses will register themselves as ‘risk management’ businesses or ‘credit consultants.’ International debt collection agents may collect foreign debts owed to Chinese companies, but the current law allows only legal bodies, such as the police, the courts or specialised legal firms to collect Chinese debts.
For a western observer, the list of documents required to implement a collection is extensive. Terms and conditions for supply of goods and services must be set before an order is accepted. The process must be controlled via a comprehensive document chain, such as purchase orders, delivery notes and invoices. These should be all in writing in order to provide evidence.
Aside from considerations of currency exchange, local knowledge, labour regulations, and taxation and legal systems, businesses will face unexpected challenges when collecting in China. Filed data on businesses is not necessarily accurate because corporate auditing is not always reliable. Local credit investigations are resourceful, but because there are no standardised criteria the quality of work from one service to the next varies enormously.
Trust and honour
A different set of attitudes govern Chinese business and these manifest themselves clearly in the approach to credit management and debt. ‘Losing face’ is still a major issue for Chinese companies, and bankruptcy is still treated as something dishonourable. ‘Guan Xi’ governs Chinese business deals – the closest Western explanation for this is a relationship of trust and honor which may take years to develop.
Additionally, there are eight main dialects spoken – and around 10 versions of each. One of the most common pieces of advice westerners are given when visiting China is to always have the address you are visiting written in Chinese before setting off – because the taxi driver won’t know where he should go otherwise.
China’s expansive geography can also prove an enormous challenge. Face-to-face resolution is undoubtedly the most effective way of collecting debt; but the sheer geographical scale of China is not conducive to this. It is also very hard to keep track of businesses that have moved away. This can mean travelling for days, only to find that the business you are looking for no longer exists.
Western businesses should also know that legal regulations contribute to the success rate on debt collection in China being lower than what they are used to in their home countries. In general, the limitation of action regarding applications to a people’s court for protection of civil right under general trading is two years; and for some exceptional international purchasing contracts is four years. This means that after the stipulated period – counting from the last demand date but not the original due date – the creditor cannot file a claim under the jurisdiction system.
This can leave Western businesses in something of a quandary. Therefore preparation is essential: find out who they already have established trading relationships with and do some homework about their trading practices, patterns and reputation.
A good route forward is to make sure to have trusted local support. Larger internationally-based collectors like Atradius Collections use trusted Chinese partners and have offices in Hong Kong – which has the advantages of being exempt from Chinese mainland regulations while sharing the same language, culture and time zone. Choosing this route ensures a greater chance of success in collecting debt
Tony Au is Regional Manager at Atradius Collections.
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