ACCOUNTS PAYABLE
Paying Into and Out of China
February 15, 2007
Christopher Bjorke, AFP

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Treasurers trade concerns and advice for moving money across China's border

China has been able to attract companies from around the globe by becoming the most desirable site for manufacturing and export in the world. However, the flow of money in and out of China tends to be more complicated.

Financial professionals with experience in China or encountering new challenges there have traded questions and advice about business in that country through discussion forums sponsored by the Association for Financial Professionals. Many of their concerns center on China's unfamiliar regulations or the relative efficiency of using familiar finance tools in a different setting.

Dale Garton, assistant treasurer of Lifetouch Inc., was recently concerned about the use of letters of credit in China.

"In the past year, my company has begun to purchase goods from China through an intermediary, leaving out the network of middlemen who were part of our purchases in the past. Although the volume of our purchases is not large, we've enjoyed substantial savings this way. In the first year of this program, we wired upfront payments of about 30% to the intermediary any time we ordered new merchandise, and paid the balance when the goods were cleared for shipment," Garton wrote.

"In order to reduce our credit exposure to the intermediary and to practice better cash management, I would like to explore the idea of paying for these goods through the use of import letters of credit instead. Our intermediary is resistant to this idea. I would like to get a better sense of how companies in a situation like ours usually pay for the goods that they import from China."

Marianna M. Carden, assistant treasurer of Oxford Industries Inc., wrote that letters of credit seem to be the preferred payment in Asia, but there may be better alternatives.

"LCs are certainly a great cash management tool, but will not likely reduce your credit exposure. Your banks will require either an additional line of credit or want to rework your current lines in order to accommodate the LCs you want to open. Those LCs will most likely qualify as a liability as soon as they are open and remain as outstanding liabilities until they are completely drawn down or expired," Carden wrote.

"There are some third-party payment mechanisms out there that, depending on your line of credit with your bank and their transaction fees, may prove more cost effective. We specifically use a company called Tradecard for those companies that want a little more security than just open account, but don't require the LC for collateral."

While some have concerns about making payments into China, other companies doing business there have questions about paying foreign vendors.

Patricia P. Adams of the A.T. Cross Co. of Rhode Island wrote about the regulations surrounding checks.

"I have heard that it is very difficult for a Chinese company to pay a foreign vendor by check (evidently it requires one to provide much documentation to the bank, etc.) and that such entities will often set up or use a related entity in Hong Kong to be the payer," Adams wrote. "I'd think this would create otherwise unnecessary inter-company transactions."

Michael Connolly, vice president and treasurer of Tiffany & Co., wrote that a related entity in Hong Kong may pose some risks.

"You are correct that it is difficult to make outbound remittances from China. We have seen the same in other countries such as Brazil and Korea. However, as long as the documentation is complete, there should be no risk (other than time) in getting through the bureaucracy. Also, it seems that the regulatory authority more closely scrutinizes inter-company payments than third party payments," Connolly wrote.

"Regarding setting up an entity in Hong Kong to make payments on behalf of the China entity, there are two risks that come to mind. The first is importation-the China entity will be attempting to import something that it can't prove that it owns. This could also create an input VAT that is not creditable.

"The second risk is a potential inability to take a tax deduction for the expenditure. The China income tax authority will not allow a deduction for something that was not paid. The Hong Kong authority will treat the payment as a loan or capitalization to the China affiliate. The old whipsaw."

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