RISK MANAGEMENT
Managing Trade Payment Risk in China
September 18, 2009
Martin Jones

Hed: Managing Trade Payment Risk in China
By: Martin Jones

U.S. firms transacting in China should pay more attention to their accounts receivable than ever before, and be willing to collect bad debt without fear of ruining relationships or reputations of business associates. The growing message in China today is that debtors can no longer get away with non-payment. China's debt collection laws are now more transparent, and fear of a lawsuit can often result in early settlement.

The same reasons for non-payment occur in China as they do elsewhere, e.g. cash-flow constraints, poor management, unforeseen events, etc. Other reasons include moral hazard, where buyers show a lack of concern for financial commitments, and political intervention, where the government acts out of non-business motives such as curbing pollution or correcting a socially unacceptable situation.

Subhed: Debt collection in China
Good credit management starts with the collection of reliable debtor information. For that there are a variety of collection tools. Reports are available from reputable information providers. Conducting desktop research, undertaking buyer visits, checking public offices, and consulting local experts all help in assessing buyers and their trading environment.

The universal methods for handling payment risk are also adopted in China albeit with some rather unique variations. Many Chinese domestic creditors tend to have a different attitude to overdue debts than their Western counterparts. Precise payment dates are not respected in China. Delays are common and almost expected. Reasons for delay are rarely given and the pay-when-paid concept creeps in-buyers not paid by their customers do not feel obliged to pay their suppliers.

Debts collected using in-house resources should be handled by respectful negotiation rather than by intense pressure and threats. Maintaining "surface harmony" achieves better collection results.

Only Chinese law firms, by law, can conduct formal debt collections. For litigation guidance, there are some simple steps for a creditor:

• Select a suitable Chinese law firm through proper research
• Start the debt-collection process as early as possible. There is a two-year statute of limitations for local debts (four years for foreign debts)
• Supply the lawyer with a power of attorney to:
  • manage the debt
  • create an escrow arrangement with the debtor and the law firm
  • sign a retainer with the firm stating the services to be rendered.
• Execute an affidavit of authority for the person acting on behalf of your company
• Provide copies of original contracts plus related documentation to support the claim
• In a contested debt collection, the Chinese law firm also will need copies of the creditor's business license and related documentation.

A lawyer often starts by doing due diligence on the debtor to see if it is able to pay. Then, the lawyer sends demand letters, makes phone calls, visits the debtor, and finally files with the court. The lawyer can obtain interim court orders to seize property and freeze bank accounts. It is possible to obtain judgment within one month of filing and at a reasonable cost. Court fees are based on a percentage of the amount in dispute, plus a court filing fee while lawyers' fees could amount to 25 percent to 40 percent of the amount recovered, depending on the work and costs involved. Though uncontested cases often are resolved satisfactorily and finalized within three months, litigation in China can still be more cumbersome than in many other countries.

China debt collections should not always provoke animosity. Some debtors want to pay but have no immediate cash. This becomes debt management, not a contested action. Accordingly, the creditor should work with the lawyer for a debt-management agreement, which should be filed with the relevant Chinese judicial authorities, and with the banking authorities. With approval from these authorities, the collected funds can later be sent out of China.

For contested debt cases the collection process is more complicated, but the receiving process and movement of funds are the same as in an uncontested collection. Lawyer's fees for contested debts are either a percentage of amounts collected or by hourly tariff.

If a debt is paid before litigation, the law firm receives around 33 percent of the amount collected. If the debt goes to litigation, the law firm receives 40 percent of the amount collected. Court appeals could increase lawyers' fees to 45 percent but the option of paying regular hourly rates remains.

Instead of waiting for bad debt to occur, creditors should prepare for defaults losses. Apart from debt management procedures, trade credit insurance is also available in China.

Country Manager, Atradius Singapore

Martin Jones is the Country Manager of Atradius Credit Insurance NV in Singapore. He was previously the Country Manager of Atradius China and General Manager of Atradius Information Consulting (Shanghai) Co Ltd. Included in his legal and finance qualifications is a Diploma of Chinese Commercial Law from Renmin University, Beijing and Vrige Universiteit Brussels.

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