Stiffing China Not as Easy as It Used to Be?

Countries that make and export things have foreign buyers who buy things. But what happens when the country making things is China and the foreign company fails to pay for what they have ordered?

Pay Up OK?

In the wake of the great global recession there has been a bad debt explosion in China. It is estimated that the number of debts owed to Chinese exporters by US companies has increased 80% over the last two years. It is estimated that 5%-10% of all of purchase orders placed with Chinese manufacturers end up as unpaid bills/bad debt. Furthermore the China Chamber of International Commerce estimates outstanding debt owed to Chinese exporters at $150 billion with an annual increase of $15 billion. At most, only 5% of this debt is currently being recovered.

So why does so much of this debt get written off, uncollected and forgotten about in China? Why are so many US and European companies getting away with not paying what they owe, with no effect on their credit rating? Chinese companies tend to keep pushing bad debt off sometimes as long as two or three years, hoping for payment, by which time it is all but unrecoverable. Chinese companies accustomed to doing business by Guanxi (relationships) negotiate with their debtors in person, usually yielding some result, but this does not work internationally.

Collections is a new element of business for many Chinese companies. Some Chinese companies fear losing face if others find out they were not paid. Big State Owned Enterprises tend to push bad debt under the rug because they can, and because no one wants their career ruined by bad debt its easier to put it off as still outstanding.

Many Chinese exporters do business based on credit, but do not have credit check and ratings regimes in place to make infor! med deci sions. Chinese companies think that debt collection is a racket and that if they hand over their case to a debt collector the collector will keep the money.

Pan Asian Commercial Consulting Group, a US based corporate debt recovery firm and a new client of ours, has entered China to try and change all of this. They believe that there is a great business opportunity but also believe there is an ethical and moral component to helping these Chinese companies.

They are offering a straightforward approach. They have agents and lawyers in all 50 states (because statutes and laws vary by state). Once they receive a file from a Chinese company they will send the appropriate documentation and letters to the debtor company. If this fails the legal process begins. Once the debt is collected, Pan Asian earns its commission and the Chinese company recovers part or all of its money.

It will be interesting to see how this industry develops in China as more and more Chinese companies assert their rights and gain a better understanding. Do you have any experiences in this arena? Positive, negative? Opinions on the business as a whole in China? What are your thoughts?