Insolvency Across Borders: China

Insolvency Across Borders: China

Of the largest foreign markets, the People’s Republic of China might be the most enticing -- and the most risky -- when it comes to business relationships. Much about the inner workings of this Asian mega economy is unknown.

For example, China has a detailed Enterprise and Bankruptcy Law, which was established in 2006 but it is not implemented in a consistent manner. Secrecy surrounding company financials and enterprise health also makes it difficult for credit professionals to obtain an accurate read on how companies, and the economy, are actually performing. Credit managers should also note that filings tend to get delayed for extended periods of time, which results in liquidation in almost every case.


Still, the country’s sheer size – China is the most populous country on Earth – and wealth make business dealings attractive. Many facets must be considered when doing business with China:

Consider that language and cultural differences make China a difficult market to understand for the West

Aside from secrecy, the Chinese language can pose its own set of problems when it comes to credit terms and insolvency regulations. Language translation is up for interpretation, and the wrong interpretation could mean great loss. Additionally, the Chinese language includes five main dialects – Mandarin, Yue, Min, Hakka and Wu – which makes conducting business all the more challenging.

Additionally, customs in China differ extensively from those in the United States. For instance, the handshake is not a standard way of greeting people in China. Making it a priority to understand China’s business customs before interacting with a business within the country could make a huge difference. This is also true when doing business in India, Japan, South Korea. When dealing with Latin countries, dialect also presents a unique challenge, as Spain’s dialect differs from Colombia’s, which in turn differs from Mexico.

Use the transaction-by-transaction approach, and understand insolvency regulations before extending credit

When dealing with Chinese companies, Nicholas Stern, editor of NACM’s Business Credit magazine, recommends a transaction-by-transaction relationship to start. Doing so makes it much easier to detect warning signs like changes in how companies request supplies or when a company starts asking for different terms. Working one transaction at a time, credit managers are able to mitigate the potential for risk on an ongoing basis. 

When conducting business abroad anywhere, and especially in countries like China where there are so many unknowns, conservative credit terms could mean less loss in the future. 

“Start out with safe terms and see how the relationship develops from there,” said Stern. There's less pain endured from going slow when developing new relationships and it could save you from losses.

Understanding how China’s insolvency regulations are implemented before extending credit is also important. For instance, though the Enterprise Bankruptcy Law holds up to international best practices, according to Stern: “It’s use has been very low relative to the size of the Chinese economy.” As noted above, the implementation of the law can be inconsistent. 

Proof of financial distress is another issue: “Creditors dealing in China have a hard time proving that Chinese companies do not have the assets to pay their debts, and cases are up to the Supreme People's Court interpretation,” said Stern.

A slowing economy means China is cracking down on insolvency regulations

China's “economy has slowed in recent years and corporate credit growth has gone in the opposite direction,” Stern stated in his article for Business Credit magazine. 

Stern, citing Susan Finder, writer of the blog Supreme People’s Court Monitor, goes on to point out that bankruptcy cases in China have risen in recent months. And as a measure to address the issue, the Supreme People’s Court “released data on a series of bankruptcy cases from the prior year.” 

This kind of data gives credit managers some insight into how Chinese companies are doing, which is something they didn’t have access to before 2016. The release of this data is a positive, as it signals that China is adopting a more willing attitude in easing the process of doing business beyond its borders. Despite this positive development, transparency in the country remains minimal when compared to many other nations.

An understanding of Chinese culture, coupled with proper knowledge and conservative credit terms that clearly protect the creditor are essential when doing business in China. Establishing relationships in China can be quite profitable if a credit manager is equipped with data and knowledge of the market.


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