Building a Credit Infrastructure in China
Keywords: credit, receivable management, Information Management, bank credit registration, credit risk assessment,
bankruptcy, mortgage, debt
Having
a predictable, systematic approach to credit and receivable
management is only recently understood as necessary in China.
1. Credit and Information Management Tools
One way China is seeking to open and modernize its economy is through the establishment of credit management tools that have long been available outside the country. In early 2001, the People's Bank of China ( China's Central Bank) promulgated the "Measure on Bank Credit Registration and Information Management (Trial)," designed to implement a "national bank credit registration and information management system." This measure requires institutions such as banks, co-operatives, trust and investment companies, and financing companies to provide information on individuals' banking transactions, as well as information on companies' disputes, defaults, and securities issuances.
Surrounding this initiative is the recognition by the private sector that they, too, can play a role in establishing safeguards and remedies for people seeking to trade more predictably. Chinese credit insurers and some of their European counterparts are active in the China market and are establishing resources in China to improve domestic and export credit risk assessment.
2. Guarantee and Contract Laws
On October 1, 1995, the Guarantee Law was enacted "to promote capital accommodation and commodity circulation, and ensure the realization of creditors' rights. The Law governs guarantee (guarantee and guarantor, guarantee contract and guarantee mode and guarantee responsibility), mortgage (mortgage and things mortgaged, mortgage contract and registration of things mortgaged, force of mortgage, realization of mortgage and mortgage of maximum amount), pledge of movables and rights, lien, and earnest." (www.sinolaw.com.cn) This law was a realization by the government that private property rights needed an official and stable basis of recognition and enforcement.
A more recent step in support of property and contractual rights was the enactment of the Contract Law on October 1, 1999. This law recognizes such recourse as rights of assignment, subrogation and transfer of debts from first-party to third-party debt-holders. These rights enhance the ability of organizations to pursue collection, and coincide with the establishment of official "Asset Management Companies," opened by the Chinese Government and banks to consolidate bad loans and debts for active disposition.
3. Bankruptcy
Bankruptcy, as understood in western economies, is a relatively recent phenomenon in China. As Dr. Li Shuguang notes in "Bankruptcy Law in China: Lessons of the Past 12 Years", appearing in Harvard Asia Quarterly, Winter 2001, "The concept of 'bankruptcy' was not formally recognized in Chinese law until the first bankruptcy law was introduced in 1906, during the late Qing Dynasty. Until that time, the role of bankruptcy law was filled by the legal and ethical tradition that, 'the son pays for the debts of his father'... In the early 1980's, Chinese economists, legal experts, and government officials began to realize the drawbacks in the way that the planned economic system dealt with insolvent enterprises, and advocated the promulgation of a law of enterprise insolvency." New laws finally came into effect on November 1, 1988.
4.
Recovering Debts In China
In light of difficulties in interpreting and enforcing contractual and property rights, proving and recovering debts in China is often problematic.
5. Arbitration
The most widely practiced official remedy for recovering debt in China is Commercial Arbitration. Arbitration, as a mechanism for resolving foreign trade disputes, was implemented in 1956. The Arbitration Law of the People's Republic of China , adopted on August 31, 1994, set the framework for how arbitration is performed today. The main body governing arbitration is the China International Economic and Trade Arbitration Commission, or CIETAC. CIETAC's rules, amended effective October 1, 2000, provide the jurisdiction and procedures for commercial arbitration. Firms selling in China are strongly advised to include an arbitration provision in their sales contracts, in order to insure any subsequent trade disputes will fall within the jurisdiction of CIETAC. The following model arbitration clause is recommended by CIETAC:
"Any dispute arising from or in connection with this Contract shall be submitted to China International Economic and Trade Arbitration Commission for arbitration, which shall be conducted in accordance with the Commission's arbitration rules in effect at the time of applying for arbitration. The arbitral award is final and binding upon both parties."
6. Use of Lawyers
Aside from arbitration, the use of lawyers to litigate claims is growing in China. The judicial system, consisting of four levels of courts functioning throughout the country, has jurisdiction to adjudicate commercial disputes. Chinese, as well as some of the leading Western law firms, now practice extensively throughout the country, representing Chinese and foreign clients on a variety of legal matters. The judicial process in China , however, is slow and expensive. It is also marked by corruption, a condition top government officials recognize and pledge to confront.
7. Collection Agencies
Traditional debt collection by lay organizations, which is the customary way of conducting third party collection in developed markets, is "illegal" in China . Collection agencies, per se, are banned under regulations issued by the State Administration for Industry and Commerce and the National Public Security Bureau in 1995. There remains a perception that "debt collection agency" means criminal undertaking, as it has been taken to mean in other Asian markets, such as Japan and Hong Kong . It is the case, however, that consulting and other business service firms, acting in co-operation with Chinese partners, are operating in China for the purpose of helping Chinese organizations pursue debts owed to Chinese creditors from debtors outside of China , thereby promoting China's interest in managing the country's balance of payment and foreign exchange levels. These organizations also have an interest, along with a growing capability and need, in advising Chinese exporters on how to limit credit risks and exposures, and how to remedy collection problems should they occur.
8. Conclusions
In view of the rapid growth of the Chinese economy, the country's attempts at reform as it enters the World Trade Organization, and the prevalence of foreign-owned firms and practices in the market, principles of credit management as understood in the developed world are bound ultimately to be embraced in China. Currently, the authors believe the number one risk of doing business in China is the inability to collect. This risk not only applies to MNCs (multinational corporations), but also to domestic firms. In fact, if China can build a business system based on sound credit practices and risk control, its own domestic sector can flourish.
For commerce to take off in China , as portrayed by many commentators and observers, China needs to develop trust and credit in its business practices. An important part of this approach includes accounting and financial information reform. Recent efforts by the Chinese Government to begin such measures are clearly steps in the right direction. However, in practice, protection truly comes about in the form of the systematic adoption and use of credit procedures and remedies by all parties, people and institutions. With a culture built and still largely based on "guanxi" and "face", there are significant challenges to the adoption of the concept of credit risk control, let alone the full systematic implementation of credit practices.
As it now stands, foreign-based MNCs can take various positions regarding their involvement in the Chinese market. They can choose not to be part of this economy until a more sophisticated credit management orientation is established. They can take part aggressively and without much information or protection against credit and related risks. Or, they can take part not only in selling to the country, but also helping to build a credit practice and culture there. Such active participation, in the long term, could be the most advantageous way to favorably position an entrant in this large, fast moving, and ancient economy.
Source:
http://www.credit-to-cash-advisor.com/Home/Articles/CreditManagement/China_CreditfortheFuture
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