What Foreign Businesses Need to Know if They Have to Collect Debt in China

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Jan 27, 2011, 05:56 ET

AMSTERDAM, January 27, 2011 /PRNewswire/ -- Trade with China has many anomalies which aren't obvious to Western businesses, creating financial challenges. This is particularly true in the case of debt collection which officially does not even exist in China.

China has had a vivid history around debt collections, which therefore were prohibited by the Chinese government in the late 19th century. The regulation is still in place and whilst debt collection doesn't officially exist, companies in debt collections will register themselves as "risk management" businesses or "credit consultants. International debt collection agents may collect foreign debts owed to Chinese companies, but only legal or authorized bodies, such as specialised legal firms may collect Chinese debts.

The list of documents required to implement a collection are extensive. Terms and conditions for supply of goods and services must be set before an order is accepted. The process must be controlled via a comprehensive document chain, such as purchase orders, delivery notes and invoices. These should be in writing in order to provide evidence.

Aside from considerations of currency exchange, local knowledge, taxation and legal systems and labour regulations, businesses will face unexpected challenges when collecting in China. "Filed data on businesses is not necessarily accurate because corporate auditing is not always reliable - local credit investigations are resourceful but because there are no standardised criteria the quality of work from one service to the next varies enormously," says Tony Au, from Atradius Collections who is based in Hong Kong and responsible for the business in China. "Additionally, the expansive geographical area can also prove a challenge, especially as debt collections are often done face-to-face."

A different set of attitudes govern Chinese business and these manifest themselves clearly in the approach to credit management and debt. "Losing face," is still a major issue for Chinese companies, and bankruptcy is still treated as something dishonourable.

Western businesses should know that the success rate on overall debt collection in China stands at an estimated 30%. In general, the limitation of action regarding applications to a people's court for protection of civil right under general trading is two years; and for some exceptional international purchasing contracts is four years. This means after the stipulated period (counting from the last demand date but not the original due date), the creditor cannot file a claim under the jurisdiction system.

Due to the challenges and risks, a route forward is to make sure to have trusted local support. Resources such as international business organisations or chambers of commerce help establish Western businesses with legal and credit management contacts and explain how the foreign system works. A successful option is engaging a dedicated debt collection service with experience in collecting Chinese debt.

Larger internationally based collectors like Atradius Collections, have offices in Hong Kong which has the advantages of being exempt from Chinese mainland regulations but sharing the same language, culture and time zone and use trusted Chinese partners, ensuring a greater chance of success in collecting debt in China.

About Atradius Collections:

Atradius Collections, a business unit of Atradius Group, provides efficient, quick and flexible solution to recover domestic and international trade debts. With a global network of collections specialists, lawyers and insolvency practitioners worldwide, Atradius Collections serve over 14,000 customers handling on average 100,000 cases a year. Over 80 years of worldwide credit management industry experience uniquely position Atradius Collections as a global leader in business-to-business debt collections. For more information, please visit: http://www.atradiuscollections.com

SOURCE Atradius Collections