Due Diligence

The vast majority of problems that foreign companies encounter when engaging in business transactions in China could have been avoided by carrying out some due diligence at the start of proceedings.

 

There are different levels of due diligence that are appropriate for different situations. If your sole interest is in exporting, the best proof of a Chinese company’s ability to pay is whether it is able to raise a letter of credit from the bank. If so, you do not need to check the company’s financial standing as the bank will have already done so. At the end of 2008 China's credit database contained the personal records of 640 million individuals and 14.47 million companies and is the largest credit information pool in the world. The database includes loan, credit card use, insurance and bill payment information of individuals and companies and is used by financial institutions in China to make personal credit checks on loan applicants and carry out due diligence on registered Chinese companies.

 

One simple piece of due diligence you can conduct is to get a copy of a company’s business licence which will tell you:

  • The legal representative of the company
  • The name and address of the company
  • The amount of registered capital which is also their limited liability
  • The type of company
  • The business scope
  • The date it was established and the period of its business licence

 

You should check that the information contained in the business licence matches what you already know and if it doesn’t then find out why. If you want to verify the information externally you can do so through the State Administration of Industry and Commerce (SAIC). The local AIC bureau is the Chinese equivalent of the UK’s “Companies House”. All companies in China are legally required to register with their AIC bureau at the municipal level to obtain their business licence. CBBC offers Company Check Services which helps UK companies conduct basic level due diligence, via the local branch of the SAIC check.

 

You will have more security if you know who the legally responsible person is, so find out who you are dealing with. If problems occur, it will be much easier to address issues with the legally responsible person, rather than a middle man, who may go missing when problems arise.

 

The shareholders of the company are responsible for that amount of liability listed as registered capital on the companies business licence.  You can check whether or not the registered capital has been paid up by using a firm of accountants to get a Capital Verification Report.

 

If you want to establish a business relationship that goes beyond exporting, you will need to carry out further research. A thorough evaluation of your potential partner may be time-consuming and expensive, but doing so will greatly reduce the risk of serious problems in the future. However it is not enough to obtain a copy of a company’s accounts, as they may not be accurate. Accounts are unlikely to be audited to the standards routinely expected in the UK, and companies may have different sets of accounts for different audiences, so it is advisable to use such data in conjunction with information obtained elsewhere.

 

A particular obstacle that British companies must overcome is the reluctance of many Chinese business partners to agree to thorough due diligence investigations. Failure to gain a full understanding of a potential partner’s credit history and professional background can spell serious trouble and financial loss. It is possible to reduce local concerns over due diligence checks through a patient and polite business approach and by stressing the reciprocal nature of the arrangement, but you should expect this stage of negotiations to be lengthy and at times difficult. Good quality consultancy and assistance is available from experienced firms resident in China.

 

Finally, do as the Chinese do. Expect to spend a lot of time at meetings and banquets with your potential Chinese partners. You might think this is a slow progress, but the Chinese are using this time to establish whether you will make a suitable and trustworthy partner and whether they want to enter into a long-term business relationship with you. It is wise to do the same.

 

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