Getting Paid & Financial Issues

Currency Exchange and Transfer of Funds

Many Chinese companies prefer to be invoiced in US dollars, particularly if they are already doing business with the USA, although it is sometimes possible to negotiate contracts in Euros or even Sterling.  Conversion of the Chinese RMB to foreign exchange is strictly controlled by the “State Administration of Foreign Exchange” (SAFE), a government department, who regulate transfer through the banking system.  This affects all financial transactions, from the ability to purchase Chinese RMB before travelling to contractual payments and dividends.  Small transactions, such as the use of ATMs and credit cards, are straightforward, but the controlled currency means that you need to be more careful in setting up contracts and investing in the market.  Company dividends may only be paid annually, following audit of accounts by an approved accountancy firm.

Contracts and Payment

Contracts as operated in the UK are relatively new in China.  They are, however, essential for successful business there, for the same reasons as in any other market. They also ensure smooth transactions of payments through the Chinese banking system, if payments do not match the contract they may be delayed, or conversion into foreign exchange may be blocked. 

When drawing up a contract with a Chinese organisation you should:

• Make it similar to other international contracts, but be very explicit and avoid legal jargon, which may not be understood.
• Include an arbitration clause, as legal action can be very expensive and difficult to pursue.
• Take care with milestones and related payments, this is especially important with royalties contracts, for which payments can attract particular attention.
• Agree and stipulate who is responsible for taxes.
• Agree and stipulate how agency payments are to be handled.
• Ensure the contract is fully understood and agreed with the Chinese organisation.   The contract should be accurately translated and both versions signed.
• Consider the law applying to the contract.  Contracts under foreign law are permitted and may offer easier prosecution in the ruling country if something goes wrong, but this will need enforcement in a Chinese court.  Contracts under Hong Kong law, which is based on English law, may be a suitable compromise.

It is common for negotiation to continue after a contract is signed in China, so it is wise to build some provision for concessions into the final figure.  Substantial additions to the contract need extra care, as, if they do not match the original contract, payments may be held up in the banking system. 

As elsewhere with large contracts involving stage payments, the final stage, which often depends on “sign off”, may be difficult to realise and this needs consideration when agreeing terms.

Short-term Finance

When exporting to China normal commercial rules should be followed, and you should discuss the arrangements for security of payment with the international department of your UK bank, the UK offices of Chinese banks or UK-based banks that have offices in China.  If you are a first-time exporter to China, the standard method of receiving payment for your goods is by documentary letter of credit.

The Chinese bank will make payment provided that the requirements of the letter of credit are met. However, be aware that a letter of credit is a form of contract between two banks.  A bank will make payment provided that the documents submitted to it are in strict compliance with the conditions of the letter of credit. This is regardless of the purchase contract. To prevent the possibility of a payment being made if the terms of the purchase contract are not met, the seller should check the letter of credit against the terms of the purchase contract, ensure that they match, and build in any necessary safeguards. 

Open Account and Bills for Collection are other payment methods commonly used between UK exporters and Chinese importers when a trustworthy relationship between the two parties has been developed. Major exports and those requiring long-term finance will require specialist payment and financing.

Pricing

Margins achievable in Chinese markets are likely to be lower than in Western ones.  This situation is changing rapidly, and increasingly Chinese companies are prepared to pay more for demonstrable benefits, and it is occasionally possible to command a premium for a unique product or service. 

Insurance

The private sector provides credit insurance for exports of consumer goods, raw materials and other similar goods.  Speak to your banker or insurance broker for more information or contact the British Insurance & Investment Brokers’ Association for impartial advice:

British Insurance & Investment Brokers’ Association
Tel:  0870 950 1790 (Consumer Helpline)
Email:  enquiries@biba.org.uk
www.biba.org.uk

Private sector insurance has some limitations, particularly for sales of capital goods, major services and construction projects that require longer credit packages or are in riskier markets.  The Export Credits Guarantee Department (ECGD), a separate Government department that reports to the Secretary of State for Trade and Industry, provides a range of products for exporters of such goods and services:

Export Credits Guarantee Department
Tel:  020 7512 7000
Email:  help@ecgd.gsi.gov.uk
www.ecgd.gov.uk