Chinese Credit Management: Any progress made? Part 2
July 28, 2009, By William F.M.J. Bastiaan, CICE
The following article originally appeared in the July 2009 issue of ABC-Amega's free client newsletter, "Credit-to-Cash Advisor".
William F.M.J. Bastiaan, CICE, Director Global Markets ABC-Amega Inc.
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In Part One, of this article we discussed cultural differences that impact the development of credit management in China. We also took at brief look at credit practices and some of the challenges in moving China toward a global approach to credit. Part Two considers the areas of credit information, and collections and the legal process. Credit Information
There still is a lack of reliable credit information in China, although the situation is improving. For the most part, business decisions are still based on a trusting relationship. The number of transactions on open account, however, is growing faster than business on secured terms. China still has a ways to go in developing a culture of transparency. While information is available to many government departments, there is no clear supporting law or policy regulating public access. The fact that filed data is not necessarily trustworthy adds to the difficulty of depending on financial information to make business decisions. In addition, there are issues like poor auditing structure, language, superficiality of local credit investigation services and such to deal with. Thus the quality, availability, and delivery of credit information still varies widely among geographic areas. It is reasonable for a credit information provider to gather as much information as possible at the lowest possible cost. They need to make a decent profit when they sell this information to their clients. Keep in mind, however, that one of the most expensive sources of information in China is balance sheet data from a government department. The cost is usually far more than what would be paid in the West. Therefore, when the credit information firm can avoid buying this data by collecting it from other sources, correct or incorrect, it increases their margin considerably. This is a real concern. As a result it is extremely important to double check every report as to what source provided the balance sheet data, whether the provider mentions this or not. As with most aspects of credit management, the credit information market in China is relatively new. Data recorded during the period when most companies were owned by the Chinese State can be seen as historical facts, but are not of much value as credit information. Furthermore, the quality of most so-called rating systems evaluating Chinese companies is questionable. One of the reasons for this is lack of statistical data necessary for reliable industrial comparison. Again, this is an area that will still take some years to develop. Surprisingly, there are almost 3,000 companies in China offering credit information reports to the market, all claiming to be better and often cheaper than the others. A closer look reveals that most are actually middlemen, buying and reselling credit reports in order to make a profit. For them, it is about sales rather than the quality of the content. This, again, underscores the importance of only using a reliable source for credit information; preferably, a provider actually engaged in the credit information industry. The demand for reliable credit information is not yet as great within China as it is elsewhere. This is largely due to the cultural differences outlined in Part One of this article. Transacting business in China remains heavily related to personal relationships. Chinese companies are beginning to realize, however, that doing business in today's global economy carries more risk than in the past. As this realization takes hold, credit information and management practices will be increasingly welcome in China. Another reason motivating Chinese companies to implement a credit management system is the need for cash. This became increasingly urgent as the current financial crisis began to impact China. This turn of events validates the Chinese government's support for the development of credit management policies and procedures. Comparison of Collections/Legal
In the West, there is a systematic, aggressive approach toward collections. When an account becomes delinquent, a Western business begins a predetermined routine for follow up designed to capture the past due payment. The 'East' takes a more passive posture. Most Chinese are not comfortable addressing overdue accounts. As a result, businesses have no established policies or systems for dealing with delinquencies. Their tendency toward avoiding confrontation results in poor follow up, with an adverse effect on cash flow. While the Western approach is more assertive and carries implications for future dealings with the customer, the East prefers to wait, hoping that the matter will resolve itself. In fact, the Chinese businessperson actually prefers to keep delinquent accounts on the balance sheet as, to them, it represents hope. Using specialized (third party) collection companies is relatively new to the Chinese. This strategy is gaining popularity, however, since using a third party prevents the Chinese firm/person from losing face. Unfortunately, being new to third party collections, the Chinese often lack the knowledge to select the best firms, and tend to go for the cheapest provider rather than the most effective. Once an account is placed with a third party, a Chinese entity might still intervene with the debtor. In the West, authority is clearly delegated to the third party who alone handles the settling of the claim. Another difference relates to recovery rates. The West is used to making quick decisions and generally sees a reasonable recovery rate. In China, the decision making process is long, sometimes cumbersome, and the recovery rate is relatively low. With regard to litigation, the Chinese law and court system is reasonably adequate. That does not mean, though, that taking the step towards litigation is easy. Chinese, in general, are afraid of law suits, as they don't fully understand the legal process. In the West, an attorney is selected based on his or her specific skills. In the East, the selection is based on the relationship one has with an attorney, regardless of any specialized knowledge of the matter to be brought to court.
The 'in-house' process also differs. The West is about being practical and willing to settle. The East tends to be reluctant to make a decision, trusting the 'system' to solve issues, and thus is not looking for a settlement. The post-judgment remedy is relatively effective and arbitration is seen as a popular alternative dispute resolution mechanism. This is encouraging, but one should not forget that there is an overall lack of sufficient professional legal services, and local protectionism still exists. Developments in Chinese Credit and Collections Management
Looking at the last year (2008/2009) we can see that Chinese entities became less reluctant to using third parties or consulting outsiders to solve collection matters. This new willingness to utilize "outsiders" is caused by the pressure of bringing in sufficient cash to run their operation, along with the understanding that having a collection issue is not a reason to lose face. More and more business people are learning that leaving uncollectables on their balance sheet does not help their company succeed, especially when demand is decreasing and cash is needed just to keep the company running. Chinese multinational firms, which increasingly have investments overseas, do understand the need for cash and have adapted the credit and collection management styles of the West. Many have full-fledged credit departments often internationally staffed (especially in affiliates outside of China).
Those companies that have local affiliates/subsidiaries in China would do well to encourage their local staff to get some education in credit management. It will pay as the necessity of better assessing risks within China is increasing dramatically. The downside for the employer is that, once staff has gained knowledge and experience, they might jump to another employer as the demand for trained credit staff in China is increasing. Conclusion
Companies in China are beginning to pick up on credit management principles, though with more focus on collection than on risk assessment. However, it still is not common for Chinese companies to gather information about their future business partner, buy credit reports, or create a customer credit file. A lot of time is still spent in the negotiation process and often a person's word is considered more valuable than any official information.
Yet, step-by-step improvements are being made, and the Chinese government fully supports these changes. The writer does emphasize that his article is based upon personal experience gained in dealing with Chinese entities - within and outside Chinese territory - for over 25 years. It also includes information from several market studies. William F.M.J. Bastiaan, CICE, is Director Global Markets of ABC-Amega Inc. and his responsibility includes marketing their collection and receivable management services in Europe, Middle East, Africa and Asia. His experience also includes more than twenty years of service with DSM, a global chemical firm, where he held the positions of Credit Department Manager and Global Credit Risk Manager. Since 1986 he is member of FCIB, a prestigious association of U.S. and European executives in finance, credit and international business. He was their first European chairman and has been serving on their Board of Directors and/or Advisory Council for more than 13 years. He is one of the founding members of the Board of Directors of Creditreform China, a credit services provider based in Shanghai, China, an international source for credit reports, receivable management, consultancy services and education with a focus on China. Fluent in several languages including Dutch, German and English, William has published articles in trade journals and credit magazines, in addition to participating in international forums and conferences. He also holds the designation of Certified International Credit Executive (CICE).
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