Change and Challenge: Debt Recovery in a Post-Boom China
by Abby Larson on January 22, 2015
China’s economic expansion over the last few decades has been nothing short of remarkable, and after thirty years of unprecedented growth, the populous nation seems destined to take the United States’ status as the world’s largest economy. First eclipsing the United Kingdom in 1872, the US economy’s reign as the top economic power may soon be coming to end. Some economists believe it already has.
In October, 2014, the International Monetary Fund (IMF) estimated that the Chinese economy was worth $17.6 trillion, edging out the US’s $17.4 trillion, and while alarming headlines blared that China had finally surpassed the US, the IMF calculations carry one major caveat: it adjusts for purchasing power parity (PPP). PPP takes into account the amount one’s money can actually purchase compared to other countries. Since money tends to go much further in China, this statistic is about $10 trillion larger than actual size of the Chinese economy, still well behind the US.
When comparing the global powerhouses of China and the US, metrics like the IMF must be considered in light of the vast historical and cultural differences between the two nations. Considering its unique societal practices and philosophies, not to mention the sheer enormity of its population, the size of China’s economy is extremely difficult to gauge. As the nation continues to grow, Western companies would do well to stay informed of the idiosyncrasies involved in doing business with the PRC.
In 2013, the total amount of trade in China topped $4 trillion, $1.95 trillion of which were imports. As a result of China’s growing role in global trade and the resulting engagement of foreign creditors, Western debt collectors may find themselves challenged by unfamiliar rules and fundamental cultural differences.
Recovering Debt in a Country that Outlaws Collection
From a strictly procedural standpoint, debt collection in China diverges from the West in several unique ways. Technically speaking, debt collection doesn’t really exist under Chinese law. As a foreign collector, you should engage an attorney within the PRC in order to pursue a claim against your debtor, as the current law only allows legal bodies such as the police, courts, or specialized law firms to collect Chinese debts.
Any collector who regularly engages in international commerce is well aware of the considerations involved, from fluctuating exchange rates and differing dialects to complex foreign laws, regulations, and taxes. To further complicate matters, China’s relatively recent economic revolution has not yet developed the strict infrastructure of long-established Western economies. Consequently, collectors can have difficulty obtaining accurate data on Chinese businesses, as corporate audits and local credit investigations within the PRC lack a standardized criteria and often prove unreliable. This challenge is compounded by the extensive amount of documents necessary to implement a collection in China, as the process requires a comprehensive document chain including written records of purchases orders, delivery notes, and invoices.
Guan Xi: Collecting and a Code of Honor
Beyond the systemic surface differences, Chinese business is governed by deep-seated traditional attitudes unfamiliar to many in the West. In dealing with debt and credit management, Chinese companies are particularly averse to “losing face” and see bankruptcy as a grave dishonor. Business relationships in China are founded on the idea of “Guan Xi,” a uniquely Chinese philosophy emphasizing trust and honor in longstanding corporate partnerships. Conversely, in transactions where this relationship hasn’t been established, Chinese businesses can seem less than cordial to Western sensibilities.
When collecting debt from Chinese companies, Western collectors may find the process more adversarial than they’re accustomed to. While Western demand letters are often thorough and filled with dense legal terminology, this strategy can be ineffective when attempting to collect from a Chinese business. While an estimated 95% of American business law disputes result an amicable settlement, Chinese businesses can be more resistant to a mutually agreeable conclusion. Instead of focusing on legal and factual persuasion, Harris suggests that western collectors should be succinct and blunt in their demand letters, and stress the consequences of non-payment in no uncertain terms.
Conducting business with China is a complex and increasingly crucial aspect of the new global economy. Even discarding the adjusted IMF statistics, analysts still project that China will gain the lead over the US by 2024. In our rapidly evolving economic world, international receivables recovery is vital to fostering healthy and prosperous business relationships. As a premiere provider of accounts receivables solutions, D&S Global Solutions can provide your business with our renowned international expertise and comprehensive experience. Our worldwide network of partners and resources, combined with our customizable solutions and in-depth dedication to our clients, can prepare your company for growth on the global stage.