Payments in China – longer terms and more delays
15 May 2019
In recent years, much of the news from China regarding payments has related to cashless consumer purchases, and the use of Alipay and Wechat Pay. But what of larger payments made by businesses for good and services?
This year, with the Chinese economy under prolonged pressure, and a spike in the number of bankruptcies being settled through the Peoples’ Republic’s supreme court, firms are resorting to using longer payment terms in order to sustain business, according to a new report by credit risk insurers Coface.
Their 2019 China Payment Survey of 1,500 Chinese companies reports that average payment terms have increased by 13% in 2018, from 76 days to 86 days, continuing a trend that began in 2015. Not only this, but 60 % of Chinese companies surveyed say they experienced payment delays in 2019, with 40% reporting an increase in late payments during the year. More worryingly, the proportion of respondents experiencing ultra-long payment delays (more than 180 days) exceeding 2% of annual turnover increased to 55% in 2018 from 47% in 2017. According to Coface, 80% of ultra-long payment delays are never paid, and when these constitute more than 2% of annual turnover, a company’s cash flow may be at serious risk.
The sectors with the longest payment terms are automotive and transport, closely followed by construction and energy.
So far, so bad - but remember these are just responses from domestic Chinese companies. For foreign firms doing business with China, here’s a further issue. During the last couple of years Chamber International have heard from a number of UK businesses who sell to or buy from China, whose payments (whether outgoing or incoming) are being delayed by Chinese banks. Whether the banks’ aim is to combat money laundering or stem capital outflows is not always clear, but the evidence suggests that delays of this kind are becoming increasingly common.
In our experience, Chinese banks may, for instance, halt a transaction because of a small discrepancy in a company name (even when this is a repeat of a previously successful transaction). In some instances a payment will been blocked because the bank feels that the amount is inappropriate in relation to the description of the goods or services in the contract. As an example, one of our clients who sells antiques found that a payment to them was blocked because the Chinese customer’s bank would not accept that an old book could cost so much! Chamber International was able to advise and the problem was resolved.
As far as bank-initiated delays are concerned, the most infuriating thing can be that the bank often does not inform the payer or payee that there is a problem, and simply block the payment. In order to avoid delays to payments into China, we recommend checking the name of any Chinese company very carefully to ensure that contracts and payment details use company names that the Chinese bank will recognise (typically the registered name of the business, as listed by the Administration of Industry and Commerce). Though some companies also include an “English” name (i.e. using alphanumeric script) in their business registration, many only register a name in Chinese characters, as mandated by the AIC. In instances where no English name is registered, the bank may take issue with your translation of the name, and insist that (as in the Chinese company name) the name of the registering province or city is included, and that word order is identical. Chamber International can help you minimise the risk of bank delays by exploring these issues with the Chinese company first, making sure that the right questions are asked.
Regarding payment terms and payer-initiated delays, Chamber International’s China specialists can help you understand the terms in your Chinese contracts and other documents. In particular, with reference to capital equipment sales, we recommend companies consider this article on contract terms.
Article by Chamber International’s China specialist Matthew Grandage
Follow Matthew on @ChamberIntChina
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