China

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110 Country starter pack Business practicalities in China How to repatriate funds Step 1: Annual audit and confirming amount of funds available. Step 2: Record filing at State Administration Tax office. Step 3: Submit application to a designated foreign exchange bank. Step 4: Remit funds. Getting paid How a business is to be paid by its customers will differ depending on the type of business structure deployed in the China-based entity. But almost universally, Australian businesses operating there nominated obtaining customer payments in Austrade’s International Business Survey (2015) as a key challenge. Without an on-the-ground presence (a representative office, a WFOE or a JV), payment must be remitted to an Australian bank account by an agent or distributor or by the customer himself if the business is selling directly to Chinese consumers. Access to either a WFOE or JV allows the business to open local bank accounts into which payments can be made for goods and services. Access to a representative office, allows the business to still open local bank accounts, but these cannot be used for trade or service purposes. Rather, they can only be used for administrative purposes. Again, note that when invoicing a customer for payment, many Chinese companies prefer to be invoiced in US dollars, particularly if they are already doing business with the US, although the currency will be determined by the contract. Choosing the right payment option When competing to win contracts, the payment terms can make a significant difference to the outcome. The best payment option at any particular time will depend on various factors: • How much can the buyer be trusted and how much is known about the company? • Is this a first transaction? Or does it involve a company which has a track record and is trusted? • How much risk is the business prepared to take in a deal of this nature? • How large is the transaction? • Is there an opportunity to bargain for more favourable terms with this buyer? Banks can assist in determining the most appropriate payment terms to engage in when doing business in China. These main payment terms are: • Letters of Credit • Document Against Acceptance, or Documents Against Payment • Cash in advance • Open account Letters of Credit (or documentary credit, import credit, export credit) These guarantee payment and receipt of title from an independent party – the bank. They are therefore recognised internationally and are the least risky way of securing payment from new customers. Most Chinese commercial banks and foreign banks with licensed Chinese branches can issue a Letter of Credit. Generally, there is no problem with Letters of Credit from Chinese banks being accepted by Australian banks, although this should be checked first, particularly if the transaction involves a Chinese regional bank. Also, it is worth ensuring that all Letters of Credit are received via SWIFT (the Society for the Worldwide Interbank Financial Telecommunication). It is very important that the documents submitted to banks comply exactly with the strict conditions of the Letter of Credit. It has been estimated that half of all Letters of Credit are rejected by banks at first presentation because they do not meet stated conditions. The Letter of Credit should be checked against the terms of the purchase contract and, if necessary, a buyer can be asked to make any necessary amendments before the Letter is presented. Documents that contain discrepancies should not be lodged unless these have been pre-approved through the banking system. Businesses failing to do so risk losing the protection of the Letter of Credit. Documents Against Acceptance, or Documents Against Payment These are used in ongoing business relationships and provide some protection – but also some risk – for both parties. They are easier to use and less costly than Letters of Credit. With Documents Against Payment, the documents needed to obtain the goods are only delivered to the importer after they have paid for the goods. With Documents Against Acceptance, the documents needed to obtain the goods are delivered to the importer after they have accepted the exporter’s bill for payment at a fixed later date. Needless to say, the latter involves greater risk for the seller. Under the former arrangement, the buyer only gets the goods
Country starter pack Business practicalities in China 111 after they’ve paid for them. Trade insurance can be taken out to cover the risk of default where Documents Against Acceptance are used. Cash in advance This payment method is only used once a Chinese buyer has developed a trustful working relationship with the foreign seller. Open account Perhaps the least desirable option, this method involves the buyer agreeing to pay for the goods within a certain period after shipment, generally 30, 60 or 90 days. This far from secure form of payment would leave Australian exporters to China fully exposed in the event of the buyer defaulting on payment. Companies using open account would in most cases routinely cover their exposure with trade insurance. Reducing risk of non-payment and slow payers Predicting or identifying who will be good or bad payers in China can be fraught. Instead, Australian businesses would be better off from the outset trying to negotiate the most secure form of payment possible when negotiating a contract. When dealing with a new customer, it is best to insist on Letters of Credit to ensure payment, while carrying out due diligence on them and making sure an enforceable contract is in place. However, in the case of very small contracts, the costs associated with securing a Letter of Credit may render the option unviable. In such cases, the financial consequences of the contract not being honoured need to be weighed against the opportunity for developing the business. Having a long-standing relationship with a customer may make a merchant more comfortable using an alternative payment method such as a Document Against Acceptance. Even so, trade insurance against risk of a default would be prudent. Letters of Credit or Documents Against Payment that guarantee payment before goods are delivered also safeguard against slow payers, which can often be the case with municipalities and local government operations. Should a less secure payment method be deployed, it is important to deal with the problem of a slow payer as soon as the payment is overdue. A conduit such as a China-based agent should be in contact with the buyer and seeking payment immediately. An alternative is to make direct contact with the buyer from Australia, or using a business associate or influential ‘friend’ in China to get in touch. Legal action is a last resort, but sometimes necessary despite the cost and effort required. As well, arbitration is increasingly being used to settle disputes between Chinese and foreign companies.
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PEOPLE'S REPUBLIC OF China COUNTRY
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9.6 million square kmS GDP 2014 SUR
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Chengdu (SICHUAN PROVINCE) Country
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China

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