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The least risky option for selling to China (or indeed to anyone) is to seek advanced payment in full. However, this is often not practical so you will need to consider other payment options.
If you are supplying goods or services to a buyer, wherever they are, it is essential to find out if the company is reputable, has a satisfactory trading record and that they are able to pay. Companies in China are no exception. Customer checks on due diligence, credit checks and trade references should all be considered if the customer is new or you have any doubts about payment. Any agreements you negotiate or sign should clearly state the payment terms agreed.
The Documentary Letter of Credit (L/C) is the tried, tested, preferred and least risky way of securing payment from new customers. Ideally the L/C should be an irrevocable L/C, payable at sight, and confirmed by a first class London Bank. Other protected options to consider would be:
Do not take risks on getting paid. Once more is known about a customer and trust has been established over a trading period then other payment terms can be considered.
The UK’s trade facilitation agency, SITPRO, has produced a wide range of trade briefings. These include comprehensive information on common methods of payments in international trade and cover potential risks and how to avoid them as well as best practice. SITPRO also provides guidance on Letter of Credit best practice.
UK Trade & Investment can provide contacts lists of legal and professional companies and consultants, many of which provide due diligence services.
Contact lists of legal and professional companies and consultants, many of whom provide due diligence services, can be obtained from the ‘related content’ box of the China: Contacts and Setting Up page of the UK Trade & Investment website.
Spend time investigating the importer’s ability to pay before entering into a Sales Agreement. This can be done by one of the many specialists offering due diligence services. Be cautious when the importer is a small trading company and is entrusted by the end user to help with the opening of the L/C. The capital of these trading companies is often quite low, and it has been known for such companies to evade their repayment obligations by opening an ‘echo’ company (a company registered by the capital owner in another’s name).
Also be aware that there are a number of business scams operating in China – if you have received an inquiry from a Chinese company out of the blue which seems too good to be true, it probably is. For more information, follow the link titled ‘Alert for British Companies: Business Scams in China’ on the China Overview page of the UK Trade & Investment website.
It is not unusual for buyers in China to require UK firms to quote in US dollars or sometimes Euros. Firms are advised to take advice on how to manage currency risk or run foreign exchange accounts to deal with such requests rather than insist on sterling only pricing. Making it easy for customers to buy from you (without risk to you) is sound business practice.
If all else fails, it is possible to seek legal recourse, and arbitration is the most popular method of dispute resolution between Chinese and foreign parties. Exporters may prefer to select a jurisdiction outside China, but this has practical limitations. It is often difficult to enforce foreign judgments in China, unless the importer has overseas assets that can be seized. It is therefore advisable to select a Chinese arbitration body such as the China International Economic and Trade Arbitration Commission (CIETAC) to solve the dispute. The exporter may require the Chief Arbitrator to be a UK resident in the Sales Agreement.
The CIETAC website contains comprehensive information about the arbitration process in China including details of how to apply for arbitration, how the system works and English language translations of all relevant Chinese laws.
Generally, an arbitration case in China will last 6 to 9 months or longer. In order to ensure the enforcement of the award, it is advisable to apply for perpetuation of evidence and importer’s assets before the lawsuit.
Note: Local legal advice should be sought and the balance of cost and time against likely success in recovering debts claims should be carefully weighed especially for modest amounts.
UK Trade & Investment
May 2006
