How To Get Free Product From China: Just Don't Pay

Great article in Asia Times by Olivia Chung, entitled,"China's debtors not paying up," on the terrible job Chinese companies do in collecting on their international debt.  There are countless stories out there (including in this blog) of foreign companies sending money off to China for product that never comes.  This article is essentially the reverse: Chinese companies shipping product overseas and then never getting paid. 

China's director of the credit-management department under the research institute of the Ministry of Commerce, Han Jiaping, estimates China has about $100 billion of accounts receivable overseas and the figure is growing by $15 billion a year.  Chinese companies' bad-loan ratio is between 5% and 30%, compared to 0.25-0.5% in developed countries. Of the $100 billion of accounts receivable overseas, 10% has been defaulted for three years, 30% for one to three years and 25% for six months to one year, and 35% less than six months.  In developed countries, the time limit for enterprises' accounts receivable is generally six months, and those beyond that are treated as bad loans.  Many enterprises in China have "almost no time limit for accounts receivable, and only if the debtors go bankrupt will those overdue be treated as bad loans."

The article briefly discusses China's most famous case of an unpaid overseas account receivable, China Changhong Electric Appliance Company.  Changhong is a major television manufacturer based in Sichuan province that started doing business with its California-based distributor, APEX, in 2001.  Over the next four years, Changhong delivered $11.13 billion in product to APEX.  In 2002, Changhong's annual report revealed APEX owed it $495 million, but business continued until 2004 and APEX eventually defaulted on approximately $2.4 billion owed to Changhong.

Liu Haishan, a founder of US-China Assets Management, says he sees three main ways Chinese companies are typically cheated:

"First, an unscrupulous buyer starts with a small order to gain trust from Chinese suppliers, and then after a few transactions, the buyer will make a big order and leave without paying the bill.  "Second, some buyers simply take the goods by taking advantage of Chinese companies that are not familiar with the laws and regulations of the US. "Third, some Chinese firms are cheated by a buyer who sets up a shell company."

When debt problems do occur, many Chinese companies do nothing, "preferring to swallow a bitter pill in silence," Liu said.  US-China Assets Management planned to hold a "China-US debt-collection seminar" in Shanghai in December, but only 18 Chinese companies applied for the seminar.  "Such neglect is rampant in Chinese state-owned companies:"

"Particularly when state-owned companies experience senior management turnover, successors usually leave 'unreasonable' overdue accounts receivable overseas as accounts receivable, worrying that those overdue would be treated as bad loans, which eventually would embarrass his predecessor and affect his work performance," Han said. "That's why state-owned companies do not take action even when accounts receivable go even a year past their due dates."

Chinese companies tend to spoil their buyers for fear of losing them as customers.  Chinese companies often give unfavorable payment terms to get business, fail to pay attention to their buyers' credit records, "and some even ship their goods with just a telephone call or an e-mail," according to Liu.

Chinese companies' unwillingness to do anything about their bad debt even after it clearly will not get paid voluntarily also contributes to their poor debt collection record:

Liu also attributes the huge bad-debt ratios in Chinese companies to the cost of collection. For example, lawyers in the Unites States charge an average of $350 per hour and take 25-35% of the total award as commission if they win the lawsuit.

I know from countless instances of first hand experience that this last reason is true.  My firm has received a number of inquiries from Chinese companies and Chinese lawyers seeking to retain us to oversee their U.S. debt collection efforts or to file a creditor's claim in a pending bankruptcy or receivership action.  Yet, because the Chinese companies are so out of line in their expectation of American attorneys' fees, we have not once actually taken on such a case.  Most Chinese companies do not use international lawyers in drafting their international contracts and that oftentimes makes prevailing in these cases only that much more difficult. 

My sense (and I say "sense" because I lack sufficient evidence to back it up) is that for all the complaining by Western companies of getting "ripped off" in China, the dollar value of the rip-offs is actually higher going the other way.   At the same time, I see all of this eventually changing as Chinese companies become more internationally sophisticated.