What China's Credit Crunch Means For YOU.

The Financial Times just did a story, entitled, Fears rise on China groups’ payments on how private Chinese companies are being negatively impacted by the credit crunch (h/t to China Economics Blog). China's credit crunch is already having a large impact on American and European companies that do business with China and I see that impact only growing.

The FT story makes the following key points:

-- A rapid deterioration in the ability of Chinese companies to pay their suppliers "is significantly increasing the risk of doing business in China."

-- Chinese companies are facing "a liquidity crunch" due to China’s plummeting exports. "Many of them were also unable to access bank loans to tide them over the tough times, especially if they were small to medium-sized private businesses."

-- Though Chinese banks have "ample liquidity," they usually do not lend to small private companies.

-- Many Chinese companies have turned to their suppliers for credit, "thus forcing the pain up the supply chain."

-- Chinese suppliers are extending credit now more than a year ago. This is "bad credit management." “Now is not the time to extend credit, it is time to restrict it.” "Most Chinese suppliers, however, have never experienced such a downturn." “A lot of these companies never had to deal with the problem of not getting paid, because sales had always been increasing,” he said, “There’s not enough financial resource, not enough management.”

I can vouch for all of the above and I can see the impact this is having on American companies. Among other things, I am seeing the following:

1. A increase in the number of Chinese companies lacking funds to produce goods as promised.
2. An increase in the number of Chinese companies cutting quality corners and then explaining they had no choice due to "hard times."
3. An increase in the number of Chinese companies shutting down after receiving payment for an order.
4. An increase in the number of Chinese companies/attorneys contacting my firm trying to figure out how to collect from American companies.. Virtually without exception, however, these companies and lawyers are completely clueless as to what it takes to collect. In most cases, the Chinese company is poorly positioned to collect.
5. An increase in the number of American companies/attorneys contacting my firm trying to figure out how to collect from Chinese companies. With very few exceptions, these companies are poorly positioned to collect.

So how does all of this impact you, the foreign company doing business with China? And what must you do about this? The following:

1. Seriously investigate any Chinese company with which you are going to do business.
2. Be even more wary of paying any Chinese company in advance. Shockingly, Chinese companies are more willing to extend credit today than they were six months ago.
3. Use a contract with your Chinese suppliers that protects you. A great contract is not a panacea, but a bad contract or no contract at all pretty much guarantees your money is history.
4. If you owe a whole slew of companies and some of those are Chinese, odds are good that your best bet for non-payment are the Chinese ones.

It's not dark yet, but it's getting there....