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China’s Changing Economy And You

Posted in China Business, Legal News

One of our China lawyers got the following email this week (modified a bit to avoid any identifiers):

I am certain you hear this everyday…”my supplier has disappeared with my deposit.” For the first time in 20 years it has just happened to me. We are a small family business in Illinois importing promotional products from China for many years. I have been dealing with one trader since 2007. She sources almost 50% of my products and always delivers quality, on-time shipments.

She has since disappeared with my deposit from an order placed in February. Can you please advise me what steps I can take to recapture the funds? As far as legalities are concerned who can I contact and where do I start? Any insight you can provide would be greatly appreciated.

We promised we would respond to the above email here on the blog, so here goes.

First off, we do not hear this every day. In fact, during good times, we might go months without hearing something like this. And during good times, when we do hear something like this, it pretty much never involves a long-time relationship. But during downturns in China’s economy we get an email like this just about every week and too many of them do involve long-time relationships.

And we are in a downturn in China’s economy right now. Sort of.

Back in 2012, I wrote an article for the Wall Street Journal, China’s Slowdown and American Business Hardly a week goes by without complaints about payment problems or bankrupt debtors, with the purpose of warning American companies to increase their guard and to react accordingly. What I said in that article applies 100% to what is going on in China right now.

I started out warning about how China tends to increase regulation of foreign companies during downturns and we are certainly seeing that again:

Take regulation. The best assumption to make is that the Chinese government will respond to the slowdown by attempting to minimize citizen discontent so as to keep its hold on power. The government is much more concerned with social harmony than with economic numbers.

The government is encouraging wage growth—including a greater-than-normal tolerance for union-style labor activism at foreign-owned factories—even though higher wages make China’s factories less competitive. The calculation is that citizens happy with their higher wages will far outnumber those unhappy and unemployed because rising wages forced uncompetitive factories to close. American companies should no longer assume that the government will welcome low-wage manufacturing with open arms.

We are seeing this.

I wrote of how “China’s prioritization of its citizens’ contentment … [means] that China is going to get tougher on foreigners, just as it (and nearly every other country) has always done when times are tough. Everything foreign businesses do will be under heightened scrutiny”:

The authorities also are throwing new roadblocks in the way of foreigners seeking to form businesses in China. Such higher standards are not uniformly applied. Beijing and local governments are ever more eager to distinguish between “contributing” and “noncontributing” foreigners. Thus, it has never been easier for well-funded, nonpolluting foreign companies to secure approval to operate in China. Conversely, it has never been tougher for foreign companies that pollute, pay low wages, or have no plans to hire Chinese employees to get their foot in the door.

I then pretty much spoke to the email above:

The slowdown also is changing Chinese company interactions with foreign companies. Chinese exporters, particularly those that compete with companies from lower-wage countries like Vietnam and Bangladesh, are suffering—in particular in very low-tech, very low-wage industries such as textiles, clothing, shoes and low-end electronics and toys.

Foreign companies that do business with Chinese companies in these industries must be on their guard. Hardly a week goes by without my law firm getting a call from a Western company experiencing problems. Sometimes the Western company has paid for a product and the company it paid no longer exists. Sometimes the company still exists but it needs “more money” from the Western company to buy raw materials for the product it already promised to produce.

Now back to the real issue. What can foreign companies do to avoid problems in China stemming from the downturn? Wish I had something new to add from my article, but I don’t, so I will just quote it:

Foreign managers need to understand what is happening in their own industries within China. This might mean visiting your Chinese co-party’s factory, warehouse or office to look for warning signs of a company in distress. Or it might mean taking out insurance to cover your China business or transaction. A number of Chinese manufacturers are owned by Taiwanese, Singaporean or Hong Kong companies, and sometimes it is possible to secure guarantees from the foreign parent.

The key is to be proactive: If you find yourself in a bad situation with a Chinese company going under, there usually is no remedy after the fact. Bankruptcy in China more often than not consists of a company shutting down in the middle of the night and its owner fleeing to another town.

The key to weathering China’s slowdown will be for foreign companies to go back to basics: think afresh about what a company contributes to China’s economy and how that is likely to shape policy makers’ opinions; focus on scrupulous regulatory compliance; and renew focus on due diligence at a company-to-company level. Above all, no Western company doing business in China should blithely assume that a slowdown won’t affect it.

Yeah great, but what is this Illinois company to do in terms of getting its money back. Well one thing it should not bother doing is contacting the U.S. Embassy or Consulate, as we explained in Have A China Business Problem. Consulate Says “Don’t Call Us.”

The way my firm’s China attorneys analyze a matter like that of this Illinois company is by looking at the dollars and cents. If this company is out $5,000, probably the best thing it can do is not to spend any more money. It can keep trying to reach its sourcing agent and if it eventually succeeds, it can try to pressure her to return some or all of the funds. But for an amount that small, it probably does not make sense to spend any money on an attorney in China and it certainly does not make sense to spend money on a U.S. attorney. I cannot imagine a U.S. attorney taking such a small matter on a contingency fee and our experience (with considerably higher dollar figures) is that Chinese attorneys will be equally reluctant. On top of that, the filing fees in Chinese lawsuits are relatively high and what good is suing someone if you cannot even find them?

But if this were a million dollar matter (and we have been contacted on those), our advice would be entirely different. In those cases, we encourage the American company to retain my law firm and then we in turn will figure out the company’s best options for recovery. This typically involves our reviewing all relevant documents and then sketching out a collection plan that typically involves our bringing on a Chinese law firm (only a Chinese licensed lawyer can appear in a Chinese court) to pursue litigation or alternative means of collection.

The most difficult cases for us are those between $50,000 and $200,000.  In those situations, we do not generally think it makes economic sense for the American company to hire our law firm, yet at the same time, there has been too much money lost to suggest that the American company just walk away. We usually give companies in these situations the following three options:

  1. Walk away.
  2. Find and hire a Chinese lawyer on their own.
  3. Hire us to work up the case and then hire a Chinese lawyer and either walk away at that point or stay on to assist.

These are not easy cases….

Sorry.

  • Kirk Alcond

    Get your cash back…

    This comment is not intended to detract in any way, from the value of Harris and Moure’s services. I would never attempt to do business in China without their guidance.

    Here is the Chinese answer to people who have had someone steal their deposit money. Yes, this really is a crime, even here in China. Get as much of it back, as soon as possible before it is spent and really disappears..

    Today, April 19, 2014 The exchange rate stands at…

    $50,000 US Dollars equals 311,210.42 Chinese Yuan

    $200,000 US Dollars equals 1,244,841.69 Chinese Yuan

    Two hundred thousand dollars is well over a million Yuan and really well worth pursuing.

    First, breath deep and locate the felons. (Everything takes longer in China than you would expect.) This is easy however. Have a trusted (Important) Chinese friend, in the general location where the money vanished, ask around for a friend of a friend cop, to find them. The police are great at tracking down people here, because of the drug trade. Never let on how much you are owed.

    What to pay for this? A couple of thousand quai (yuan), (three hundred and twenty bucks) cash on delivery for the information.

    This may not seem like enough money, but it is a fair going rate for this.

    Policemen in China only get about 5,000-10,000 quai a month depending on where they work and what rank they hold. Their job is often dangerous with bad work hours. They are often ex-military, tough guys. Beyond that they usually average a couple of thousand more from kickbacks and bribes etc. Those above them in the hierarchy turn a blind eye to all of this because it is the normal state of affairs here in China.

    Next, with the help of a recommended, Chinese lawyer with good local connections, approach the thieves to work out immediate, even if only partial, repayment.

    The person who cheated you knows they committed a crime. But they will fabricate all sorts of tragic stories to cover their misdeeds. You as a foreigner on the other side of the world are not prepared to cope with this. So I would advise you to stay out of the picture entirely. Simply have the attorney and his cohorts handle it. You got scammed because the thieves thought they could easily get away with it. But, with the right Chinese lawyer and a carefully prearranged contract, you can prove them wrong.

  • Ward Chartier

    Do escrow firms exist that are either legally operating in China or have legal reach in China? I simply do not know.

    As a potential customer outside of China, if I was dealing with a China supplier, I would put my payment with an escrow firm that would release payment [1] upon shipment or [2] upon quality acceptance which could be done either at the source, at the China freight forward’s warehouse, or at the final destination.

    Have any readers tried this approach, have constructive criticisms, or other opinions?

  • Vino Collapso

    China’s economy is in a downturn? Implying that because of this more Chinese are stealing money from foreign traders? Sorry that’s rubbish. More Chinese than ever before are wealthy, the outbound tourist numbers are skyrocketing and mandatory wage increases have been in place every year for the last few years. Chinese are becoming MORE, not LESS wealthy. Chinese companies are NOT going bankrupt in droves. You may get naive foreign traders, but not poor Chinese. But as you say, if there are companies going bust, you’ve lost your money anyway. No point in spending legal fees to recover something that’s isn’t there anymore.

    • On the Corner

      sorry mate but the economy is down here and more people in China are stealing money via bank account scams etc. I work on the front lines of it everyday in the manufacturing field. The outbound tourists are on recon missions to figure out where to stash the ill gotten gains and the wage increases are what’s killing off manufacturing. Chinese companies are going bankrupt in droves all over the provinces and they are running with their money to every corner on earth. The elite Chinese are wealthier and the common people can’t even afford to buy a house. This is reality here in China.

      • Vino Collapso

        You can’t just “get” money out of China and “run away” with it. Outbound tourists on recon missions? That’s 100 million tourists in 2013 and a increase of 22% per annum. Meaning that by 2026 according to you there’ll be no-one left in China. That is WAAAAY different to what the demographics and sensible people state.

        • On the Corner

          and yet people are doing it weekly, the Shanghai airport removed the machines that detect cash as people walk out coats lined with USD. Last year the customs official in Detroit told me that Chinese people coming in from Shanghai flights are walking in with suitcase of money…and they have to count it all. I must be senseless…. the rich will be out of China, the poor will remain. Don’t see what’s really happening do you?

          • Leisha Aram

            According to Russia Today (May 3, 2014) China has already overtaken the US economically.

  • zmaestro

    Too many sap stories about run away agents and manufacturers not returning the call. Doing more business in China will only enable them to scam more money out of these naïve investors and companies. I would look for countries such as Korea, Taiwan, Singapore, Vietnam or Malaysia before looking into China. There are alternatives you know…. Some companies lost all their investment and manufacturing facilities due to corrupt local officials taking over the business by shutting the production down with lame excuses like a small labor complain or landlord wanting to end contract early.