China collection profile

 

China
       

China

China-flag
 
PDF icon   Read the full Collections Profile
 
PDF icon   Read also the EH Economic Research Country Report
 
World Bank Doing Business
2014: 96/189 countries
2013: 99/189 countries
 
 


Complexity of collecting debt:

grading
Notable High Very High Severe


Executive summary

  • As a result of the re-balancing policy in China, direct financing or bank loan is shrinking sharply and extending to more and more sectors. Consequently, DSO remains high and late payments are not efficiently regulated.
  • The court system is complex and suffers from a lack of transparency, delays and high costs are to be expected. As enforcement results are poor, amicable or non-litigation collection is the preferred option.
  • The insolvency framework is complex, liquidation is the default procedure.
 
General Information GENERAL INFORMATION arrow-transparent
 
Collection Practices COLLECTION PRACTICES arrow-transparent
Court Proceedings Court PROCEEDINGS arrow-transparent
 
Insolvency Proceedings INSOLVENCY PROCEEDINGS arrow-transparent
 
General Information 

GENERAL INFORMATION

Days Sales Outstanding (DSO)

Payments terms in China fluctuate from 30 days (high-tech industry) to 120 days (commodity trading)  the average day sales outstanding (DSO) is on a deteriorating trend reaching 82 days in 2015 despite cultural standards do not allow taking liberties with commitments. In most cases, overdue payment stems from financial difficulties faced by the debtor's customers (increased by weak banking support). In practice, extending payment delays therefore constitutes a frequent cash management method and Chinese companies often insist (heavily) on obtaining 120 to 180 days payment terms. Agreeing on such conditions is not advisable.

 

Late payment interest

Late payment interests may be charged, subject to contract terms. Calculation is made on the basis of the People’s Bank of China's loan rate: 6% per year as of 1/2014 (5,6% if the overdue is below six months, 6,15% if the overdue is above one year). If the case goes to court, most creditors / plaintiffs will charge 4 times the Central Bank rate if late payment occurs and there is no penalty clause in the sales contract. Interests normally serve as a negotiation tool and tend to be abandoned when a compromise is found and the debt is recovered amicably. When no compromise is reached, collection costs would however be included into the claim. 

 
divider
collection practice 

COLLECTIONS PRACTICES

Orchestrated negotiation first

The key to amicable collection n China is the expertise in the market and knowing what can be used to leverage and pull the debtro back to negotiation as dunnnig letters are not very effective. Before starting legal proceedings against a debtor, assessment of assets is important as it allows verification as to whether the company is still active and whether recovery chances are at good. In addition, it is essential to be aware of the debtor’s solvency status: if insolvency proceedings have been initiated, it indeed becomes extremely difficult to enforce a debt (see below)​

 
divider
Court Proceeding 

COURT PROCEEDINGS

The Chinese court system is overly complex. The courts are divided into multiple tribunals at different levels. At the lowest level, the Basic People’s Courts (including County People’s Courts; Municipal People’s Courts; People’s Courts of Autonomous Counties, and People’s Courts of Municipal Districts) hear criminal, administrative cases and domestic claims under RMB 50m in first instance. Intermediate People’s Courts handle certain cases in first instance (including foreign-related cases and claims in excess of RMB 50m) as well as appeal proceedings brought against the decisions rendered by the Basic People’s Courts. At the Central Government level, the Higher People’s Courts finally handles interpretation issues but it may also decide on major cases in first instance.

If the amicable phase fails or if the debtor questions the claim, the option of starting legal proceedings remains. If the debt is undisputed, it is possible to start a pre-court procedure (PRC Civil procedure law no. 189) requesting a Payment Order from the Basic People’s Court, enforceable for fifteen calendar days upon service to the debtor if the latter fails to obey and does not bring a defence. If the debtor brings a counterclaim, the case must however be dealt with through ordinary court proceedings which are however not advisable. Proceedings would nonetheless occur as follows: once a claim is filed, the competent court would conduct a preliminary examination to determine whether the case ought to be accepted. The court would then examine the evidence and invite the parties to reach a compromise prior to rendering its decision. Remedies ordered by the court would normally take the form of compensatory damages, orders towards the elimination of detrimental effects, cessation of infringements, etc. Specific performance may also be ordered. Punitive damages are however not admissible.

 
divider
insolvency Proceeding 

INSOLVENCY PROCEEDINGS

Insolvency in China is a matter of cash flow and balance sheet alike: a debtor is deemed insolvent when it is illiquid, i.e. when it is permanently unable to pay its outstanding debts, but illiquidity may also be characterized when the debtor's liquidated assets cannot satisfy all the creditors. Both tests must be satisfied prior to filing for bankruptcy. According to the new Enterprise Bankruptcy Law of 2006 (inspired from international standards), restructuring, liquidation and compromise are available for companies in financial difficulties. The Supreme People's Court in June 2009 furthermore provided guidance, saying that enterprises with viable future prospects and in line with the national structural adjustment policy should be actively supported through restructuring and compromise procedures. In addition, it seems that local governments can use stability maintenance funds or encourage third parties to provide interim financing. Having said this, it is not obvious whether these regulatory efforts are efficient, and it actually seems that they are not relied upon in practice. Proceedings would usually take place before the Peoples Courts' (economic divisions) of the debtor's region, but in practice compromise rarely applies and restructuring or liquidation are traditionally relied upon. The years 1996 to 2003 witnessed a peak time during which the Government let a lot of state-owned companies to go bankrupt as a means to clear up bad assets. This policy was efficient at the time however, since then, companies have rarely made efforts to go through insolvency proceedings and simply tend to disappear. As a result, the recovery ratio from insolvency procedure overall seems very limited and it is essential to provide the best efforts in order to settle any dispute prior to reaching insolvency.

 
divider
 
man-tel    

Talk to one of our debt collections experts near you.

> Email us now

 

 
divider
 

> For more information on local collection practices, court proceedings and insolvency read the full Collections Profile

 

map icon Go back to the world map