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The Magic Tool of Swift and Successful Debt Collectionby Robert J. Allan and Edythe HuangIn our blog on September 25, Don't Chi Ku If You Don't Have To, we discussed the reoccurrence of Chinese sellers unable to collect accounts receivable from American buyers based on excuses of timeliness or non-conforming goods. In our story there is usually an American businessperson or entity taking advantage of the poor Chinese seller because of the seller’s cultural inclinations. The American buyer knows the Chinese seller is unfamiliar with the United States legal system and is culturally resistant to seeking the advice of legal counsel (although this is changing). The American buyer takes advantage of the Chinese seller by accepting goods but never paying on the premise the Chinese seller will not do anything about it.
We have already suggested seeking the advice of legal counsel; but there's more.
What can Counsel for the Chinese seller of goods do about the American buyer’s failure to pay for the goods?
The most powerful tool in our collections arsenal is the Prejudgment Writ of Attachment. In our experience, once a Right to Attach Order has been issued based on a Prejudgment Writ of Attachment, the debtor always wants to settle and is willing, if able, to pay at least a substantial portion of the outstanding debt.
In California, where Allan Law Group, our United States founding member is based, a Prejudgment Writ of Attachment allows commercial creditors with debts owed greater than US$500 to create commercial liens on the debtors' property before a Court issues a judgment. Typically, a Prejudgment Writ of Attachment is proper when the defendant may attempt to hide assets from the Court to prevent a debtor from transferring, encumbering, dissipating, or concealing assets available to satisfy the judgment. In order to obtain a Prejudgment Writ of Attachment, there must be an express or implied contract and a fixed or readily ascertainable amount which the creditor can and must show with "probable validity" the corporate debtor owes the creditor.
Ascertaining with certainty the amount owing is the most important fact and the most time consuming feature of the process. Although the statute seems somewhat vague when referring to a "fixed or readily ascertainable" amount it is not. The Court will only issue a Prejudgment Writ of Attachment if the amount claimed to be owing can be ascertained with certainty. Being off by a “penny” can prevent the Right to Attach Order from being issued. Remember, the Court is placing a lien on another "person's" property based on a claim, not a judgment and will not do so unless it is established to the Court’s satisfaction that a “sum certain” is probably due to the creditor by the debtor.
In order to obtain a Right to Attach Order, the creditor must first file a complaint, which is served by the usual means, on the debtor. Notice of the hearing on the Application for the Pre-judgment Writ of Attachment must be served with supporting declarations and supporting documents. At the hearing on the Application the creditor has the burden of proving the creditor’s right to attach general or specific property, that the creditor will likely prevail in the action with probable validity, and that the attachment is not sought for any other purpose but to secure the claim.
Before the Court orders a Right to Attach, the creditor must file a Bond or Undertaking, typically through an admitted surety insurer. This is done to protect the debtor in case the creditor does not win the suit.
The Court will issue a Right to Attach Order if the creditor has met its burden of proof. Once issued by the clerk of the Court, the order will allow the County Sheriffs or the United States Marshals Service to seize property of the debtor which is located in the jurisdiction of the Court. The property will be held until the trial is completed.
The Problem -- Most businesses cannot wait a year or longer to collect accounts receivable and survive.
The Solution -- Once a Right to Attach is ordered by the Court, the creditor's attorney should expect a call from the debtor's attorney. It is now time to settle.
Following the Food
by Edythe HuangIt's not that my father does not like to travel, because he does. But he has a great fear of going to places that don't have Chinese food. This fear has kept him from joining many trips abroad- so much so that I take pictures of Chinese restaurants wherever I go to show him that, next time I return to the same destination, he can come too, without the fear of being forced to eat the native food.
During one of my last vacations, I took more pictures of Chinese restaurants than I ever have before… and no, I was not in Asia. There were Chinese restaurants in the countryside of the Czech Republic and Austria, in the city of Ljubliana, Slovenia, in the small countryside towns of Postojnska, Slovenia, and even in northern Croatia. Chinese restaurants were everywhere in the Eastern European countries I visited.
Imagine my (non-existent) surprise when I got back to the office and the article "Chinese Investment in Europe: a Shift to Services" in the Chinese Business Review was waiting for me. According to Vanessa Rossi and Nora Burghart, the newer EU members from Eastern Europe are one of the new targets of Chinese Outbound Direct Investment (ODI). Although the UK and Russia receive most of Chinese ODI directed at Europe, the Eastern European countries of the EU are the latest place where Chinese hope to see a growth in exports.
Eastern Europe is not the only place that is seeing a rise in Chinese ODI. The Chinese Business Review issue dedicated to the topic cites Latin America as the next biggest new hotspot. Yet, Chinese restaurants have been in Latin America for years. Chinatowns in Mexico City, Havana, Buenos Aires, Lima, in San Jose and the Puntarenas area of Costa Rica that have been around for decades, some even over a century.
If you want to stay ahead of the curve and know where China is going next, look to the unlikely economic indicator: the number of Chinese restaurants in the area. In my experience, and without passing any judgment, Chinese business people tend to believe that Chinese food is far superior to any other food in the world. The statement is based on the many hours that I have spent listening to various "Uncles" and "Aunts" talk about how great Chinese food is and how much better it is than anybody else's food (when cheekily asked when was the last time they had non-Chinese food, many have been happy to tell me that they deemed to have Japanese food this past week. When asked the last time they had "Western food," the typical response was a cringe accompanied by some reference to the fact that he or she just can't manage to eat a potato). To many Chinese, the idea of going without Chinese food for even a week is a harrowing prospect. But, if they know they can get Chinese food while on a business trip, no matter how awful it is, they are happier to make the trip.
This information can benefit any wei go zen (non-Chinese), especially business people. If you are working with or entertaining Chinese people, make sure Chinese food, preferably "the good stuff," is available for native contacts or visitors. Don't be afraid to make recommendations of good Chinese restaurants, after all, most conversations in China revolve around what restaurants are the best restaurants in town or for a particular dish. And if you want to know where Chinese business is going to go next, remember, in many cases, Chinese business follows Chinese food.
Chi li ma?
Don't Chi Ku if You Don't Have To
By Edythe Huang and Robert J. Allan
Our clients are giving us déjà vu. It's better than many ailments, but the eerie feeling is just as disconcerting, especially when the root cause is known. As we sit in on client interview after client interview in which they tell us their story, we can't help but let that peculiar sensation wash over us. . . the sensation that we've heard this all before.
Typically, the story goes something like this:
There's a Chinese seller and an American buyer who have cultivated a relationship over a couple of years. According to the contract they have been following for the last year or two, the Chinese seller is to deliver goods in installments over a period of time. The American buyer has always paid on time, and the relationship is a good one.
Suddenly, upon receiving one of the installments, the American buyer calls up the Chinese seller and sternly says, "the goods weren't conforming this time and I'm not paying for them." The Chinese seller is puzzled, but writes it off as a singular incident and sends the buyer the next installment of goods on time.
This time, the American buyer accepts the goods and pays on time. The Chinese seller is reassured and sends off the next installment of goods on time.
The American buyer finds something wrong with this third installment and refuses to pay. Once again, the Chinese seller believes that there must be something wrong with the shipment. After all, he and the American buyer have a long standing relationship. Next time, he tells himself, everything will be fine and he'll get paid. . . just like last time.
He sends a fourth shipment. Again, the American buyer finds something wrong with the shipment and refuses to pay.
If he's smart and on top of things, the Chinese seller realizes that the long term relationship that he spent years cultivating with the American buyer may not be as strong as he thought it was. He calculates that he has sent three installments and is owed a few tens of thousands of dollars, yet knows he is not going to get paid. Many buyers do not realize that they are not going to be paid until a few more installments of goods have gone out and they are out a few hundreds of thousands of dollars.
Panic sets in. What can he do about it? Many decide that all they can do is chi ku, or ”eat the bitter.” The accounts receivable gets moved to a loss, a very painful loss.
But there are a few brave souls who have ventured into the American justice system. Those are the ones who are giving me déjà vu. They are approaching American lawyers to help them collect. And we're able to collect, but it takes the Chinese seller to, first, be able to recognize the problem, and second, get in touch with an attorney who can collect.
If you and your business don’t have to chi ku, then why would you?
Enforcing Chinese Judgments in the United StatesBy Julia Zhu and Robert AllanWe often receive inquiries from our clients on enforceability of judgments entered by US courts either in Hong Kong or China. Now, here comes the other side of the coin. We were recently asked by a reporter about how many judgments entered by Chinese courts are enforced in the US.
The enforcement of foreign judgments is frequently regulated by bilateral treaty or multilateral international convention between two states. Presently, the United States is not a party to an international agreement for the general recognition of foreign judgments. No treaty obligates foreign courts to recognize judgments of U.S. courts and vice versa.
Actions to enforce a foreign judgment generally are filed in a federal court of the United States because jurisdiction is based on diversity. However, the enforcement of a foreign money judgment in a court of the United States is determined by the laws of each individual state.
If the time to appeal in the court of origin has lapsed, and the judgment has become final, the holder of a foreign judgment, decree or order may file suit before a competent court in the U.S. which will determine whether to give effect to the foreign judgment. The local version of the Uniform Foreign Money Judgments Recognition Act applies in most states, including California.
Foreign country money judgments may be enforceable in California if they meet the requirements of the UFMJRA and the creditor brings an action in California to obtain a domestic judgment. California courts, however, have broad discretion to deny enforcement of foreign country judgments. The UFMJRA applies to any foreign country judgment granting or denying recovery of a sum of money. It does not apply to a judgment for taxes, a fine or other penalty or a judgment for support in family law matters. The UFMJRA does not prevent recognition by “comity” (or nonrecognition) of a judgment that does not come within the terms of UFMJRA.
A foreign country money judgment may be recognized in California only if final, conclusive, and enforceable where rendered even though an appeal is pending or may be taken.
We conducted a research on Westlaw for case law nationwide regarding enforcement of Chinese judgments, 68 cases came up.
A very recent case is worth our attention. On August 12, 2009, the United States District Court for the Central District of California issued a judgment enforcing a $6.5 million dollar Chinese judgment against an American corporate defendant under California’s version of the UFMJRA.
It is generally believed that United States courts will not enforce Chinese judgments given the lack of a treaty between the two countries on the issue and given that Chinese courts generally do not enforce United States judgments in China, which limits the argument for reciprocity in the United States. Given this decision, California may become a favorable forum for enforcement of Chinese judgments in the United States. One can expect this decision to be of great interest to Chinese plaintiffs with Chinese judgments against American corporate defendants, especially those located in the state of California. Other states that have enacted the UFMJRA, including New York, may also be affected.
by Alexandra Damsker
As we discussed in our last entry, arbitration is gaining steam as a method of dispute resolution in both the PRC and Hong Kong. As a refresher, arbitration is legally binding, and comes in two (or three) basic "flavors" in the PRC. First are local PRC disputes, which go through either the China International Economic and Trade Arbitration Commission and China Maritime Arbitration Commission. Second are international disputes, which generally - but not always - includes US companies (see the final paragraph for this warning). International disputes can be broken down further into disputes regarding "foreign awards" (from a non-Chinese arbitration institute), and those regarding "foreign-related awards" (from a domestic arbitration body involving a foreign party). The distinction between "foreign" and "foreign-related" will be seen in the section regarding enforcement.
In any event, parties with international disputes relating to the PRC generally choose to arbitrate in Hong Kong. Hong Kong has a long and well-established legal history, particularly with international disputes (especially with those involving Western nations) and is easier to predict in many ways than PRC outcomes. Also, unlike the PRC, but similar to the US, Hong Kong is subject to principles of common law. Accordingly, along with Singapore, Hong Kong is the main venue of arbitration in the region. The primary arbitration center is the Hong Kong International Arbitration Center (HKIAC), which increased the number of disputed resolved 35% in 2008 over 2007 (compared to 14%increase in 2007 over 2006). As noted previously, the increase is likely due, in part, to the declining economy, as the decreased cost and increased speed both serve to facilitate the speed and profitability of business.
Hong Kong announced in February of this year that it expected to create a single regime for international and local arbitration, based on the UN Commission on International Trade Law Standards (UNCITRAL), without rewriting them. (Interestingly, if both parties are PRC citizens, the arbitration is considered "international" in Hong Kong, just as the Hong Kong arbitration ruling is considered "international" by the PRC government for the purposes of enforcement, discussed below). The use of UNCITRAL is being interpreted as permitting the use of UNCITRAL interpretation for interpretation of the new Hong Kong ordinance, bringing new clarity to arbitration proceedings (and, presumably, negotiations prior to arbitration), filling gaps in Hong Kongʼs court system. The ordinance will also contain limits on court redress of arbitral awards.
Arbitration procedures are gaining popularity among unlikely followers. For example, arbitration tends to typically be less attractive to financial institutions for both the tendency to "split the baby" and their lack of summary judgment. However, the HKIAC recently announced that it is resolving investor disputes related to sales of US $2.03billion in financial products (mostly mini-bonds) associated with Lehman Brothers (see http://www.asialaw.com/Article/2068790/Search/Results/A-new-solution.html?Keywords=Civil+Justice+Reforms) - yet another signal in arbitrationʼs new popularity.
In addition, on April 30, a key case, A v. R, was resolved in Hong Kongʼs High Court, further enforcing the finality of arbitration decisions and encouraging enforcement of the award payment. In that case, the court concluded that mounting an unfounded challenge to an arbitration award fails to comply with a partyʼs obligation to further the objectives of the Civil Justice Reforms (introduced April 2, 2009), particularly the duty to assist the court in the just and efficient resolution of a dispute. Further, and most importantly - it added indemnity costs, considering heavier than usual costs fair, adding further penalty to those wishing to challenge arbitral awards in Hong Kong.
The tools are all there: The PRCʼs Civil Procedure Law of 2007 lays out the basic principles of recognition and enforcement of foreign arbitral awards, which includes both institutional and ad hoc (proceedings conducted by someone other than an "arbitral institution") arbitration proceedings conducted in Hong Kong, both of which are recognized in the PRC. It also lays out a two year time limit for enforcement (an improvement over the previous law’s one year limit), which helps creditors.
However, arbitral awards cannot be enforced unless they have been recognized by the local PRC courts as being enforceable, and local protectionism has been a problem. Although, in 1995, the PRC Supreme Court declared its solitary supremacy in its right to refuse to recognize both foreign awards (from a non-Chinese arbitration institute) and foreign-related awards (from a domestic arbitration body involving a foreign party), that hasn’t solved the problem. There is no time limit on the Supreme Court’s decision, so getting through the procedural red tape can drag on for years - which can also be due to some local protectionism. Enforcement is further hampered by Chinese interest, local or otherwise, in the defendant - and, as anywhere, whether or not the defendant is even solvent.
Finally, it is important to note that domestic arbitral awards may not be enforceable at all! Unlike foreign and foreign-related arbitral awards, Chinese courts can review the arbitration tribunal’s findings of both fact and law. The mere fact that one party is a wholly foreign-owned entity will not normally render the award foreign or foreign-related. So the winning party in arbitration may be pronounced the loser by the court. Consider this when considering domestic arbitration - you may end up in litigation anyway...
Is arbitration the answer? Perhaps - it depends on where you and your partners are located, the interests the PRC has in your and your partners’ business, and the solvency of your partners’ business should the situation decline. Once again, this cannot be overstated: CONSULT YOUR ATTORNEYS. THIS SHOULD BE CONSIDERED BEFORE A MATERIAL BREACH OCCURS. Once disaster strikes, these questions can certainly be revisited, but you are never stronger in negotiating that when you are still at the contracting stage, particularly as the mood is still congenial and terms are much easier to set. An ounce of prevention is worth ten pounds of cure when it comes to dispute resolution mechanics. At the USA China Law Group sound prevention is sound business - please feel free to contact us.
Wishing you good counsel - and good health!
by Alexandra DamskerYou are coasting along, manufacturing products in China, beginning product development there, as well as opening up your European and Asian markets when - something goes disastrously awry. Despite the best of intentions between you and your Chinese suppliers, a shipment is missed, a major contract term goes unfulfilled, and negotiations are getting you nowhere. “But I have a contract!” you say? As our friends at www.chinalawblog.com have explained so well, Chinese contract law is far from clear(see, for example, http://www.chinalawblog.com/2009/06/china_gets_all_new_on_contract.html, discussing the Explanations of Contract Law released by the PRC Supreme Court, effective May 13, 2009).
What are your options? Well, as in the US, you have the courts, mediation, and arbitration.
The benefit of the court system is that all decisions, including mediation and arbitration,are subject to the ruling of the courts. In that respect, if you start with the courts, youare more likely to get a final ruling. However, as Chinese law is based on Civil Law rather than common law, there is no system of stare decisis (“like cases are determined alike”)-therefore, there is little to no predictability in ruling. Determinations can only besurmised by hints from the Supreme Court, and most would wish just a bit more to on which to base the outcome of their business. Without the principle of predictability to buoy up one sideʼs argument - and thus speed up negotiations and settlement – the odds that a dispute will end up in the fickle and byzantine Chinese court system is discouragingly high.
Mediation is an alternative, and may work better for those who merely need assistance negotiating the relationship or one or two issues. As a less adversarial and often cheaper process, disputes can be resolved quicker and with relationships more likely to remain intact. However, mediations are non-binding, and issues may end up in the courts and/or arbitration in the end - with additional costs, delay, and possible antagonism. If, however, you merely require “lubrication” in your relationship to restart your negotiations, “conciliation centers,” as they are know, are not uncommon, and your legal counsel can refer you to a good source of knowledgeable, independent mediators.
Arbitration, on the other hand, is legally binding, and is gaining prestige and steam in both the PRC and Hong Kong. Local disputes in the PRC usually go through the China International Economic and Trade Arbitration Commission and China Maritime Arbitration Commission. However, most disputes with any international aspect, including those involving US companies, go through Hong Kong which, unlike the PRC, is subject to principles of common law, and, along with Singapore, is the main venue of arbitration in the region. The primary arbitration center is the Hong Kong International Arbitration Center (HKIAC), which announced that it resolved 605 disputes in 2008,compared to 448 in 2007 and 394 in 2006. The increase is no doubt due, in part, to the declining economy, as the decreased cost and increased speed both serve to facilitate the speed and profitability of business. Arbitration is expanding as a method of dispute resolution, and will be discussed further in our next blog entry.
So, what to do? Regardless of which path you choose - make sure you clearly indicate your chosen venue (litigation, mediation, arbitration) and body IN YOUR CONTRACTS. This cannot be overstated - an ounce of forethought will keep you from pounds of medication for your ulcers and heart...and isn’t that what good lawyers are for? Good health comes with good counsel - so keep your counsel informed of events in your company, and let them protect you. The attorneys at the USA China Law Group have years of experience in keeping you protected, so contact us at your earliest opportunity.
You’ve gone through a thorough analysis to determine that outsourcing works for you, and China is the place to go (our team can help you out with this). Now you need to know how to get started - and, unlike many of our blogging friends, we’ll just put this up front. You need really good business and legal advice for this. China’s economic and legal dealings have changed a great deal in the past year, and you don’t want to leave your company’s future at risk because you didn’t plan well enough. So, what’s in the plan? There are five main issues to consider.
First, how much work are you going to do in China?
Second, if you are farming out cost-heavy functions, such as manufacturing (as many are), are you able to get financing? According to David Drayton, author of the wonderful Silk Road International blog (Steps for Effective Sourcing) and this excellent article on Chinese outsourcing, (New Opportunities) financing is a hit-or-miss enterprise these days.
Technically insolvent Chinese banks are cash-rich due to government funded injections, and they’re loaning out money like your favorite grandmother,yet they seem to be targeted towards specific industries, such as technology, education, logistics, green tech, health care, infrastructure, and transportation. In addition to these sectors, local governments and connected entities are getting cash. It may be difficult for an unconnected factory to get access to those funds. Factoring is an option in the short term, but long term will eat away your profits. Otherwise, China is littered with unused inventory, cancelled product and cheap labor. Cash flow, orders, deposits, guarantees and creativity in your terms will get you far. And understand their wariness - foreign cancellations completely changed the industry, so they are a bit more circumspect on foreign orders. Whatever you do, make sure you’re steering clear of the Foreign Corrupt Practices Act - Asia tends to be a red flag for this law. More on the FCPA can be found here: at the Justice Department's official web site.
Third, are you protecting your intellectual property? We can’t emphasize enough good use of counsel familiar with Chinese courts on this one. The intricacies of the Chinese legal system moves us on to our next point.
Fourth, have you considered product liability issues? In addition to US liability issues, China doesn’t have a network of national insurance providers for product liability, and factories end up going bankrupt in the wake of liability issues (e.g., the Sanlu milk issue). The ongoing Epic Kayak case will give us a glimpse of the Chinese court position on outsourced product liability - look for US product liability insurers to keep a close eye on the outcome of this case, too. You may also want to consider a product test service to keep quality assurance as high as possible.
Finally, you’ll want a local agent to oversee the process and provide onsite troubleshooting. Our affiliate attorneys in the USA China Law Group have offices in Hong Kong, Guangzhou, Shanghai, Beijing and Nanjing.
The engine of China is huge, and you may be able to harness China’s energy to power your company’s bottom line, thriving in the midst of recession. But failing to plan is planning to fail - so be smart and plan wisely!
by: Alexandra Damsker Costs are high, profits are dropping, and you’re considering outsourcing some or all of your business production to China. Is this a good idea for you? While the outsourcing party used to be more of a free-for-all fête to pare down costs, it’s now more of a selective affair. Trends are changing, particularly with China, though it remains a massive global economic engine, powering the bottom line of companies both in the US and abroad. Labor is cheap, but getting more expensive - the 2008 labor law ending termination “at will” has increased both costs and risk - and product liability risk and quality control have yet to have a fully restored reputation from recent setbacks. Global economics and the value of the dollar have been making the US and other countries, such as India and the Philippines, more viable alternatives. However, costs in China are still comparatively low, and China has a well-established outsourcing system and infrastructure that’s relatively “turn-key” for companies operating with knowledgeable advisors. What’s more, the economy is now opening China up to companies it’s never been open to before, including smaller companies and reduced orders.
So how does this shake out in terms of shipping your goods or services off to China? Well, some industries are growing wary. In BDO Seidman’s excellent 2009 Technology Outlook Survey, for example, 62% of CFOs at leading US technology businesses reported that the US would be their primary outsourcing destination in 2009 (16% reported China as leading destination in 2009, 13% reported India, and 19% reported no interest in additional outsourcing - reflecting a likely decline in international outsourcing). The study also reported that outsourcing to China is down from 46% in 2008 to 19% in 2009. (Get a better look at the survey here: http://www.bdo.com/news/pr/1016.)
However, while technology and IT, including call centers, are coming out of China, industries and company functions with high capital costs are moving to and remaining in China. Examples of both include the pharmaceutical industry and manufacturing functions, both of which are expected to maintain current levels or rise in the upcoming year. In addition, China is rising as the new head of clinical trials in Asia. (Check out this great article on pharmaceutical trending for more information on that topic: http://trendsniff.com/2008/11/06/china-numberone-destination-in-asia-for-pharmaceutical-outsourcing/.)
Our next blog will look at the complicated process of outsourcing, to give you a better idea of what to expect. Our experts at the USA China Law Group are happy to discuss whether outsourcing is a good fit for your company, and if China is a good partner country for you.
05/01/2009 by Edythe HuangJust over one week before President Barack Obama and other world leaders met in London for a summit focusing on the global recession, China was making clear it wants a greater say in managing economic policies worldwide.
The latest blast from Beijing in March: a call by China's top central banker, Zhou Xiaochuan, to replace the U.S. dollar with a new global currency.
Zhou: reserve currencies based on a single issuing country just doesn’t work: Issuing countries of reserve currencies are constantly confronted with the dilemma between achieving their domestic monetary policy goals and meeting other countries’ demand for reserve currencies. On the one hand the monetary authorities can not simply focus on domestic goals without carrying out their international responsibilities. On the other hand–they cannot pursue different domestic and international objectives at the same time. They may either fail to adequately meet the demand of a growing global economy for liquidity as they tries to ease inflation pressures at home, or create excess liquidity in the global markets by overly stimulating domestic demand. The goal, Zhou writes in a paper released on the website of the People’s Bank of China on March 23, is to "create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run."
Zhou suggested the IMF's Special Drawing Rights, or SDR, could serve as a super-sovereign reserve currency.
The idea of an international currency is worth considering. We have a global economy. To facilitate trade, we need an international currency. Zhou’s argument is basically how can we have a truly global economy without a global currency.
Notwithstanding the apparent logic of this argument, the global consensus is the U.S. dollar will not be replaced by an international currency or any other currency including the renminbi in the near future. Here’s why:
First, the U.S. will not give up the U.S dollar’s status as the dominant global currency without a fight. Speaking on March 24 at a congressional hearing in Washington, Treasury Secretary Timothy Geitner and Federal Reserve Chairman Ben Bernanke both stated on the record they categorically oppose any change in the status quo. Later that day President Obama in responding to Zhou’s “suggestion” to replace the U.S. dollar with a SDR stated, “I don’t believe there is the need for a global currency.”
Second, the U.S. dollar is already established as a the global medium of exchange. Any unseating of the U.S. dollar would signal the end of the U.S.’s stature as the world’s supreme economic power. It would also destabilize the world’s economy given the trillions of dollars of foreign investment in U.S. government securities, the largest current investor in those securities being China.
Third, the most likely successor to the title of global currency is the renminbi. However, the consensus of both Western and Chinese analysts the renminbi is significantly undervalued and China’s financial markets and banking system will not be sufficiently “mature” for the renminbi to be a viable contender for this title for at least another decade.
Notwithstanding these facts the Chinese are uncomfortable holding U.S. dollar denominated foreign reserves and debt. Taxi drivers in big cities such as Beijing and Guangzhou no longer accept U.S. dollars as they did only a year ago. Many Chinese people are looking for alternatives. Maybe they will learn from Jim Rogers, who walks around with gold coins in his pocket (see Bloomberg.com Jim Rogers video with Bernard Lo) in case the whole financial system collapses.
May, 2009 - By Julia Zhu
No matter what you read in local or international newspapers and magazines or see on TV you will inevitably find economists stating that the “leading indicators” reflect the direction of the world’s markets.
Some economists state the world economy is getting better, while others opine it is going to get worse before it gets better. The data relied on by the economists for these diverse opinions are: the GDP of the world and the component nations, consumer price indexes, commodity prices, foreign exchange rates, etc. No matter what their opinion is at this time they are all anxiously anticipating the upswing.
China remains optimistic. U.S. Secretary of State Hillary Clinton was in China in February of 2009 on the last leg of a four country tour of Asia focused on the global economic crisis. Gallup Polls conducted throughout 2008 reveal the Chinese were more optimistic about their economy than the other three nations she visited. Earlier this month, Wen Jiabao, the Premier of China publicly stated China’s economy is doing better than expected. Zhou Xiaochuan, the governor of the People's Bank of China, said last week there have been positive changes in the Chinese economy in the first quarter of 2009.
However, given concerns about the accuracy of economic data in China I have a personal economic indicator which is similar to The Economist’s “Big Mac” index.
I am currently staying in Guangzhou on business. Guangzhou is a sleepless city where construction cranes have been the predominant feature of the skyline for years. However, the city was oddly quite around the Chinese New Year in late January when I happened to be in the same area of the same city, and it seemed it had been like that for a while. I saw blue sky. I didn’t see many people or cars out during the night. What was wrong with that? Dust, dirt, noise and crowds are good –they are signs that things are happening!
Over the past a few weeks, things seemed to be changing whichresulted in my discovery of the perfect indicators we are on the upswing in China which I call the weekday bed time and weekend wake-up time. The louder the noise from construction, crowds and cars is around me, the earlier it starts and the later it ends, the earlier I wake up and the later I go to bed. It works really well. I have become an early bird even if I still stay up late. I am happy more often than I am sad. It just means that life is returning to the normal bustling status we have become accustomed to in China in the past twenty years.
I have determined we do not need complicated economic indexes and financial data to determine how the economy around us is doing. We just need to be aware of what is happening around us.
by Julia Zhu
Millions of uninsured, inadequate medical resources, unequal access to care, expensive and unaffordable health care — China knows all about it.
Health infrastructure in the poor countryside is especially creaky. In 2005, 25% of public-health resources were devoted to rural residents, even though they made up roughly 60% of the population, the Wall Street Journal notes.
Most Chinese normally need to spend over 100 RMB out of their own pockets (about 14 USD) on the treatment for cold in hospitals in China. You may want to pause for a second before you say it is not that bad. For many rural Chinese, that amount of money may be 1/5 of their whole month income. I hear many people say “I am just too poor to get sick.”
China’s official Xinhua news agency framed the problems in pretty stark terms:
The health care sector is one of the weak links in China’s social welfare system. Soaring medical fees, a lack of access to affordable medical services, poor doctor-patient relations and low medical insurance coverage compelled the government to launch the new round of reforms.
China announced plans Wednesday to build thousands of new hospitals and put a clinic in every village in the next three years, the first steps in a decade-long reform plan to provide universal health care coverage.
"By 2011, we will remarkably improve the accessibility of basic medical care and health care services and alleviate the burden of the general public for medical costs," Vice Health Minister Zhang Mao said at a briefing for reporters.
The reforms also include plans to build 29,000 new township hospitals, and 2,000 at the county level.
We're worried China will be the first country that will become old and sick before it becomes rich. Health reform, a good move!
by Edythe Huang
Lately, I’ve been a bit obsessed over a comment that Geitner made about China’s currency manipulation. Yes, I know it’s old news, and yes, I know that I’ve already blogged about it. But, I can’t seem to get past the accusation.
During a recent trip to China I got in the habit of asking people I met there what they thought of Chinese currency. I was starting to get a better picture of the big picture. Essentially I came to the conclusion that everyone manipulates their currency by indirectly buying and selling in the market, China is just an easy target because they do it a bit more than everyone else. I was just beginning to understand a small part of the very large and complex market that is Chinese currency. . . and then, China called for alternative currency. When I first watched the announcement on CCTV, I was a bit shocked.
Why in the world would China call for an alternative currency? After all, they are the largest holder of United States hard currency. Their incredible power created through holding so much hard currency reserve would essentially vanish . . . unless they used their hard currency reserve to buy the alternative currency. Their current account balance is much higher than any other country (by $100 trillion) and they aren’t burdened with the level of debt which saddle most western countries. It completely makes sense why China would want an alternative currency: they would have more of it than anyone else.
As for me, I was even more shocked in the hour when Geitner was agreeing with China. Thank goodness he changed his mind fast. Why would the United States want the rest of the world to lose confidence in the dollar? I do not know much about the intricacies of currency exchange and rates, but I do know that the only thing the dollar rests on is the confidence that the world places in the currency. Why would our finance guy say that we want a competitor? I have the upmost respect for Geitner’s intelligence and ability, but that short-term agreement with China did make me step back and wonder about his judgment for a moment.
by Julia Zhu
Just over one week before President Barack Obama and other world leaders met in London for a summit focusing on the global recession, China was making clear it wants a greater say in managing economic policies worldwide. The latest blast from Beijing: a call by China's top central banker, Zhou Xiaochuan, to dump the U.S. dollar as the world's most important currency.
Zhou: reserve currencies based on a single issuing country just doesn’t work:
Issuing countries of reserve currencies are constantly confronted with the dilemma between achieving their domestic monetary policy goals and meeting other countries’ demand for reserve currencies. On the one hand–the monetary authorities can not simply focus on domestic goals without carrying out their international responsibilities. On the other hand–they cannot pursue different domestic and international objectives at the same time. They may either fail to adequately meet the demand of a growing global economy for liquidity as they tries to ease inflation pressures at home, or create excess liquidity in the global markets by overly stimulating domestic demand.
The goal, Zhou writes in a paper released on the website of People’s Bank of China on Mar. 23, is to "create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run."
Zhou suggested the IMF's Special Drawing Rights, or SDR, could serve as a super-sovereign reserve currency.
The idea of an international currency is worth considering. We do have a global economy. To facilitate trade, we need an international currency. I mean, how can we have a global economy unless we also have a global currency?
However, pretty much everyone agrees replacement of U.S. dollars with an international currency is not going to happen any soon. Here’s why:
First, the U.S. isn’t welcoming the idea and will fight against it. Speaking on Mar. 24 at a congressional hearing in Washington, Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke both said they categorically oppose the change. Obama came out with support of the US Dollar and to reply to the Chinese he stated, “I don’t believe there is the need for a global currency.”
Second, the U.S. dollar is already established as a medium of exchange. To replace US dollars, the new currency would have to be adopted worldwide by private companies for international trade transactions, a tremendous challenge.
No matter what, Chinese are now nervous holding U.S. dollars. Taxi drivers in big cities such as Beijing and Guangzhou don’t take U.S. dollars as they did before. I think many of us are nervous holding dollars and maybe rightfully so. Maybe we should learn from Jim Rogers, who walk around with gold coins in his pocket (see Bloomberg.com Jim Rogers video with Bernard Lo) in case the whole financial system collapses.
The Obama administration was off to a shaky start in US-Chinese relations when Treasury Secretary Timothy Geithner directly called China a currency manipulator. The Administration seems to have switched directions this week after that gaff when it named its second Chinese American, Gary Locke, to lead the Commerce Department. (The first to be named was Steven Chu, Secretary of Energy.) The decision to name Secretary-designate Locke after two failed nominations marks a move toward positive Chinese-American relations.
Gary Locke was a partner of Seattle-based law firm Davis Wright Tremaine, where he worked on issues involving China, energy and governmental relations. He then became the first Chinese-American to hold the position of U.S. Governor when he became governor of Washington State in 1997. While Governor, Locke became known as a pragmatist who focused on international opportunities. After he stepped down in 2005, Locke worked on Chinese President Hu Jintao’s visit to Seattle in 2006.
Locke’s history of a close relationship with China (and his comparatively scandal-free resume) no doubt put Locke on Obama’s radar for Commerce Secretary. But what does it mean for the future for the future of the commerce department?
When Locke accepted the nomination, he said “Our nation's economic success is tied directly to America continuing to lead in technology and innovation and in exporting those products, services and ideas to markets around the globe. The Department of Commerce can and will help create jobs and the economic vitality our country needs.”
Although these seem to be words for words sake, there is something more in the nomination. The Commerce Secretary works toward increasing jobs at home; opening global markets for US companies and eliminates trade barriers, and expands export opportunities. Locke already has a good relationship with Chinese officials. It has not been any secret that the US has had a large trade deficit with China. Perhaps I’m being a bit optimistic, but it seems like Locke has been nominated because he may be one of the few people who have the ear of China and the ability to talk to them about “increasing their domestic consumption” and balancing trade in a way that they may be willing to listen. Obama may be trying to bait China with honey by having a person they trust go to talk to them. There’s nothing wrong with a bit of good diplomacy and negotiation.
The World Bank’s Quarterly Report, published last Tuesday called for China to boost its domestic demand. This is not the first time the World Bank has urged the Chinese government to encourage its people to consume. The World Bank has made the same recommendation in just about every other quarterly report on China. And yet, this time, it’s a bit more striking because it begs the question, what more can China do?
First, let’s go to the 800 pound gorilla in the room. There’s been an economic crisis that has rocked the world since Sept. 15, 2008. For the first time, China’s government is not the only government that must urge its people to spend money and consume products, especially at a time when unemployment has risen, 67,000 small businesses in China fell into bankruptcy, and economic growth has slowed.
Second, the Chinese government just launched a Rmb4,000bn ($586 billion) stimulus plan aimed at upgrading infrastructure, expanding social welfare, and reforming rural land. About $123 billion of the $586 billion will be spent on a universal health insurance for the next three years. Some experts say a universal health care plan will create the foundation of a broad Chinese middle class who will have more of an appetite for world goods. However, it will take time for the wealth to accumulate.
Third, the Chinese government wants people to consume. It just wants to make sure that exports continue at a higher rate than imports. Unfortunately for the Chinese, export growth is shrinking. The only way for China to keep up the extraordinary economic growth rate it has enjoyed is to increase domestic demand. The Chinese government understands this and has put in much effort to restore consumer confidence to this country of savers through, let’s face it, economic propaganda.
I took the opportunity to look at quarterly reports of other countries to see if those countries were admonished the same way or to see what other countries do to deter the recommendation. What I found was pretty surprising. . . or not. Mongolia (it’s the only other quarterly report that came out in Feb. 2009 which discusses domestic demand) was praised for their domestic demand. The reason? Mongolia’s imports are greater than their exports. Therefore, one desired equation is imports > exports = good domestic demand.
China’s solution if they want to satisfy the World Bank (and the rest of the world): start importing more than they export. Not to state the obvious, or actually, to state the obvious, I do not see the Chinese government being so thrilled about the strategy.
This past week Chinese families have gathered to celebrate the beginning of spring, often referred to as the Chinese New Year. Everywhere, upside down “fu” (luck/prosperity/fortune/ happiness) signs hung on doors and walls to ring in the Year of the Bull. The character “fu” hangs upside down every year (the Chinese word for upside down sounds like the word for “to come” or “to arrive”); but this year, the signs seem to be asking for something more. In the economic downturn, everyone is hoping that the year of the bull will usher in a bull market.
The question is how? How do we inspire investor confidence, especially when cash and credit are both dwindling? The media continually points out that nobody seems to know anything about anything in the financial market or where the problems come from. And yet economists are having a field day with their theories on how to fix the problem. Interestingly enough, many of there theories go back to economics 101: is it better to spend or to save our way back into economic prosperity?
China and Japan have been well known for following the “saver” mentality, while the United States and many other western economies have preferred to spend there way into a good economy. Even after the September 11 attacks on the World Trade Center, former-President Bush told the American people to go out and consume. It was probably not the most practical response, but it was consistent with seventy years of American economic policy. What is wonderful is that we got away with it for a quite some time: America has managed to spend its way into more than $10 trillion dollars worth of debt. There are many factors that contributed to the current crisis; one of the biggest is also based on one of our most closely held beliefs: consumerism. Our consumer mentality resulted in a reliance on credit and the overextension of our liabilities on a micro and macro level.
When I finally took a step back to examine my very “American,” capitalistic belief in spending, I realized that it violates common sense. There are many complex economic theories and charts demonstrating why spending is great and will save the economy, and yet, at the end of the day, the bill still comes and someone has to pay for it. So how are we going to pay yesterday’s bill?
Even though alarm bells may be ringing in your head along with words “unpatriotic” or “communist,” perhaps it is time for Americans to start learning from the Chinese and the Japanese. It might be time to start thinking about saving instead of spending.
Let me be clear in what I am proposing. I do not believe that spending and saving are mutually exclusive. What I advocate is for Americans to spend within their means and put some money away for tomorrow as opposed to spending tomorrow’s money today.
Although I do not have the intellectual prowess or credentials of John Maynard Keyes or Befekadu Degefe, I do have a credit card and I know how to shop. Shopping has taught me that if I buy a widget, I will have to pay for it. For a while, I could put off payment of the widget by putting it on my credit card, but I’ll probably accrue interest payments on top of the cost of the widget if I do not pay off the credit card immediately. However, if I wait a while to buy the widget while earning some money, I can pay for the widget in full and not accrue any interest payment, keeping more money in my pocket that I can spend elsewhere, invest, or save for a rainy day. That money will eventually funnel into the economy.
Some economists warn that saving will lead to absolute job loss and further the economic doom. To suggest such a result relies on a proven assumption: we have put ourselves in a vicious cycle. Our entire economy is inflated because we have been spending tomorrow’s money. If we stopped spending tomorrow’s money today, there will be no money today because we already spent it all yesterday. What these economists propose is that we continue to be the rat in the wheel. The credit bubble has already burst and we are seeing the result. It would seem counterintuitive to follow the same path and create another credit bubble, run in another wheel, which will eventually burst and lead to a similar result.
It’s time to try something different. I understand that there would be a difficult period during the transition from a spender economy to a saver economy. In the long term, it seems like a better policy to spend what you have instead of risking spending what you hope to make. Will saving start a bull run tomorrow? No; but it may inspire market confidence in the future, maybe even enough for a bull run. And, then, there might just be real money to back it up.
In early November I was asked by Professor He Zhiyi, the Director of the Management Case Center of Peking University, to prepare and present a paper entitled: "Western and Chinese Perspectives of Corporate Social Responsibility" at the Global CEO Forum in Beijing on November 15 and 16, 2008.
While researching and preparing the paper, I came to believe the concept of social responsibility, which has many contemporary definitions but is most often considered to be responsible business behavior, was historically founded in Chinese cultural and currently accepted more by the Chinese government than Western governments.
My attendance at the conference validated this belief. All of the speakers representing the government emphasized the Chinese government's commitment to the concept, codified in Chapter 1, Article 5 of the Company Law of the People's Republic of China. This concept mandates that a company shall not only comply with the laws and the obligations of business and social morality but shall also bear social responsibility as well.
Cheng Siwei, a UCLA alumnus, the Chairman of the organizing Committee for the conference, and the Vice Chairman of the Standing Committee of the 10th National People's Congress gave the welcoming address. While recognizing the current global economic crisis, which he defined as a crisis of confidence in Western governments and financial systems, he stated long term climate change is more important to the world than the current crisis. He closed his comments by saying we only have one earth and we need to protect it together.
While it is easy to be skeptical of statements made by representatives of “beautiful laws" passed by the Chinese government, my attendance at the conference convinced me that both the government of China and the major multinational corporations from China, influenced by the recent earthquake and its effect on Chinese society, are serious about implementing corporate social responsibility in China.
Unfortunately, the event was not as well attended as expected due to the current economic crisis. The chief executive officers of multinational corporations need to diligently attend to their corporate affairs and the heads of both the Chinese and Western governments were attending the G20 summit in Washington hastily convened by President Bush.
Notwithstanding the absence of a strong Western presence at the forum, it was worth attending and definitely confirmed my belief that the government of China, at all levels, realize that the future of sustainable development in China and the world requires recognition and implementation of responsible business behavior emphasizing people, the planet and profits.
 “Recall that earlier generations faced down fascism and communism not just with missiles and tanks, but with sturdy alliances and enduring convictions.” - Barack Obama,
Presidential Inauguration,
January 20, 2009
It seems that some Chinese state media got a little snip happy with President Obama’s speech. Not only was the “C” word above cut out, but so was another line: “To those who cling to power through corruption and deceit and the silencing of dissent, know that you are on the wrong side of history; but that we will extend a hand if you are willing to unclench your fist." Cutting the reference to communism is understandable. After all, China is still arguably “communist,” but cutting the second line is troubling. Steven over at Lost Lao Wai Blog ( http://www.lostlaowai.com/blog/2009/01/21/obama-speech-censored-in-china/) asked, does this mean that the authorities in Beijing think that they are “corrupt”, “deceitful”, of actively “silencing dissent?” Although Steven may be that cynical, I cannot join him on that proposition. Instead, I agree with his other proposition, that the removal of the select lines was knee-jerk paranoia.
By watching the video and the reaction of startled journalist and commentators, the decision to cut those lines was not a decision from “above” (a.k.a. the Government). Instead, the decision seemed to be an immediate reaction by whoever was in control of the video feed. That man or woman was not likely to be a governmental official. Instead, it was probably some media director/executive who did not want to get the state station in trouble for broadcasting rhetoric that was not agreeable to the Party: Better safe than sorry. Just this once, I believe the Chinese Foreign Ministry when they said that they did not have anything to do with the editing.
Furthermore, I doubt that there was reason to cut the lines. The editing of the speech illustrates the beliefs and self-awareness of Chinese executives’ more than it demonstrates American views of China. Just yesterday, the Chinese Ambassador to the United States, Zhou Wenzhong, congratulated Obama on his inauguration, and said in a speech at NYU, "It is the common aspiration of the Chinese and American peoples, and it serves our fundamental interests, to ensure healthy and steady development of the China-US relationship in the coming years and beyond.” Perhaps it’s a little naïve, but this time, I think that the American media is just having a field day over another Chinese censorship issue.
Plus, I don’t think the lines were meant to be insulting to China. Maybe I’m still in mindset of Obama Mania and he still can do no wrong in my eyes, but I don’t think Obama meant the line to be a cheap shot at China. US-China bilateral relations will be too important for his presidency to start it off on the wrong foot. Plus, he doesn’t seem to be one to proclaim fighting words meant to insult another nation.
 Happy Chinese New Year from USA China Law Blog!!
Sam Crane at The Useless Tree posted two very interesting articles on multiculturalism in China, available at http://uselesstree.typepad.com/useless_tree/2008/09/can-a-black-man-be-chinese.html and http://uselesstree.typepad.com/useless_tree/2008/09/can-a-black-woman-be-chinese.html. This newly vibrant topic is not limited to the blogging world. The Economist also pointed to the growing Brazilian population in Dongguan in its article “Brazilians in China” at http://www.economist.com/business/displaystory.cfm?story_id=12209081.
Crane highlights several different issues of multiculturalism: (1) The existing nationalities within China including the Han Chinese and the 56 officially recognized minorities. (2) People of mixed race who will likely appear in the future. These include the children of “mail order brides” from neighboring countries which has started to become popular to a growing, male-dominated population, as well as those children with a parent from the West or Africa and a parent from China. (3) The increased immigration of laborers, for example, the Brazilians discussed in the Economist article. In a culture which separates within its rhetoric the ‘people of the Middle Kingdom” (Chinese) and “outside people” (foreigners), the thought of acceptance might seem difficult. Crane asks the question, “How will China deal with the pressure to expand the racial and cultural definition of Chinese-ness?”
I am reminded of a book by Pearl S. Buck, Peony, wherein the famous writer tells the story of a Jewish merchant family who had made its way to China after the Diaspora. The novel tells the story of a young Chinese servant in the house, watching as the Jewish son assimilates with the Chinese population against the wishes of his mother, who is disparately attempting to keep the family separated from their Chinese neighbors. The son must make a choice. He chooses to be part of the only culture he knows while retaining parts of his mother’s culture. As time goes on, the son and his sons become more and more Chinese, mixing with the Chinese around them until they have almost forgotten their own history. Peony is based on the true story of Jewish merchants who entered China as early as the 8th century via the Silk Road.
Although well written, the articles at The Useless Tree make it sound as if multiculturalism in China is something of a novelty that should be expected to become common place in the future. Although the population of multicultural people might be growing or expected to grow at a faster rate than it has in the past, the Chinese have had immigrants come to their country for thousands of years. The interesting aspect of historical immigration to China is that it has usually ended with the foreigners’ assimilation into Chinese culture. This is what has happened in the past, and this is probably what is expected to happen in the future.
So, what is different now? Has technology changed the way that individuals identify themselves? Has a global society changed the way that individuals identify themselves? I would argue that nothing has changed in the department of immigration.
Although Crane says that China’s experience will be different from the experience of western colonial powers who have allowed the immigration of their colonized people, I would argue that China is not very different when it comes to immigrants because the immigrants are not very different. History will repeat itself. As time goes by and families stay in a country, they will become more and more “Chinese.” We could take America as an example. You could ask most people in New York City, “What are you” in reference to their ethnicity. You might get “Italian”, “Irish”, “Egyptian”, anything really. However, if you ask, “have you ever been there?” The person might get offended, but the truth is many have not been to the country from which they state they come. Or if they have traveled there, it is typically a quick visit where they had the experience a typical American tourist would appreciate. (I am not only generalizing, but I am speaking of people whose families have been in America for two or three generations.) Although they have held onto bits of the culture within the family, the truth is they have become American and do not really know anything else.
There are people who have moved to China with no plans to return, who have children who are born in China and plan to stay in China. Those children are Chinese. They will no doubt hold on to pieces of their parents’ culture, which will get handed down, but they are culturally Chinese. Even if one parent is American, European, African, or Middle-Eastern, their children will be Chinese if China is all they know as home.
What the government classifies as “Chinese” is always different than the cultural expectation. However, even if classified as a “minority” in China, strictly legally, that individual should not be treated any differently than a Han Chinese. The Constitution of the PRC guarantees equal rights to all ethnic groups in China. It also promotes the economic and cultural development of ethnic minority groups. It might even be a perk not to be labeled a Han Chinese because ethnic minorities are not subject to the One Child Policy.
The point is that China is no different than other countries in their experiences with immigrant populations. There are some immigrants that will come and go. There are some that will stay. Most of those that will stay will most likely assimilate. The level of the assimilation might make a difference to the government when it comes to how “Chinese” one must be before the One Child Policy is applied. However, that is a policy that the Chinese will no doubt come up with when it is time for it to be considered. Perhaps China will take its turn with the 1/16th rule.
China Banking Regulatory Commission (CBRC) issued Guidelines on Risk Management of Loans Extended by Commercial Banks for the Purpose of Acquisition (the “Guidelines”) on December, 9th, 2008. The Guidelines overturn a long-standing restriction on the granting of bank loans for equity investments in China. The initiative will expand the financing channels available to Chinese enterprises and is expected to boost both onshore and outbound mergers and acquisitions (M&A) activity.
“Chinese government has announced a series of macro-adjustment measures recently, promoting industrial upgrade and encouraging promising M&A transactions. More and more companies are involved in M&A activities recently with greater demand for M&A financing. Commercial banks also demonstrate their willingness to make M&A loans. In the meantime, Chinese government has promulgated more policies on boosting domestic demand, and extending stronger support to M&A transactions. It’s just the right time for CBRC to introduce such guidelines. The main idea of the guidelines is to require qualified commercial banks strike the balance between the market demand and their risk appetite. For commercial banks, M&A financing is not only a credit tool to support strategic M&A, but it should also be put under sound risk management framework.” China Banking Regulatory Commission, December 2008.
Under the Guidelines, a commercial bank is required to establish its loan management procedures and information system for the acquisition loan business based on the principle that such procedures and system for the acquisition loan business must be more stringent than other types of loan business.
CBRC stipulates that the following requirements must be met for banks to be qualified for M&A lending: good risk management and internal control mechanism; adequacy ratio of loan loss provision not less than 100%; capital adequacy ratio not less than 10%; and professional teams on M&A due diligence and credit risk assessment.
The Guidelines point out that commercial banks must require the borrower to provide adequate guarantees, including but not limited to asset-backed, equity pledge, and third-party guarantees and other forms of security in compliance with the law.
The Guidelines are expected to be a boost to the local M&A market and would help domestic companies undertake overseas M&A activities. Industry insiders explain that an M&A loan is similar to a bridge loan, which is used as a short-term transition loan. The issuing of an M&A loan is to promote “small risk to large”. The “snake eating the elephant” approach to M&A transactions contends that once it is backed by funds, is more likely to be successful. However, the actual implementation of the Guidelines remains to be seen.
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