Risk of chinese companies finance decisions international resource development, inc

The Risk of Chinese Companies The Risk of Chinese Companies Finance DecisionsFinance Decisions

Kim Kirkendall, CPAInternational Resource Development, Inc.

Email: [email protected] www.chinaresourcenetwork.com

With 28 years of doing business in China and clients that range from SME to multi-nationals we are the resource to

improve your business!

Why Does it Matter How Chinese Why Does it Matter How Chinese Companies Self Finance?Companies Self Finance?

Its obvious if you have customers in China that their financial health matters to you. But its equally important if you depend on a supplier in China.

The corporate lending landscape in China is very different from the US, and its important to understand the environment your partner in China is doing business in.

copyright - do not copy or share without permission -International Resource Development, Inc.

Why Is lending different? Why Is lending different?

Corporate Lending in China is heavily reliant on non-bank lending. Why? Banks in China are mostly government owned (2014 they are starting to allow “private” banks) and the foreign banks don’t participate actively in corporate lending.

This forces many businesses to borrow in less regulated markets – a large portion of borrowing takes place with “Shadow Lenders” – very different from the US and European lending environment.


Cities are littered with Cities are littered with unfinished constructionunfinished construction


800,000 companies close but 800,000 companies close but only 1,000 file for bankruptcyonly 1,000 file for bankruptcy


The Overall Corporate Lending The Overall Corporate Lending Market in ChinaMarket in China

1. State Owned Banks

2. Foreign Owned Banks (still limited)

3. Self Funded Growth

4. Non-Bank Lending ie: Shadow Lending◦ Private Lenders – Direct Loans

◦ Small Banks Consolidated Pools

◦ Micro Credit Pools

◦ Pawn Shops (often use cars / real estate clltrl)

◦ Trust Companies


1 1 -- State Owned BanksState Owned Banks

� Are one way the government implements policy – to grow or slow the economy

� They are thought to be under funded and have high levels of risky debt

� They focus their lending on government owned companies and large private companies

� They typically make asset based but infrequently make operating capital loans

� In 2014 the govt has instructed the banks to loosen lending to try to slow non-bank lending

� In 2014 the govt allowed the first Chinese privately held banks to begin start up


2 2 --Foreign Banks still limited Foreign Banks still limited

To provide more loans foreign banks need more assets (accounts) and most have not invested in consumer banking / branch growth.Foreign banks have focused on trade financing and individual wealth management


3 3 -- Self Funded GrowthSelf Funded Growth

� This was the standard by in the 1990s and into the middle of the 2000’s

� Companies kept reserves of cash

� Companies accumulated assets - didn’t sell

their old factory when they build a new one

� They leveraged one investment to fund another investment

� As inflation picked up and owners wanted to maximize returns they started over investing (KTV’s, hotels, etc) and it drained their liquidity


4 4 –– Shadow LendingShadow Lending

� The amount of Shadow Lending has been listed at between 25% to 40% of the overall lending market

� The interest rates vary from reasonable (4%) to sky high (500% annual rates)

� Who uses Shadow Lending? ◦ Local government investment companies

◦ Private businesses

◦ Entrepreneur and Startup companies

◦ Real Estate developments


Different Types of Shadow LendingDifferent Types of Shadow Lending

1. Private Lenders – Direct Loans

2. Small Banks Consolidated Pools

3. Micro Credit Pools

4. Pawn Shops (often use cars / real estate collateral)

5. Trust Companies


1&41&4--Pawn Shops & Private LendingPawn Shops & Private Lending

Private Lending

� Many entrepreneurs invest in family businesses – trust and better returns

� Some group together funds for lending

Pawn Shops

� Take high value items – paintings, cars, real estate

� Are incorporated businesses with high valuations


2&32&3--Small Bank & MicroSmall Bank & Micro--Credit PoolsCredit Pools

Micro Lending

� Online platforms for p2p lending

� Underground lending, brokers take deposits / investments and make loans

� There is some loan shark / mafia behavior going on in this market…

Small Bank

� Smaller regional banks consolidate investment funds and make loans

� Has led to defaults and protests when money is lost and banks don’t guarantee


55--Trust CompaniesTrust Companies

� Non-Bank lenders that sell “high yield investments” and then loan that money

� The government is increasing regulations in this field, but they are not eliminating it

� The overall market is estimated at $2 Trillion in assets held by Trust Companies

� They lend typically to larger private companies and for Real Estate development


ExamplesExamples

� An example of personal funding is private Chinese companies accepting 1 year or more delayed payment on invoices – A/R of 90 or 180 days is not uncommon

� Company came to me about a shuttered business and how to turn it around – shadow and bank debt was not manageable and the owner was in jail

� Small entrepreneur has multiple businesses in various niches and instead of a safe investment being a savings account – its investing in a family restaurant business

� Clients distributor was found drowned…in 1 foot of water after stumbling on a late night walk?

� Client called and wanted to check out potential acquisition for a close bid, our “James Bond” research found that their entities in China had not be closed and that their key supplier had an agreement to add $X to the product price to recoup unpaid funds from their shuttered local entity


CollectionsCollections

� By law there are “no” debt collection agencies, but law firms can be used

� The majority of collections within China are done by negotiation (and shame)

� Only large debts, and typically foreign companies, can be taken to court

� More common is the China International Economic and Trade Arbitration Commission (CIETAC), the arbitration agency in China that handles international economic and trade disputes.


BankruptcyBankruptcy

� Rarely used – its new to think of the company as being an entity and not an extension of the owner

� Similar law to US - Offshore creditors are second to onshore creditors and shareholders are last

� Instead of bankruptcy - Large companies (often govt owned) have banks bail them out and Small companies run for the hills


Cultural Differences FinanceCultural Differences Finance

� The West bases developments on facts; the East focuses on people / society.

� The West has the tendency to judge and make decisions based on the future; the East gives greater consideration to the past.

� In the West business decisions are based on available financial information and contracts; in the East these decisions rely more heavily on trusting a relationship.

Past experience with people = relationshipscopyright - do not copy or share without permission -International Resource Development, Inc.

What To Do? What To Do?

� Know who you are dealing with – not on paper, in person

� Do your own risk assessment or hire us to do it; what is their motivation, what is their exposure, how strong is the business, what are their goals

� What is reasonable in China in your industry

� Don’t delay – if there is a problem act fast and begin negotiation for a settlement

� We can help your company assess your partners in China – either directly or with a “James Bond” visit

� Check with your bank and insurance company for programs they offer


International Resource International Resource

Development, IncDevelopment, Inc..For over ten years we have been helping companies improve

their operations in China. The founder, Kim Kirkendall moved to China in 1986 living there 5 years. She has manufacturing / operations management experience in China and the US, having spent the last 28 years focused on China.

Recent projects include;

◦ establishing a distribution network in China – creation of the distributor structure, identifying master distributors, leading the development of a local website, pitching Chinese online retail outlets

◦ resolution of a clients customer (GE) complaints & managing the preparation for the customers audit of the client’s local supplier

◦ Analysis of a clients supplier management corporation in China, feasibility of the business, staffing, opportunities for improvement

www.intlresource.comwww.chinaresourcenetwork.comTEL: 330-573-5518 EMAIL: [email protected]


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Risk of chinese companies finance decisions international resource development, inc