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July 31, 2017

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How foreign firms get better credit to move forward

THE round table “Getting Credit in China” was held on June 21 at the General Consulate of Italy in Shanghai with the aim of helping foreign companies move forward without red tape of credit restrictions.

“Getting Credit in China” brought together GWA Greatway Advisory, the World Bank, the Bank of Shanghai, Intesa Sanpaolo Bank and the SEB group. The representatives of these businesses gave a number of speeches varying in visions and topics, but with a similar focus on how foreign companies can get loans and credit in China.

This year in the 2017 Doing Business report, The People’s Republic of China scored 64.28 points, ranking 78th overall. The Doing Business report is an annual statement conducted by the World Bank, which measures the effects of regulations and whether they improve or constrain business activity. Doing Business uses quantitative indicators on business regulations and the protection of property rights, and compares them across 190 economies.

This year’s research highlighted China’s strengths in the fields of starting a business, enforcing contracts and registering property. However, some aspects were not as developed, such as resolving insolvency, dealing with construction permits and protecting minority investors. The data changes if we apply the same factors on two of China’s most important cities: Shanghai and Beijing. Shanghai scored 64.52 points, whilst Beijing totaled 63.98, an impressive ranking in itself.

A major positive for SMEs operating in China is the affordability of credit. However this is somewhat dampened by their lack of immovable property or real estate and a lacking legal framework.

Choice of banks

An important aspect for firms to get credit in China is linked to the choice of foreign banks, which are more familiar with their business framework, or it is possible to opt for a local Chinese bank. Firms must weigh the pros and cons of their decision. Foreign banks of the same country of the firm seeking finance guarantees the firm a total focus of the bank on their business. Additionally, the bank has a higher percentage of available capital, as well as an international presence and can immediately adjust to new regulations. On the other hand, a local bank will be able to provide the firm access to its large local network and wide customer base, a valuable utility for any business hoping to succeed in China.

Another major point of the discussion regarded the new regulations issued by the Chinese regulation authorities.

The three main Chinese regulation authorities — the People’s Bank of China, the State Administration of Foreign Exchange and the China Banking Regulatory Commission — introduced new regulations regarding getting credit in China. The new guidelines will affect the banking sector the most, in particular take a stricter and more rigorous view towards overseas businesses. These new guidelines will provide credit risk management of banking institutions in terms of credit granting, due diligence, independent loan examining, post-loan management and so on.

The main goals of the regulations are ensuring strict compliance with laws, regulations and internal policies, prevent and guard against financial risks and also ensure the banking sector serves the real economy.

Additionally, the regulations aim to crack down on shadow banking, entities outside of the regulated banking system that provide liquidity and credit and can also constitute a risk as there are no guarantees for borrowers and the sector is more prone to fraud. The pros of this system are that they are more flexible and cheaper than traditional banks.

 

The author is Managing Partner and lawyer at GWA Law, Tax & Accounting, Shanghai.




 

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