1 Oct 2002
Money Services Expand As Mainland Opens(HKTDC Hong Kong Trade Services, Vol 02,2002)
Vol 2, 2002
Banking, Finance & Insurance
|Leading financial institutions in Hong Kong, such as the Bank of China (foreground) and HSBC (towering in the background), have close cultural and historical ties useful to SMEs active on the Chinese mainland.|
FOR more than 20 years, as SMEs heightened their business activities on the Chinese mainland, the choices among financial institutions were rather limited. That situation is changing fast.
The market for non-mainland banks has been opening for several years, a process accelerated through concessions granted by the mainland government to secure entry into the World Trade Organization (WTO).
Hong Kong banks, having close cultural and historical affiliations with many parts of the mainland, are developing a strong presence and offering many services ideal for SMEs. After all, such companies are the foundation of any Hong Kong bank's client base.
Substantial restrictions affect how non-mainland banks can deal in renminbi (RMB), the mainland currency, and the extent to which they can serve domestic clients. Hence, until now many of the services involved foreign currency and international companies.
The Bank of East Asia (BEA) is recognized as having the largest network among foreign banks on the mainland. It opened its first mainland branch in Shanghai in 1920.
Consistent with growing business, along with a main branch in Shanghai's Pudong area, BEA has a sub-branch in the Puxi district and branches in the cities of Shenzhen, Xiamen, Guangzhou, Zhuhai, Dalian and Xian. Its representative offices in Fuzhou, Beijing, Qingdao, Wuhan, Tianjin, Chongqing and Chengdu operate mainly for business liaison.
The bank recently obtained approvals to upgrade its Beijing representative office to a full branch and to offer Internet banking services by all its branches and sub-branches on the mainland.
Services of special importance to SMEs include:
- foreign-currency and RMB deposits and loans;
- project finance and working capital loans;
- trade finance facilities;
- documentary credit negotiations and collections;
- remittances, guarantees; and
- buying and selling foreign currency.
BEA has gained approval from the People's Bank of China (PBOC) to conduct RMB business in Shanghai, Shenzhen, Dalian and Tianjin cities, as well as in Jiangsu, Zhejiang, Guangdong, Guangxi and Hunan provinces. BEA has the largest number of licences to offer RMB services on the mainland. With these approvals, the bank offers a full range of RMB services to those customers permitted by the PBOC.
Hang Seng Bank also has a number of branches on the Chinese mainland and supplies "most normal banking services and a full range of trade services as far as regulations allow", says assistant general manager and head of commercial banking David Tam.
Hang Seng Bank offers RMB accounts to foreign or joint venture sino-foreign companies through its Shanghai branch and foreign currency services to foreign and Chinese mainland enterprises through its Shanghai, Guangzhou and Shenzhen branches.
How do SMEs stand to benefit? "With our experience, expertise and connections, we can develop tailor-made financial packages for SMEs to meet specific needs and requirements when operating in the mainland market," says BEA's general manager and China division head Raymond Yu.
Why should SMEs use Hong Kong-based financial-service providers for business on the mainland? "Thanks to our broad customer base in Hong Kong, there is a lot of opportunity for us to leverage their relationships with us. There is a credit history, and we have good knowledge of their businesses. This can speed up the process when they start to work with our mainland branches," says Hang Seng Bank's Tam.
Apart from branches in Guangzhou, Shenzhen and Shanghai, Hang Seng Bank also has a branch in Fuzhou along with representative offices in Beijing and Xiamen. It has obtained preliminary approval to set up a branch in Nanjing.
"In providing services to SMEs, Hong Kong-based banks will as far as possible maintain practices on the mainland similar to their operations in Hong Kong. SMEs can accommodate these practices without difficulties. They do not need to spend much time to become familiar with such practices, which in turn can enable them to focus on their own businesses and enhance their operational efficiency and effectiveness," says Yu.
Many non-mainland banks need broader networks as the market continues opening. One way to expand is through WTO-related measures which allow them to buy into domestic banks. HSBC led the way last December by acquiring 8% of the Bank of Shanghai (in which Hong Kong-based Shanghai Commercial Bank also owns 3%).
Hong Kong banks will continue serving customers with a widening range of financial services. For example, HSBC has negotiated for a stake in the mainland's Ping An Insurance.
WRITTEN BY PAUL WOODWARD
TO secure bank funding for operations on the Chinese mainland, SMEs must follow specific procedures.
"Our main considerations are a borrower's financial performance, repayment ability, background, management experience and integrity, together with industry prospects and project viability," says the Bank of East Asia's general manager and China division head Raymond Yu.
Banks also evaluate such collateral as pledges on time deposits, factory buildings or other properties and bank standby letters of credit.
Customers with obviously strong finances and competent management may secure bank loans "on a clean basis" (no collateral needed).
"The best strategy is to provide all information required while addressing banks' concerns as far as possible," says Yu.
Hang Seng Bank assistant general manager and head of commercial banking David Tam agrees. "There's not too much difference from applying for a loan in Hong Kong. We need to assess the whole business in Hong Kong and on the Chinese mainland," he says.
Sometimes the process will begin more easily if the customers maintain their financial management in Hong Kong. "We often lend in Hong Kong first and call on our mainland branches to help with specific mainland needs," says Tam.
As SMEs become established on the Chinese mainland, they work more through local bank branches.
One priority area is management of domestic Chinese receivables. Most Hong Kong SMEs on the mainland initially focused on exports. They needed help to fund factories and then rather traditional trade finance. Now the mainland domestic market emerges as a viable target.
Only limited local banking resources on the mainland can help companies to manage domestic-market receivables. In many places, such resources are non-existent, requiring crude cash-on-delivery terms. This constrains business growth and creates the dangers of staff members and local offices handling large sums of money.
Advice from banks with mainland experience can prove enormously important to SME clients.
"We can offer advice and a friendly hand to guide them. For instance, we worked with our customers last year to provide bank guarantees in lieu of deposits required by the customs authority on the Chinese mainland. Our head office in Hong Kong and mainland branches cooperated to get details of those guarantees exactly right. We can also advise our customers which government offices to visit for any special requirements," Tam says.
New challenges emerge almost every day. Invariably, SMEs gain by dealing with vastly experienced banks that have close cultural ties to their mainland counterparts.
WRITTEN BY PAUL WOODWARD
Some Required Documents To Secure Funding For Chinese Mainland Projects
- All constitutive documents, like business licence, any equity/cooperative joint venture contract (if any), memorandum and articles of association and certificate of approval for establishment of foreign-invested enterprises
- Audited financial statements for the last three years
- General background information
- Legal entity code certificate
- Borrowing certificate or card
- Capital injection report
- All constitutive documents, like business licence, memorandum and articles of association and certificate of incorporation
- Audited financial statements for the last three years
Source: The Bank of East Asia
"No sale is complete until the money is collected," says D&B Receivable Management Services international account manager Dixon Wong.
"Collection success drops the longer you wait and can require additional sales to offset losses," says Wong, who specializes in Chinese mainland trade disputes and has more than 10 years' experience in managing international business collections.
The first step in effective credit management is always to conduct risk assessment to judge any client's probable ability and willingness to pay later. Obviously, buyers that appear to have no profits for long periods will be less able to fulfil their financial obligations.
"SMEs should try hard to obtain detailed trade references and credit information on clients and even business partners. A prudently drafted contract can save lots of hassle when disputes arise," Wong says.
He recommends considering various methods to collect receivables:
- Do-it-yourself. When using a DIY approach, never admit to a dispute in the first place, because matters may be resolved amicably without ruining business relationships. During any negotiations, offers and counter-offers should be on a "without prejudice" basis.
- Professional third-party collection agency. A professional collector familiar with local practices, culture and laws can help locate debtors more efficiently. Through personal visits and negotiations, collectors can clear up issues, demand payment, negotiate settlement or arrange payment plans. Sometimes collectors may help to mediate disputes among international traders.
- Para-legal/attorney services. These are often on a contingency basis, but sometimes require up-front fees. This places preliminary legal pressure on the debtor. If such an approach fails, the next step is to sue.
- Lawsuit. SMEs must state clearly the jurisdiction of any dispute when entering into sales contracts. Failure to do so usually means resorting to laws and regulations in the debtor's country. An out-of-court settlement is always feasible. For court proceedings, the statute of limitations is different in every country. On the Chinese mainland, for example, it is four years for cases involving international trade. In deciding whether to sue, consider the debtor's financial status and the need to budget a lump sum as security for costs usually asked by courts in overseas cases.
- Mediation. An appointed mediator participates and helps both parties reach an acceptable agreement or settlement. This is cost-effective and efficient.
- Arbitration. Legally binding, this is relatively cost-effective and usually more efficient than a lawsuit. One arbitrator (or more) decides proper awards. This is similar to a court judgement, but there is no appeal. Hong Kong has all the necessary facilities of an arbitration centre.
WRITTEN BY VANAPA ONGVISES
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