Financing Your Business in China
Often one of the most important and challenging elements in closing a business deal in China is obtaining the required financing. Companies need to be able to deliver a variety of financing options when negotiating projects in China. One cannot over emphasise the need for a Canadian company to understand and communicate with both sides of the financing issue (i.e. the western financier's perspective and the Chinese official's perspective). If you don't have in-house expertise that speaks the language of the banking community and fully appreciates the Chinese perspective, think about engaging a specialist who does.
This article briefly explores the available sources of financing support both in Canada and in China and some of the issues related to financing in China.
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Foreign exchange issues
The State Administration of Foreign Exchange (SAFE), an organization under the People's Bank of China advises on exchange control policy. Designated state and approved foreign banks are permitted to engage in foreign exchange business, as are a number of non-banking financial institutions.
For a foreign business to repatriate foreign exchange out of China, it needs to provide its foreign banker with proof of needs for current account purposes, such as dividend/interest payment notices and import/export invoices. For dividend repatriation, a resolution of the board of directors of a foreign-invested enterprise is all that is required. For foreign exchange required to pay for imports, the invoice, customs documentation and bills of lading is usually what is required. The banker will then present the application to SAFE for approval, and carry out the remittance instruction upon approval by SAFE. (Please note that only amounts above US$100,000 in general would need to require SAFE approval and this amount varies from location to location. Otherwise the domestic bank is usually authorized to allow conversion to forex based on documentation required.). SAFE approval is required for Chinese companies on foreign currency borrowing, while joint venture and wholly owned foreign enterprises do not require such approval and need only register the transaction with SAFE.
It is important to note that all imports into China can only be paid for in foreign exchange, not in renminbi. In some cases, Chinese buyers will want to pay for these imports in renminbi, but regulations don't permit it. Similarly some Canadian companies in China may want to use their in-China revenues to finance expenses, including expenses incurred in Canada. These in-Canada expenses would have to be paid for in foreign exchange and approval must be obtained from SAFE, through its foreign banker. It is not certain that approval will be given.
Canadian government financing institutions
Export Development Canada
Export Development Canada (EDC) provides Canadian exporters with financing, insurance and bonding services as well as foreign market expertise.
As a recognized leader in providing ground breaking commercial financial solutions, EDC is constantly looking for new, innovative ways to serve its customers. EDC’s goal is to help Canadian companies, no matter how big or small, capitalize on all the exciting opportunities that exporting offers.
Canadian Commercial Corporation
The Canadian Commercial Corporation (CCC) is a federal Crown Corporation. Its mandate is to act as prime contractor in export sales by Canadian suppliers to foreign governments, international agencies and other overseas buyers. By guaranteeing the exporter's contract performance, CCC provides the firm with the added credibility that puts potential clients at ease. In addition, CCC provides a number of services aimed at facilitating such export transactions.
CCC can also facilitate access to pre-shipment, working capital financing using the Progress Payment Program, and may be able to offer better payment terms on open account transactions.
Northstar Trade Finance (NTF)
Northstar Trade Finance (NTF) provides fixed-rate medium-term loans to eligible Chinese buyers of Canadian equipment and services. The loan is secured by a registered lien over the exported goods and insured by the EDC. Northstar's shareholders are the Bank of Montreal, the Royal Bank of Canada, HSBC Bank Canada, the National Bank of Canada, the Government of British Columbia and the Government of Ontario. Northstar's loans are particularly relevant to small and medium-sized exporters that require financing from $100,000 to $5 million with repayment terms of two to five years. It will process a complete application in seven days.
All major Canadian commercial banks are active in China, particularly in the area of trade finance.
- Scotia Bank has branches in Guangzhou, Chongqing, and Hong Kong and a representative office in Beijing and in Shanghai
- The Bank of Montreal has branches in Beijing, Guangzhou, and Hong Kong and a representative office in Shanghai
- The Canadian Imperial Bank of Commerce has a representative office in Beijing and in Shanghai
- The Royal Bank of Canada have representative offices in Beijing
- The National Bank of Canada and the Toronto-Dominion Bank are present in Hong Kong
- Major international banks, such as HSBC, with a Canadian client base, are well represented in China
Canadian banks normally look to EDC to provide insurance on letters of credit. They also accept/confirm Chinese bank letters of credit and lend to select Canadian/foreign clients who have investment projects in China. The letters of credit are normally issued by acceptable Chinese banks and confirmed by the Canadian bank. These banks can also provide operating loans and term loans for appropriate projects and, in some cases, forfeiting for longer payment terms.
There are many Chinese banks that have correspondent banking arrangements with Canadian banks and issue letters of credit for confirmation by Canadian banks. For the Canadian exporter, it is important to know which Chinese bank their Chinese customer uses and to ensure that that particular bank is acceptable to their Canadian bank for issuuance of letters of credit. The Canadian bank can advise on which Chinese banks they work with on this type of arrangement.
The four main Chinese banks which are perhaps most relevant for Canadian exporters are:
- the Bank of China
- the China Construction Bank
- the Industrial and Commercial Bank of China
- the Bank of Communications
China also has 11 shareholding banks and 112 city commercial banks, however their international impact is limited. EDC has credit facilities in place with the Bank of Communications, the Industrial and Commercial Bank of China, and the Export-Import Bank of China, that are available to Chinese importers of Canadian goods and services. In a few cases, Canadian companies have received direct financing from Chinese banks for their China operations.
In some cases, cash deals occur because Chinese buyers are trying to avoid bureaucracy in obtaining a letter of credit. Getting a letter of credit is not always convenient for the buyer because the funds needed are frozen temporarily by the bank. Therefore, they often prefer doing cash advance or cash on delivery deals in certain sectors where there are strong cash flows. The oil and telecommunications sectors are two areas where cash deals frequently occur. There are also more and more efficient small and medium-sized Chinese enterprises willing to pay cash.
The Canadian Trade Commissioner Service in China has prepared this report based on primary and secondary sources of information. Readers should take note that the Government of Canada does not guarantee the accuracy of any of the information contained in this report, nor does it necessarily endorse the organizations listed herein. Readers should independently verify the accuracy and reliability of the information.
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