Good friend, and frequent commenter, Jay Boyle once said that “Guanxi either retires or goes to jail“, and over the past few years in particular we have begun seeing this as Beijing clamps down on a number of officials for graft.

Most recently the removals of Shenzhen Mayor Xu Zongheng and Pi Qiansheng Binhai New Area Investment Zone Director caught my attention as these men were in the drivers seat of major economies, economies that were view as drivers of China’s march to 8% GDP growth.

A few notes of where I find these arrests as important:
1) Many firms when entering China travel from zone to zone looking to find the best deals. Deals that are sometime in contravention with Beijing’s guidelines for incentives. 2 years ago while visiting Suzhou on one such trip were were flatly told that the days of old were gone, and that a new path was being taken. For some, like my client, they chose Suzhou regardless, but for others the search continues further inland. To areas that were reportedly giving better deals.

Deals that could come under inspection

2) The old boys network in Tianjin and Shenzhen are being dismantled, and Beijing wants more control. Tianjin, a city that was only until a few years ago largely managed by those born in Tianjin, Beijing has taken advantages of a few opportunities to dilute this power base and exert its control. for the average firm, in the short term, this may not seem important, however for firms looking to invest at the highest levels or for those firms hoping to skirt the rules, things could change quickly.

Some food for thought on a couple of recent new pieces, and for those with a larger apetite, I highly recommend the article  China’s Governance Crisis and China’s New Leadership

Following the announcement that China plans to establish social security number system,news that China has drafted its first law on social insurance came soon after.

According to the article:

It specifies a common right for citizens, urban and rural alike, to pay premiums and enjoy social insurance for medical care, work injuries, unemployment and childbirth.

The draft highlights more efficient fund management. Governments at municipal, provincial and the state-level should encourage and support the public’s participation in supervising insurance funds.

However, the most important piece of information that I have been able to see is that workers will be able to pay into the system and pull benefits in different locations.  A huge boost for China’s migrant labor, and a key consideration for managers who will be called on to move around China to open new markets.

For firms, the true impact will be largely unknown as there are still a minimum of to readings before this becomes law, but this is surely one of those pieces of regulation that if done right will have a wide impact on China.

China Briefing has just posted SAFE Issues New Regulations to Further Control Foreign Exchange Movement, which confirms the worst case scenario I ran through in my post earlier this month The Next Problem for China’s Exporters: SAFE Regulations.

Confirming what, Michael Pettis’s warned about in his post Hot weather, cold market, I made a trip to the SAFE Homepage to see what I could find, and with the help of google Translate you can get the major points of the document that SAFE posted last week (Google Translation of same page).

Reason for the new rules according to the document is to

“improve monitoring and management of external debt statistics, prevent foreign debt payment risks”.. i.e. reduce the levels of hot money flowing intothe country, and to restrict any potential outflows that may negatively impact the economy (think Thailand June 2007 before the crash on July 2)

and to address this, buyers and investors will be required to clear their money through SAFE before they can spend it, the amount of money that can be cleared at any one time will be limited, if you don’t spend the money within 90 days it must be taken back out, and that to take the money back out it is going to involve an equally painful process.

Now, I don’t think it takes a whiteboard for you to understand the hurdle that has just been put in place for everyone who sources in China.

Effectively, to the best I can tell, cash flow will now be extended at a minimum 30 days.. up to 90 days… and the idea that you need to have a “holding pool” is also now confirmed.

In Pettis’s post he mentioned:

One of my students, whose uncle is a Southern-province-based exporter, told me that he believed (he wasn’t sure) that typically exporters would need to find financing for this period, and since most of them are excluded from commercial bank financing, they would need to take short-term loans from the informal banking sector. This sounds pretty plausible.

From that, here are a few ways to structure this off the top of my head.  I am not sure which is the best in terms of speed, and I am not an accountant/ lawyer so I am not sure how each method would be more/ less in compliance, but here are a few:

1) Set up a WOFE/ Rep Office on the mainland that can establish a bank account and act essentially as a fund manager.  Firms will need to move money in well in advance, clear it, and then put it into this account for future use.  This fund will need to have a safety stock, and need to be well managed, to ensure that any delays in approvals of new funds can be buffered

2) Work with a trusted import/ export firm who will act as your fund.  Depending on the I/E you choose, they may already be the best option as they have a history of bringing in money, pooling it, clearing it, and managing the supplier payments.  The operational issue with this is that you need to give the I/E extra money .. .and backing those funds out is a huge pain.  From a risk perspective, this also adds to the equation as there are stories of I/E firms simply pulling runners

3) ship out a safety stock before Oct 1 that will get you through the end of the year and see what happens.  I am fairly confident that in an attempt to cool off the hot money flowing into this economy, the government is going to find that they are going to have to relent when shown the impact on the manufacturing sector.  this is a nuclear option on hot money (yes… we should be worried)and the innocents appear to be small to medium sized firms (Chinese and foreign)… and the relevant agencies are surely going to be hearing about it.

Things you should do:
1)Read the posts that China Briefing and Michael Petis have put online, to understand the issue
2) Call your accountant, your China based partner, your import/ export partners, etc and work out your exposure.
3) Call your freight forwarder and book vessels in the Sept 20 - Oct 1 time frame.  I can guarantee you that there will be a massive push that week, and you are really better off booking early.
4) If you are still confused, or you are still looking to learn more, check out the SAFE organized training event.  There appear to be a few of them starting next week, and the contact information that I was able to find on the event was:

Contact:, Zhang Wei
Tel: 010-68573886 (Zhang Wei)

Of course, if you have a different work around please email me or comment below.

I would like to post details that allow others to develop work arounds.  I promise… no details that would let anyone work out who it is.

For those of you who were alseep last year, there was an issue related to quality control and product safety that rocked US consumers and gave everyone at CNN something to talk about.

My position at the time was that it was firms like Mattel and FTS tire Import who were to blame for not investing in their quality control platform.  Wasn’t a popular position to take at the time, but sure enough… Mattel apologized for their role.

For the 2008 Christmas season though, I have a feeling that we will all be able to look back and point out the recent decision to stop issuing F visas from July 20 to September 20 as the primary culprit.

All fluff aside, I spoke to several people in HK last week wihle I was there about how the visa policy had impacted them (they were in social compliance/ factory audit groups)… and their only comment was that they were glad they had the F visa as having to get a tourist visa every few days was going to be a real issue for many inspectors who operate from HK and go into Dongguan and Shenzhen for inspections.

Another impact that I have heard of - and it is something BOCOG must be hearing about on a daily basis - is that many of those packages that sponsors are given to entertain clients on the Olypmic green are largely going to waste becuase people cannot get the visas.

Looks like the 400m hurdles just got jacked up another notch.

Good friend of mine sent me an email this morning alerting me to an issue that they were discussing, the SAFE regulations that are set to hit the market next week. Where he ended the email with:

As for the new SAFE regulations for monitoring forex from trade, they don’t take effect until July 14. Presumably importers won’t be facing delays until then

As you may have read, heard, or remember… there has been a huge amount of money coming into China that finds its was into stocks, real estate, bank deposits, etc. It is called hot money, and everyone I have spoken with on the subject - and by all media accounts - the numbers are huge

The problem though, as I am told, is that this money is largely unaccounted for and poses real macro level risks for the economy (what comes in… can go out?), and in an effort to get control of this problem SAFE has enacted a new regulation that will essentially put all money inflows through a process of some sort (I am still looking into the process).

When asking my friend about some resources, he pointed me to the Michael Pettis article Hot weather, cold market, and at this point I would also do the same as it is an excellent article on the topic.. and the post below it covers the hot money issue.

the passage that popped off the page for me was:

I was discussing with my students over coffee the effect of the new export-management controls on inflows announced Wednesday night (and discussed in Thursday’s entry). We agreed that if these measures are at all effective in seeking out hidden hot money inflows, the monitoring period would probably add a few weeks to the time between when foreigners pay for an exported good and when the cash is actually disbursed to the Chinese exporter.

One of my students, whose uncle is a Southern-province-based exporter, told me that he believed (he wasn’t sure) that typically exporters would need to find financing for this period, and since most of them are excluded from commercial bank financing, they would need to take short-term loans from the informal banking sector. This sounds pretty plausible.

For me, where I see the importance of these paragraphs is that essentially he believes it may take an extra 20 days or so to clear the inbound money, and where this is important is that many manufacturers simply will not move the product until they have been paid in full.

So, where his conversation was of manufacturers out finding bridge loans (something I am trying to understand more), for me the main issue is that international buyers may need to set up a mechanism in China whereby they can idle the money they need for a particular month.. and then backfill.  It will require a lot of planning, more attention to forecasts and budgets, and potentially (depending on one’s current set up) may require a firm to acutally register an entity in China.

PErhaps I am reading it wrong?  But, in the time I have been assisting on trading in China I have never been able to tell my exporting factories that I need 20 days to pay after they ship the goods.  we are not WalMart or GM, and we simply do not have that power..

and I am sure there are others out there in the same position.

So, if anyone out there knows more about this, please post a comment.  5 days isn’t a lot of time to bring together a workaround, but it would be good to understand this more before the deadline comes.