The Next Problem for China’s Exporters: SAFE Regulations

Tuesday, July 8, 2008 20:55

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.

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5 Responses to “The Next Problem for China’s Exporters: SAFE Regulations”

  1. Dan says:

    July 9th, 2008 at 8:38 am

    These sorts of regulations just keep get nuttier and nuttier. China is putting band-aids on a leg that needs amputation. I was going to write on this also, but I do not really yet understand the repurcussions and/or workarounds for foreign businesses yet either.

    You mention foreign companies registering an entity in China and I see how that would help for purely “domestic” transactions, but if the newly registered WFOE (let’s say) then wants to move the goods back to the home country, it will still be facing the same situation, right? Or are you just suggesting this as a way to get around the new/likely delays? In other words, WFOE buys the product and then WFOE sells the product to its parent company overseas and WFOE is the one who has to wait 20-30 days, not parent?

  2. Rich says:

    July 9th, 2008 at 9:25 am

    Dan.

    I am not sure if this regulation is nutty or not, but it could definitely grind the gears a bit.

    Second Model.

    It would not be a means to transfer price, avoid tax, or other. . simply it would be a trusted account that could be internally managed to match orders. It remains to be seen jsut how cumbersome the regulations will be, and two of our suppliers have not even heard of them… a call to an import/ export firm we know who has been a great provider of upcoming regulatory changes also has heard nothing…

    so.. maybe it is nothing? or maybe no one in the trading community realized that they are in the second ripple?

    R

  3. fatso says:

    July 17th, 2008 at 3:03 am

    Key challenge is combining such regulations with targets of low inventories / lean and optimal supply chain management – every step which is not instant adds to the chain. Someone must finance these delays and in an environment where payment and goods are linked together time-wise when payment stops then goods stop. Creative L/C management (using L/C and deferred payment) is maybe a possibility, and if my information is correct that L/C factoring is now also available in China so I guess the exporter could use this tool, however will the domestic banks delay acceptance until evidence that payment will pass SAFE?

  4. Nru says:

    July 25th, 2008 at 8:57 am

    So now not only do we have to pay the raw material suppliers from our own pockets to start the production ( It is very difficult for big orders ), we also have to bear the difference in the exchange rate between the day we get the TT till the day we actually get the money in hand ( After the goods are shipped and the documents are shown to the bank ).

    It is good for buyers that they are assured till a certain extent that the factory will have to supply the goods in order to get their hands on the money, but this will also lead to factories churning out goods faster with even poorer quality control to export as fast as possible in order to get the money faster to save the exchange rate difference. Or am I missing something here?

  5. Rich says:

    July 25th, 2008 at 10:21 am

    Fatso –

    that’s a good question. another question I would have is who bears the cost of the L/C being factored… eventually, the buyer (i.e. consumer).

    Nru –

    I think this will actually force the buyers to put out the cash 45 days ahead of shipment, so while the factory is still in the process of finishing the order, your cash is already in country with the expectation that they are going to do the job right… that is not only going to crunch the buyer’s cash flow… it potentially puts them in a risky position where their money is locked up in country for another 90 days if there is a screw up.

    R