New Barriers to Trade: Blacklists

Wednesday, March 11, 2009 0:10
Posted in category From the Factory Floor
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One of the most interesting business dynamics that has come out of the recent crisis has been the psychological impact on China’s business.  Early on, there was a clear recognition that firms here were going to feel the fallout, and the first visible steps came when the government took action via VAT rebate increases for the textile industry, relaxing the RMB, and pumping liquidity into the system.

All steps that we would come to expect of China’s policy makers during a downturn looking to protect their economy, but in the business world, things were very different…that while the government was doing all it could to promote trade, those on main street were doing all they could to mitigate the risks.

As the recent China Stake’s article US Importers on China’s Blacklist highlights:

“We dare not accept orders from the US due to high risk. After we deliver the goods, they don’t pay us, or even vanish completely. This has happened many times. In the past we would get money two or three months after we delivered our goods. But now we won’t see it even two or three years after the delivery,” says Xu Min, a salesman for Shanghai Sanmao Import & Export Co.(Sanmao) attending the 19th East China Import and Export Fair.

Why this article is interesting to me is that while I knew suppliers were tightening up their payment terms (asking for more cash / guarantee upfront), I had not heard of manufacturers who were actively saying no to business due to the perceive risk in the market.

It is a situation that under normal circumstances could be avoided through guaranteed letters of credit, but as I have mentioned before, even those are now at times hard to come by as many Chinese banks have developed their own internal blacklists against other “unstable” banks.

Where this could get interesting is that as firms are forced to buy in cash it is going to be far more important that buying firms have strong QC in place.  that, unlike when a L/C was involved, inspections will need to occur onshore, and that should any disputes occur it could potentially become a real cash flow nightmare for the buying firm who no longer has a measure of safety through the use of financial instruments.

Could this force more closures in China and abroad?

Are there any buyers out there who have experienced this and have worked through it?

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