Factoring in china

FACTORING IN CHINA

Pavitra Venkateswaran

National Law University, Jodhpur

Roll No: 870

FACTORING

Factoring is generally viewed as an account receivable

management policy that subcontracts multiple facets of

the credit-administration process to a single outside

intermediary

Among these administrative functions, its financing role

has received most attention due to the prominent

advantage in solving financing problem which is a main

barrier to firm’s growth

FACTORING AND SMES

This advantageous solution is especially attractive

to SMEs in developing countries for it does not rely

on information about the ‘‘borrower’’, but rather on

the obligor

However, as factoring keeps developing steadily in

China, the financing problem faced by SMEs has not

yet been mitigated

IN CHINA

Factoring in China keeps growing steadily in volume from

2004 with jump in 2010.

Actually, factoring in China kept increasing as fast as at the

top ten growth rate worldwide from 2006, with 2010 witnessing

an amazing leap of factoring volume to approximately 130%.

This fast growth directly brings a huge expansion of factoring

volume, making China one of the leading factoring markets

worldwide.

VOLUME OF FACTORING OPERATIONS IN CHINA IN COMPARISON TO SELECT

COUNTRIES

United Kingdom keeps dominating the factoring

market worldwide, with France replacing the

second place of Italy from 2008.

As it shows, China ’s share of factoring operations

has been rising constantly in Asia as well as in total

world.

It was ranked as the eighth largest share

worldwide just behind that of the listed countries in

2009,and surpassed even the France’s in 2010,

rising to the second largest share worldwide.

FACTORING STRUCTURE IN 2010

Domestic factoring is the main type in China as well as in

other developed factoring markets such as United Kingdom,

which suggests a reasonable structure of factoring.

International factoring in China is larger than that in

other countries, which may contribute to the development

of factoring market in China by introducing developed

financial technology and standard financial operation from

abroad.

REASONSChinese companies are having a tougher time funding day-to-day operations as

cash flow begins to dry-up due to slowing customer accounts receivable payment

cycles. A recent business survey by Peking University showed 30% of businesses

being affected by late customer payments in 2011, compared with only 6% of

respondents in 2010.

Since China has no central credit history tracking mechanism, commercial debtors

find it very easy to pay on their own terms, or not at all. Bill discounting, referred to

as “factoring”, is a rapidly-growing form of finance in China for this very reason.

Since the purchaser of the accounts receivable is responsible for collections, the

original vendor doesn’t need to be as worried about slow-paying customers.

Factoring in China has grown from $235.72 billion in September 2011 to $358.31

billion in June 2012.

MEASURES IMPLEMENTED BY SHANGHAI

China's Ministry of Commerce (MOFCOM) issued a circular1 in June

2012 encouraging domestic and foreign investors with experience in

the factoring business to establish specialized commercial factoring

companies.

By the end of 2012, three government entities in Shanghai had jointly

issued measures to implement the MOFOM circular 2 (the

Implementing Measures). The Implementing Measures, which came

into effect on December 11, 2012, set out detailed requirements with

respect to the establishment of commercial factoring companies in

Shanghai.

GENERAL SETUP REQUIREMENTS

At least one of the investors in the commercial factoring

company or an affiliate thereof must have a track record in

the factoring business or a related business (this may

include global trade, finance leasing, financing guarantee

or small-scale lending).

A commercial factoring company must have at least two

senior management officers with three or more years of

management experience in the finance industry.

The commercial factoring company cannot commingle its

factoring business with any of its other businesses.

The investors must contribute a minimum registered capital

amount of RMB50 million to set up the factoring company. The

contribution of registered capital must be made in cash, and no

less than 20 percent of the registered capital shall be paid upon

the establishment of the commercial factoring company. The

remaining 80 percent of the registered capital must be paid

within two years from the establishment date. A foreign

investor may make capital contributions using cash in any

freely convertible currency or renminbi obtained offshore, or by

way of onshore renminbi profits and income.

The commercial factoring company must have sound internal

control systems, including, without limitation, risk evaluation

procedures, business operation guidelines and other relevant

monitoring systems.

SCOPE OF BUSINESS

A commercial factoring company may engage in

the following business activities:• Export factoring (with the debtor of the assigned

accounts receivable being outside China)• Domestic factoring for domestic trade• Consulting services with respect to commercial

factoring• Development of credit risk management systems• Other related businesses approved by the relevant

Chinese authority

PROHIBITED ACTIVITIES

A commercial factoring company is not permitted

to engage in the following business activities:• Taking deposits• Granting loans• Specializing in or, upon entrustment, carrying out

debt collection or any related business which is not• directly relevant to commercial factoring• Making investments under an entrustment structure• Other related activities prohibited by the relevant

authorities

REGULATORY REQUIREMENTS

The risk assets (i.e., the total assets of the company less cash, bank deposits and debt) of the

commercial factoring company cannot exceed ten times of the total amount of its net assets.

A commercial factoring company must engage a custodian bank that is a member of the global

factoring

organization.

A commercial factoring company must register the assignment of accounts receivable with the

Credit

Information Center of the People's Bank of China.

A commercial factoring company must file monthly reports to Pudong COFTEC and cause its

custodian

bank to file reports regarding the operation of the custodian funds once every six months to

Pudong

COFTEC.