Knowing how to collect debt in China requires navigating through a vast and a totally foreign country for outsiders. Only if you understand China and its people, can you transverse its currents. If you don’t understand the unexpected intricacies and culture , then doing trade with China will be a major challenge that may cost your business dearly. 
China imported an estimated USD $1.327 trillion  in 2010. This makes China the world’s third largest importer. Trade with China has many anomalies, which aren’t obvious to Western businesses, thereby creating numerous financial challenges, if not outright major risks. 

Firstly, there is the unexpected Chinese attitude towards payment practices. Debt collection is accepted under the concept of “business as usual” within the West. But,  “Collections” as an industry do not even officially exist in China. Formal collection agencies are not even legal.

To understand why this is the case one needs to go back to 19th Century China. Back then, a visit from a debt collector could be a life-changing and even dangerous event. As a result, the Chinese government imposed a law prohibiting collections. This same law is still in place today.  While debt collection doesn’t officially exist, some companies do provide “informal” debt collections services. These collection businesses will register themselves as ‘risk management’ businesses or ‘credit consultants.’ International debt collection agents may informally collect foreign debts owed to Chinese companies, but the current law permits only legal bodies, such as the police, the courts or specialized legal firms to collect Chinese debts.

For a western observer, the list of documents required to implement a collection is extensive. The terms and conditions for the supply of goods and services must be set before a proper collection order is processed. The process must be controlled via a comprehensive document chain, such as purchase orders, delivery notes and invoices. These document should all be set forth in writing in order to provide evidence.

In addition to the considerations of currency exchange regulations; local practices; labor regulations; and taxation and legal systems, businesses face additional unanticipated challenges when collecting debts in China. Filed credit data on businesses is not necessarily accurate because corporate auditing and filing is often not reliable. Local credit investigations can be resourceful, but there are no standardized format for their capabilities. The quality of credit and asset discovery work from one investigation service to the next varies enormously.

Trust and honour


A different set of attitudes towards credit govern Chinese business.  These manifest themselves clearly in their approach to credit management and debt. ‘Losing face’ is a major issue for Chinese companies and its officers. Bankruptcy is treated as something dishonorable. 

‘Guan Xi’ governs Chinese business deals.  The closest Western explanation for this term is a “relationship” based on trust and honor. Such trust may take years to develop. Trust is not lightly squandered. Chinese entrepreneurs avoid damaging their relationships and status because it is the basis for all business. Damaging a debtor’s reputation in his business community can have more of an effect towards collecting a debt than the actual filing of a lawsuit. Often the most effective means of collection in China means sending a reasonable representative of the creditor to the debtor’s door in person. In the West such a physical practice would often be considered overly zealous. Not in China.

Additionally, there are eight main dialects spoken – and around 10 versions of each. One of the most common pieces of advice Westerners are given when visiting China is to always possess the address you are visiting written in Chinese before setting off – because the taxi driver won’t know where he should go otherwise. When coming to collect a debt in China it is often critical to literally be able to speak the local dialect.

China’s expansive geography can also prove an enormous challenge. Face-to-face debt resolution is undoubtedly the most effective way of collecting accounts receivables. But the sheer geographical scale of China is not conducive to this. It is also very hard to keep track of businesses that have moved to a new location. This can mean travelling for days to a province, only to find that the business you are looking for no longer exists or has moved to another neighborhood.

Western businesses should also be aware that Chinese legal regulations actually lower the success rate for debt collection than what creditors are used to in their home countries. Generally, the statute of limitations for a civil action regarding an application to a People’s Court for protection of a civil right under general trading is two years.  For some exceptional international purchase contracts the statute is four years. This means that after the regulated period – counting from the last demand date, but not the original due date – a creditor cannot file a claim under the judicial system.

This can leave Western businesses in something of a quandary. Proper preparation of a claim is essential. Always research the debtor’s trading practices, patterns, and reputation. To collect a claim try to discover with whom the debtor already has established trading relationships. 

A good route to follow is to make sure to enlist trusted local support for your claim. Larger internationally-based collectors use trusted Chinese partners. This practice has the advantage of containing exemptions from Chinese mainland regulations combined with sharing the same language, culture, and time zone as the debtor. Preparing a careful strategy ensures a greater chance of success in collecting a debt
in China.