Doing business in China means understanding how your partners (customers or suppliers) are financing their business. The lending market in China is very different from the U.S., this presentation explains how Chinese companies finance the operations of their businesses.

1. The Risk of Chinese CompaniesThe Risk of Chinese Companies
Finance DecisionsFinance Decisions
Kim Kirkendall, CPA
International Resource Development, Inc.
Email: virtualoutsource@hotmail.com
www.intlresource.com www.chinaresourcenetwork.com
With 28 years of doing business in China and clients that
range from SME to multi-nationals we are the resource to
improve your business!

2. Why Does it Matter How ChineseWhy Does it Matter How Chinese
Companies Self Finance?Companies Self Finance?
Its obvious if you have customers in China
that their financial health matters to you.
But its equally important if you depend on
a supplier in China.
The corporate lending landscape in China is
very different from the US, and its
important to understand the environment
your partner in China is doing business in.
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International Resource
Development, Inc.

3. Why Is lending different?Why Is lending different?
Corporate Lending in China is heavily
reliant on non-bank lending. Why?
Banks in China are mostly government
owned (2014 they are starting to allow
“private” banks) and the foreign banks
don’t participate actively in corporate
lending.
This forces many businesses to borrow in
less regulated markets – a large portion
of borrowing takes place with “Shadow
Lenders” – very different from the US and
European lending environment.
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International Resource
Development, Inc.

4. Cities are littered withCities are littered with
unfinished constructionunfinished constructioncopyright - do not copy or share
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International Resource
Development, Inc.

5. 800,000 companies close but800,000 companies close but
only 1,000 file for bankruptcyonly 1,000 file for bankruptcy
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International Resource
Development, Inc.

6. The Overall Corporate LendingThe Overall Corporate Lending
Market in ChinaMarket in China
1. State Owned Banks
2. Foreign Owned Banks (still limited)
3. Self Funded Growth
4. Non-Bank Lending ie: Shadow Lending
◦ Private Lenders – Direct Loans
◦ Small Banks Consolidated Pools
◦ Micro Credit Pools
◦ Pawn Shops (often use cars / real estate clltrl)
◦ Trust Companies
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International Resource
Development, Inc.

7. 11 -- State Owned BanksState Owned Banks
Are one way the government implements policy
– to grow or slow the economy
They are thought to be under funded and have
high levels of risky debt
They focus their lending on government owned
companies and large private companies
They typically make asset based but infrequently
make operating capital loans
In 2014 the govt has instructed the banks to
loosen lending to try to slow non-bank lending
In 2014 the govt allowed the first Chinese
privately held banks to begin start up
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International Resource
Development, Inc.

8. 22 --Foreign Banks still limitedForeign Banks still limited
To provide more
loans foreign
banks need more
assets (accounts)
and most have
not invested in
consumer
banking / branch
growth.
Foreign banks
have focused on
trade financing
and individual
wealth
management
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International Resource
Development, Inc.

9. 33 -- Self Funded GrowthSelf Funded Growth
This was the standard by in the 1990s
and into the middle of the 2000’s
Companies kept reserves of cash
Companies accumulated assets - didn’t sell
their old factory when they build a new one
They leveraged one investment to fund
another investment
As inflation picked up and owners wanted
to maximize returns they started over
investing (KTV’s, hotels, etc) and it
drained their liquidity
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International Resource
Development, Inc.

10. 44 –– Shadow LendingShadow Lending
The amount of Shadow Lending has been
listed at between 25% to 40% of the
overall lending market
The interest rates vary from reasonable
(4%) to sky high (500% annual rates)
Who uses Shadow Lending?
◦ Local government investment companies
◦ Private businesses
◦ Entrepreneur and Startup companies
◦ Real Estate developments
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International Resource
Development, Inc.

11. Different Types of Shadow LendingDifferent Types of Shadow Lending
1. Private Lenders – Direct Loans
2. Small Banks Consolidated Pools
3. Micro Credit Pools
4. Pawn Shops (often use cars / real
estate collateral)
5. Trust Companies
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International Resource
Development, Inc.

12. 1&41&4--Pawn Shops & Private LendingPawn Shops & Private Lending
Private Lending
Many entrepreneurs invest in family
businesses – trust and better returns
Some group together funds for lending
Pawn Shops
Take high value items – paintings, cars,
real estate
Are incorporated businesses with high
valuations
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International Resource
Development, Inc.

13. 2&32&3--Small Bank & MicroSmall Bank & Micro--Credit PoolsCredit Pools
Micro Lending
Online platforms for p2p lending
Underground lending, brokers take
deposits / investments and make loans
There is some loan shark / mafia behavior
going on in this market…
Small Bank
Smaller regional banks consolidate
investment funds and make loans
Has led to defaults and protests when
money is lost and banks don’t guarantee
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International Resource
Development, Inc.

14. 55--Trust CompaniesTrust Companies
Non-Bank lenders that sell “high yield
investments” and then loan that money
The government is increasing regulations
in this field, but they are not eliminating it
The overall market is estimated at $2
Trillion in assets held by Trust Companies
They lend typically to larger private
companies and for Real Estate
development
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International Resource
Development, Inc.

15. ExamplesExamples
An example of personal funding is private Chinese
companies accepting 1 year or more delayed payment on
invoices – A/R of 90 or 180 days is not uncommon
Company came to me about a shuttered business and how
to turn it around – shadow and bank debt was not
manageable and the owner was in jail
Small entrepreneur has multiple businesses in various
niches and instead of a safe investment being a savings
account – its investing in a family restaurant business
Clients distributor was found drowned…in 1 foot of water
after stumbling on a late night walk?
Client called and wanted to check out potential acquisition
for a close bid, our “James Bond” research found that their
entities in China had not be closed and that their key
supplier had an agreement to add $X to the product price
to recoup unpaid funds from their shuttered local entity
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International Resource
Development, Inc.

16. CollectionsCollections
By law there are “no” debt collection
agencies, but law firms can be used
The majority of collections within China
are done by negotiation (and shame)
Only large debts, and typically foreign
companies, can be taken to court
More common is the China International
Economic and Trade Arbitration
Commission (CIETAC), the arbitration
agency in China that handles international
economic and trade disputes.
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International Resource
Development, Inc.

17. BankruptcyBankruptcy
Rarely used – its new to think of the
company as being an entity and not an
extension of the owner
Similar law to US - Offshore creditors are
second to onshore creditors and
shareholders are last
Instead of bankruptcy - Large companies
(often govt owned) have banks bail them
out and Small companies run for the hills
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International Resource
Development, Inc.

18. Cultural Differences FinanceCultural Differences Finance
The West bases developments on facts; the East
focuses on people / society.
The West has the tendency to judge and make
decisions based on the future; the East gives
greater consideration to the past.
In the West business decisions are based on
available financial information and contracts; in
the East these decisions rely more heavily on
trusting a relationship.
Past experience with people = relationships
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International Resource
Development, Inc.

19. What To Do?What To Do?
Know who you are dealing with – not on paper, in
person
Do your own risk assessment or hire us to do it;
what is their motivation, what is their exposure,
how strong is the business, what are their goals
What is reasonable in China in your industry
Don’t delay – if there is a problem act fast and
begin negotiation for a settlement
We can help your company assess your partners in
China – either directly or with a “James Bond” visit
Check with your bank and insurance company for
programs they offer
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International Resource
Development, Inc.

20. International ResourceInternational Resource
Development, IncDevelopment, Inc..
For over ten years we have been helping companies improve
their operations in China. The founder, Kim Kirkendall moved
to China in 1986 living there 5 years. She has manufacturing /
operations management experience in China and the US,
having spent the last 28 years focused on China.
Recent projects include;
◦ establishing a distribution network in China – creation of the distributor
structure, identifying master distributors, leading the development of a local
website, pitching Chinese online retail outlets
◦ resolution of a clients customer (GE) complaints & managing the
preparation for the customers audit of the client’s local supplier
◦ Analysis of a clients supplier management corporation in China, feasibility of
the business, staffing, opportunities for improvement
www.intlresource.com
www.chinaresourcenetwork.com
TEL: 330-573-5518 EMAIL:
virtualoutsource@hotmail.com
copyright - do not copy or share
without permission -
International Resource
Development, Inc.