Managing Risk in China

At the HSBC Trade Connections event in Shanghai in June, a speaker from the Shanghai Foreign Development Investment Board focused on the similarities in business practices in China compared with other markets. “China is very similar to other countries in the field of business,” he said. “The major principles are the same.” Wherever you are, he added, “communications are important”. The key differences, he explained, are primarily in culture and language.

Despite some similarities in business practices, corporate perceptions are often that there are significant differences in business practices in China. Furthermore, as HSBC head of global payments and cash management Wong Kee Joo said: “It’s more complex in China.” Even though much of what companies do is actually very traditional trade: for example, managing risk still requires strong vigilance.

Speakers at the event provided a variety of perspectives on how foreign companies are managing risks using practices that are often quite specific to China.

“For companies starting up a new venture in China,” said Ernest Mui from German braking systems specialist Knorr Bremse, “partnerships are one of the best ways to succeed.” Partners can bring relationships and access that foreign firms would not have on their own, he noted, so business development can progress faster. Additionally, he said that “if you have a good relationship with your partner, you can collect money before other people” and potentially reduce collections risk. At the same time, he said a key step is to “do a lot of due diligence” since it’s very important to “make sure that you have confidence in the partner”.

Building these partnerships isn’t something that happens overnight. Even once due diligence has been done, said renewable energy consultancy Sgurr Energy director Ian Irvine, companies need to “be patient and build relationships”.

Issues can arise even when partner relationships are good, and Irvine remarked that “face is quite important.” “When there’s a discrepancy,” he explained, “you need to approach it in a different manner and not say that they’re wrong.”

HSBC China’s head of trade and supply Bruce Alter also said that “you want to know who your counterparty is” in order to manage counterparty risk well. Straightforward relationships are best, he said, and “if you start seeing convoluted structures, you need to be careful.” Additionally, he noted that deploying “risk management tools like insurance and credit default swaps” can help mitigate risks.

Once relationships are established, companies then want to manage their trade risks effectively. HSBC Europe head of trade and supply chain Mark Emmerson noted that “the death of documentary credit is overstated” and companies still want security in their supply chains. In order to de-risk the supply chain, then, they’ll leverage their banks in order to use “more secure forms of payment”.

One technique for managing settlement risk specifically, explained HSBC senior vice president (SVP) for business planning and strategy Ben Chan, is using the renminbi (RMB) for settlement. RMB settlement enables hedging, he said, and it can also lower costs in an environment where the RMB is appreciating by about 5% per year.

Mui also mentioned that it’s difficult to take funds out of China, so companies often “try to keep the capital as low as possible”.

Taking a broader perspective, Alter said that a significant difference between China and other markets is that “regulatory changes are frequent” and companies need to follow the changes carefully to make sure they are in compliance. Wong chipped in to say that there are “constant updates on a daily basis”, and there can be 5-10 new regulations per day. In addition, he noted that “each city takes a regulation and interprets it”, so it is important to understand the local context as well as the national context.

Another broader market risk in China, which many people don’t think about, is staffing and space. In a presentation on China’s second cities, Dezan Shira & Associates director Richard Cant said that large cities “are running out of space” and may have a shortage of workers, so smaller cities are taking up the slack. While these second tier cities may have less developed supply chains and infrastructure, as well as fewer professionals, he said they can still have a “stable workforce”, a more relaxed policy environment and an “influx of new talent” that make them attractive for growing businesses. Even so, noted one participant, the work ethic and staff profiles can be different in the second tier cities, so some companies use a strategy of automation in larger cities rather than moving out to smaller cities.

While China may indeed have similarities to other markets in its business practices, there can quite clearly still be significant differences. The presenters at the event provided a timely reminder that wherever one is doing business, including in China, it’s important to get to know the local market and take effective steps to mitigate risk.

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