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Doing Business in China: Middle Kingdom Vaults Mostly Sealed to Foreign Entrepreneurs

By Doug Young

(Beijing) — China’s surprise credit downgrade last week seems as good a reason as any for a closer look at what credit is like for foreigners living and working here, in terms of things like getting credit cards, credit lines and loans. Anyone doing business here for a while is probably laughing inside by now, since most know full well that China is pretty much the land of closed doors when it comes to getting local credit if you’re a foreigner.

Against that backdrop, perhaps many see China’s downgrade last week by Moody’s Investors Service as a bit of comeuppance, for a country that claims to want our investment and expertise but often makes things much harder for all but the best and brightest. In this case, the best and brightest would mean corporate citizens like General Electric, IBM or Procter & Gamble, which can get credit anywhere around the world simply by stating their names.

But when it comes to smaller firms or entrepreneurs just getting started, the Middle Kingdom’s bank vaults can often be quite firmly shut for providing loans and credit lines needed to fund operations. In all fairness, lack of access to credit and loans is a common beef among small business owners in the West as well, since banks and other financiers often worry about inability to repay.

But credit cards are quite easy to get in the West, and stories abound of young entrepreneurs who financed their dreams by maxing out numerous credit cards in their earliest days. Places like the U.S. also have government-backed programs like the Small Business Administration (SBA), which work with banks to spread the risk around in helping startups and other small businesses get loans and credit lines.

And then there’s China, where even getting a credit card becomes a herculean challenge for most foreigners. I found that out the hard way when I tried to get a local credit card a couple of years ago. My motivation behind a task I knew would be both difficult and frustrating lay partly in my true desire to have such a card, since there’s still the rare occasion where both my local debit card and a foreign credit card won’t work. But my bigger reason was simply to help a reporter friend who was writing a story on the subject of foreigners getting credit cards in China.

I dutifully visited five or six banks, including one affiliated with my university where I taught at that time, which had plenty of access to my salary history. A staffer at one of the banks simply laughed and told me to look elsewhere, while others mostly presented me with lists of the many documents and other paperwork required, some of which would have been impossible to obtain. In the end, my best chance appeared to be with Citibank, though even their requirements seemed like too much trouble, and I ultimately gave up without ever getting a card.

That theme is repeated throughout the Chinese banking system, where “Sorry, we can’t help foreigners,” seems to be a regular chorus played out by public and private lenders alike. The results of my usual polling of friends and acquaintances surprised even me, as I learned that foreign small business owners in China mostly go without local credit cards and credit lines, and simply use existing cash flow to finance operations. That’s certainly one way to do things if you’re a non-capital-intensive service company, although it could be quite stifling if you want to expand quickly or hit a rough patch when a major client misses a bill.

One entrepreneurial contact who has been through the process noted that applying for a loan from a local lender usually requires a strong track record, big cash flow and lots of good relationships — things that people just starting out usually lack. As if that wasn’t bad enough, most lenders also require property as their main form of collateral, something the vast majority of foreigners don’t have due to strict controls on real estate ownership.

The biggest lesson for foreigners intent on financing their businesses from local sources is to have a strong local partner, people told me. One of my contacts who required big bucks for building onsite solar arrays said he relies heavily on the credit of companies erecting the arrays, which are often big state-owned or foreign entities. After all, if IBM is involved in a project, at least it’s a company that can be chased down even if it’s not a direct loan applicant.

Another consultant pointed out that even when credit is available, it’s often doled out in loans that are so small as to be not worth the time needed to apply. That view was reinforced when I talked to my contacts at internet giants Tencent and Alibaba, which have both opened private banks within the last two years as part of a government pilot program to encourage more lending more to entrepreneurs.

A Tencent spokeswoman told me the company’s WeBank provides maximum loans of just 300,000 yuan ($44,117), while a contact from Alibaba’s MYBank gave me figures that implied similar limits. Those certainly aren’t amounts to sneeze at, but they also won’t keep businesses of any size going for too long. Not that it matters anyhow, since both banks won’t lend to foreigners. And so the beat goes on, leaving most of us to rely on our own cash resources and local partners, or simply hope our clients keep paying their bills on time.

Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to DougYoung@caixin.com.

 

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