Sourcing in China?: Read This NOW

China Briefing has just posted SAFE Issues New Regulations to Further Control Foreign Exchange Movement, which confirms the worst case scenario I ran through in my post earlier this month The Next Problem for China's Exporters: SAFE Regulations.

Confirming what, Michael Pettis's warned about in his post Hot weather, cold market, I made a trip to the SAFE Homepage to see what I could find, and with the help of google Translate you can get the major points of the document that SAFE posted last week.

Reason for the new rules according to the document is to

“improve monitoring and management of external debt statistics, prevent foreign debt payment risks”.. i.e. reduce the levels of hot money flowing intothe country, and to restrict any potential outflows that may negatively impact the economy (think Thailand June 2007 before the crash on July 2)

Now, I don't think it takes a whiteboard for you to understand the hurdle that has just been put in place for everyone who sources in China.

Effectively, to the best I can tell, cash flow will now be extended at a minimum 30 days.. up to 90 days... and the idea that you need to have a "holding pool" is also now confirmed.

In Pettis's post he mentioned:

One of my students, whose uncle is a Southern-province-based exporter, told me that he believed (he wasn't sure) that typically exporters would need to find financing for this period, and since most of them are excluded from commercial bank financing, they would need to take short-term loans from the informal banking sector. This sounds pretty plausible.

1. Set up a WOFE/ Rep Office on the mainland that can establish a bank account and act essentially as a fund manager. Firms will need to move money in well in advance, clear it, and then put it into this account for future use. This fund will need to have a safety stock, and need to be well managed, to ensure that any delays in approvals of new funds can be buffered
2. Work with a trusted import/ export firm who will act as your fund. Depending on the I/E you choose, they may already be the best option as they have a history of bringing in money, pooling it, clearing it, and managing the supplier payments. The operational issue with this is that you need to give the I/E extra money .. .and backing those funds out is a huge pain. From a risk perspective, this also adds to the equation as there are stories of I/E firms simply pulling runners
3. ship out a safety stock before Oct 1 that will get you through the end of the year and see what happens. I am fairly confident that in an attempt to cool off the hot money flowing into this economy, the government is going to find that they are going to have to relent when shown the impact on the manufacturing sector. this is a nuclear option on hot money (yes... we should be worried)and the innocents appear to be small to medium sized firms (Chinese and foreign)... and the relevant agencies are surely going to be hearing about it.

Things you should do:

1. Read the posts that China Briefing and Michael Petis have put online, to understand the issue
   
2. Call your accountant, your China based partner, your import/ export partners, etc and work out your exposure.
   
3. Call your freight forwarder and book vessels in the Sept 20 – Oct 1 time frame. I can guarantee you that there will be a massive push that week, and you are really better off booking early.
   
4. If you are still confused, or you are still looking to learn more, check out the SAFE organized training event. There appear to be a few of them starting next week, and the contact information that I was able to find on the event was:

   Contact:, Zhang Wei
   Tel: 010-68573886 (Zhang Wei)

Of course, if you have a different work around please email me or comment below.

I would like to post details that allow others to develop work arounds. I promise… no details that would let anyone work out who it is.

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