China - Methods of Payment China - Methods of Payment
In China there are many ways to finance imports. The most commonplace are letters of credit and documentary collections. No matter what method is used, the Chinese importer needs to apply for the foreign exchange amount for the trade transaction from the State Administration of Foreign Exchange (SAFE). Please see the section below on “Foreign-Exchange Controls” for more information.
Letters of Credit
China, as a member of the International Chamber of Commerce since 1995, is subject to the Unified Customs and Practice (UCP) 600 code that govern letters of credit.
Most Chinese commercial banks, e.g., Bank of China, China Construction Bank, Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of Communications, China Merchants Bank, and CITIC Bank, have the authority to issue letters of credit (L/C) for both imports and exports. Foreign banks with branch or representative offices in China can also issue letters of credit. Please refer to the following Chinese banks’ website for details on how to apply for an L/C in China:
This method of payment is similar to a letter of credit, but less formal and more flexible. Just as with letters of credit, the exporter submits a full set of trade documents for payment collection to the bank designated in the contract. The bank will send the documents to the home office, which examines them and, in some cases, passes them to the buyer for further examination. Payment is made after the documents have met the approval of all parties. This method of payment provides only limited coverage against default. It can be considerably less expensive than a letter of credit, but should be used with caution. It is the responsibility of the exporter to determine the specific instructions to be used in the collection letter. Please refer to the Bank of China for further details on application qualifications and a flowchart of the process:
Contract Advance (for wire remitted funds, also called T/T Finance)
It is a specially tailored service for transactions under open account contract wherein T/T payment terms are called for. Upon arrival of goods, the Chinese importer may apply for this service whereby a Chinese bank may advance the importer the payment to the exporter. The importers are to repay this advance after the goods are sold and the proceeds are received. Before applying for a contract advance, the importer needs to apply to the Chinese bank for a T/T Finance facility, which may be granted after assessment of the importer’s financial status.
Import factoring is suitable for Open Account (O/A) import business. At the request of the supplier and in the light of a Chinese bank’s internal appraisal of the importer’s credit standing, the bank can offer the supplier a credit line, under which the bank will not only protect the export receivables assigned to the Chinese bank against the importer’s credit risk, but also provide the importer with financial management services as well. The importer needs to select O/A as the payment term when negotiating with the supplier, and suggest the supplier to submit factoring application to a Chinese bank, i.e., the import factor, through the supplier’s local export factor. Upon receipt of the supplier's application, the import factor will notify the supplier of the credit line decision after comprehensive assessment of the importer’s credit standing. The supplier will dispatch goods and assign the related export receivables to the import factor in accordance with the approved credit line. When the factored invoices come due, the import factor will remind the importer to effect payment.