Chinese factoring legal environment 'improved with key legislation and regulations' in 2020


Factoring activity in China grew significantly in 2020 (up seven per cent) compared to 2019, across both the bank and commercial factoring (non-bank) sectors, as the Chinese economy displayed resilience despite the COVID-19 pandemic, describes Chris Wohlert, Business Leader, CDF Asia, Wells Fargo Commercial Distribution Finance in the most recent edition of World Factoring Yearbook. This was reflected as well in the increase in the factoring penetration of GDP, reaching 3.4 per cent.

Factoring, as an element of supply chain finance, has been backed by regulators and policymakers to provide financing support to the real economy and to expand access to finance for SMEs – including the re-introduction of domestic credit insurance to support factoring. On the other hand, 2020 saw a continued focus by the regulators on strengthening risk management practices and executing the 2019 measures to strengthen the management of the commercial factoring industry.  Of note, the legal environment for factoring improved with key legislation and regulations issued during 2020, which took effect as of January 1st, 2021.    

Factoring Industry Environment

The proportion of total business-to-business (B2B) sales made on credit in China continues to grow to an average of 53 per cent (significantly up from 40.4 per cent in 2016 and 44.3 per cent in 2019) and is now generally consistent with the average percentage in the Asia-Pacific region (56 per cent).  Overall, the percentage of uncollectible receivables climbed from 1.9 per cent in 2019 to three per cent in 2020, which is in line with that of the Asia Pacific region.  Consequently, 83 per cent of firms expect to strengthen their internal debt collection procedures[1]. At the end of 2020, the balance of bills and account receivables of industrial enterprises with revenues higher than EUR 2.5m was RMB 16.41tn, an increase of 15.1 per cent over 2019, which significantly exceeded the operating revenue growth of 0.8 per cent, confirming a lengthening of accounts receivable collection time.  Notably, the longest reported accounts receivable DSO  comes from foreign funded enterprises at 62.6 days versus an average for all Chinese enterprises of 51.2 days[2].   

Factoring in China usually takes one of three broad forms:

  • E-Commerce Solutions.  Leveraging the intersection of both product and cash flow and big data within an e-commerce platform to provide finance to sellers.
  • Core Enterprise Model.  Leveraging the perceived credit strength of a core enterprise to typically provide financing for its supplier base; typically, using a factoring model.  In other markets, this is often referred to as payable finance or reverse factoring.
  • Logistics Third Party Models.  Leveraging logistics data and control from third party providers to control inventory and receivable collateral to enable transactional finance – either via factoring or inventory/warehouse finance.
  • 1] Atradius Payment Practices Barometer China 2020.  https://atradius.com.hk/en/publications/payment-practices-barometer-chin...

    [2] National Bureau of Statistics, China http://www.stats.gov.cn/english/PressRelease/202101/t20210128_1812863.html

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    To read the whole article and much more, order World Factoring Yearbook 2021 here.