China banks step in where CNAPS fears to tread

 What are the specific problems companies encounter in China relating to accounts receivables, especially when the company has several locations across the country?
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ross-city receivables is one of the biggest problems.  Although cheques are acceptable “in-city”, the instrument cannot be used for cross-city payments and therefore electronic funds transfer (EFT) is the default choice.   The truly nationwide EFT in China is called CNAPS (China National Advanced Payment System), but because of high transaction cost involved, CNAPS remittance can only be supported by a selected number of banks/ branches in China.
Electronic migration has begun for a majority of cross-city payments where wire transfers via the central bank’s clearing system (CNAPS) or via the large local banks’ in-house clearing systems are possible
However, the use of CNAPs is limited in its current reach – 32 provincial cities across China, and to the branches of banks that connect to CNAPS in these cities
Most companies utilize either the account transfer method ( involving fund transfers within the same bank) or cash. Alternatively, the customer needs to open a lot of collection accounts with different banks to collect cash payment via the branch counters, which is obviously inefficient to manage.
 For in-city payment, paper based instruments (company cheques, cashier orders, demand drafts) are still very common instruments as it cheaper (a RMB1.20 flat rate) than sending a wire transfer. 
Another major problem is the lack of comprehensive collection data to facilitate efficient reconciliation, as in most cases the payment reference being transmitted by banks either gets truncated through the clearing system or is not captured, as some banks refuse to capture the information for their customers.  As such, it is difficult to control the quality of information to be fed from different banks. 
How advanced are methods of assessing cash flow, inventory, credit risk and liquidity?
As far as I understand, customers are still primarily making use of traditional bank statements to monitor their customers’ cash flow and receivables status.  Only a handful of banks in the market can offer sophisticated cash management solutions – i.e. provide timely and complete collection reports - to facilitate effective management of working capital and credit risk etc.
What progress has been made so far in shortening the collection and clearing cycle?
The local market has been pushing for the deployment of CNAPS capabilities across the country. The coverage is still far from 100% yet, but the system has already helped many customers in improving the fund availability.
At HSBC, we have also established alliances with the major local banks to enable payors of our customers to deposit funds (in cash or by account transfer) directly via the branches of local banks, into our customer’s accounts. These are  maintained with us centrally.  
Under such an arrangement, funds credited to a HSBC account would go through these local banks’ internal systems instead of CNAPS, and the funds availability can usually be within 24 hours if the deposit is made before the cut-off time.
What is the existing state of the mainland infrastructure, relating to electronic collection methods and clearing houses and real-time gross settlement?
As mentioned, for paper receivables, cheques are used “in-city” but prohibited for cross-city payments.  Companies therefore need to resort to electronic payments.
For high value payments, the nationwide network is CNAPS.  However, as the funds availability is uncertain (transfer may go beyond 24 hours) most banks use their internal network to make the transfer. 
As regards low value payments, ACH (Automated Clearing House) type batch-processing is not available in China.  Again, using major local banks’ internal networks (with payor and payee having their accounts with the same bank) is the preferred solution. 
Foreign banks are also trying to offer a solution via bilateral agreements with local banks and partners.
As regards credit cards, the penetration rate was poor before, as the applicants had to meet stringent criteria to obtain approval of the credit line.  The situation has changed and a 75% increase in number of cards was recorded in 2003, according to Euromonitor in May 2003).  It is expected that the channel will be a popular receivables solution in the next few years.
Can companies outsource check collection to banks?
  Companies have difficulty in outsourcing cheque collection to banks’ lockbox solution because of the legally required procedure of the beneficiary stamping at the back of a cheque as endorsement.  As such, a cheque is not a common payment medium in China.
How feasible is consolidating the collection accounts with one or two banks in China?
It is feasible because customers are only required to open an account with a collection bank which has an alliance network established with the major local players, such as HSBC.  Under this arrangement, the collection bank can consolidate the funds and the data from its alliance banks on behalf of its customers. Technically speaking, the funds deposited at the local bank (e.g. bank A) will be credited into the account of the collection bank (e.g. HSBC). This solution also gets around the limitations on the limited number of bank branches foreign branches are allowed to have on the mainland.
How does a company make the choice when choosing a local partner bank to work alongside HSBC? Or does the customer rely on HSBC to make that choice?
Yes, we need to work with the local banks to form a comprehensive collection network.  HSBC would provide a list of alliance banks for customers to choose from.  Usually customers would make decision based on a set of criteria e.g. coverage, cut-off time, funds availability date, available collection information, credit standing and charges.
 

 

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