On March 3, 2009, the Ministry of Commerce, Ministry of Finance, People’s Bank of China, China Banking Regulatory Commission and China Insurance Regulatory Commission (collectively, the Five Authorities) jointly issued the Opinions on Promoting the Sound Development of Credit Sales.
The primary objectives of the Opinions are to implement the Opinions on Stimulating Distribution and Promoting Consumption, a topic in our last issue of China Update) issued by the General Office of the State Council in 2008, and to further expand consumption to sustain economic development. In response to the slowdown of economic growth in China, the Opinions on Consumption have proposed several measures to increase domestic consumption. The Opinions build on these measures, and emphasize the importance of promoting reliable credit sales to boost domestic demand and enhance the overall credit system in China.
Currently, credit sales account for a small portion of the total sales by enterprises in China. Due to the lack of a well-established credit system and experience in managing accounts receivable, cash transactions prevail, especially between small and medium-sized enterprises (SMEs). Against this backdrop, the Opinions aim to improve the overall credit system, expand consumption, and help ease SMEs’ financing difficulties.
The Opinions promote both business-to-business and business-to-consumer credit sales. A credit system enables consumers to buy things that they otherwise would not be able to afford, which increases the efficiency of their capital utilization. For credit sales in the retail industry, the Five Authorities encourage large-scale retailers to offer consumers the option of purchasing on credit, and to cooperate with commercial banks and credit guarantee companies to promote credit sales and thereby increase current consumption.
The Opinions also advocate the establishment of a mechanism to manage and share the risks associated with credit sales. Relevant authorities are expected to guide and support enterprises in constructing systems for assessing credit risk, keeping records of client information and credit history, and managing accounts receivable. Moreover, enterprises are recommended to purchase credit services and products, such as credit insurance, to mitigate potential losses arising from buyer default.
In the Opinions, the Five Authorities also call for the development of service industries related to credit sales that can assist enterprises in expanding their credit systems. Specifically, the Five Authorities encourage commercial banks to cooperate with enterprises and insurance institutions to provide enterprises with financing support, such as credit guarantees or pledged loans backed by accounts receivable or movable properties. In particular, the Five Authorities push for an expansion of professional account receivable management services, namely, account receivable factoring or third-party account receivable collection, which are still underdeveloped in China. The recent establishment of the China Banking Association’s Professional Committee for Account Receivable Factoring, however, demonstrates that China has made progress in regulating and developing this particular financing service.
The Opinions provide general guidance to lower-level authorities on the development of credit sales in China, and mark the beginning of what may eventually become a well-regulated financing services industry supporting credit sales. Nevertheless, to ensure the sound and rapid development of a credit system in China, more detailed regulations should follow the Opinions.