Due Diligence in China

The author of this article studies the actual situation of Chinese credit industry in an expert’s perspective. He points out the existing problems by analyzing the reasons that form different credit consciousness between Chinese and foreign people.

In China, the importance of credit and due diligence has not been paid enough attention to. Generally, credit or credit standing just relate to people’s daily life when an individual applies for a credit card as bank’s procedures. Such concepts were seldom got enough attentions in other social activities. The currency between friends is always based upon the depth of friendship, not upon the credit.

To enterprises, some international companies based in China have quite stronger consciousness of risks because of their linkages with global business. Some other small number of companies is aware of the importance of credit in economic cooperation and makes use of credit services to undertake credit investigation so that a lot of unnecessary losses have been avoided. But a great number of enterprises are thanking god if there is business under the unfavorable financial environment, let alone considering about credit. In fact, it is yet the right time to emphasize due diligence.

Most of Chinese enterprises are learning lessons from the process of doing international business. Why the concepts of credit and due diligence have been accepted widely in the western countries, the situation in China is contrary? Firstly, there is lack of corresponding legislation in China. Each government administration possesses different information. No systematic collection is available and these scraps of information are not public. At present, although there are credit concept and credit rating, they are not getting popular for being short of unique standards. We have to admit that although many companies actually benefited from credit investigation, the number of it is far more less than we expected. Secondly, the level of credit transparency is low in many companies as a consequence of no channel for credit spreading. Good credit can only be communicated and strengthened by word-of-mouth of clients; bad credit was get known through one transaction, but kept unknown the next time. Therefore, companies are not motivated to get a good credit. Those evil intentions feel no pressure.

To many Chinese companies, credit is taken into consideration only when problems appear in economic cooperation (generally the commercial fraud or being unable to get back the debt). Charges or turning to repayment demanding for companies are possible solutions. After all, under Chinese law, any kind of repayment demanding for company is forbidden and is considered law violating.

Legal approach can be a good solution to economic disputes between companies. It is quite fair to safeguard company's rights with legal weapons. Anyway, a lot of companies neglect due diligence before lawsuit. No investigation is conducted on property of the defendant for the implementation of the judgment. In this case, one sentence of "I have no money" would make the court being at a loss what to do. In China, only 0.9 million judgments were implemented, the number was only covered 60% of 19.2 million economic suits. The main reason of this situation is the prosecutor doesn't know the property location of the defendant.

How is the actual situation of Chinese credit industry? The history of credit investigation services can be dated from 1993 in Chinese mainland. Eight years' development hasn't seen the emergence of a new industry. Under actual environment, the difficulty of undertaking credit investigation makes it hard for people to engage in such activities to increase rapidly. For example, there are only about ten credit investigation services in Beijing at present, nothing compared with other industries and most of them are founded very recently. After all, there is a bright prospect for Chinese credit industry. From June last year, Shanghai began to build personal credit system at selected areas. Owners of these credit accounts can get credit loans from banks. Actually 680 thousands people have got credit loans amounting to 54.7 billion Yuan, which covers 15% of the total loans amount. Varied credit cards were held and the number has been reached to 1.13 million.

At the end of May 2000, the "Forum of Chinese Credit Management system" was held in the Great Hall of the People. All of the institutions attending the forum stressed unanimously the importance of due diligence and expressed their urgent wish to establish credit system. The attendees included National Information Center, banks, commercial companies, investigation institutions and the media. We are sure that under the collective efforts of various circles, the consciousness of credit would be quickly accepted and aware by enterprises. Here is coming an era of paying more attention to the credit.