Using Capital Verification Certificates to Determine the Creditworthiness of Your Chinese Buyer

April 25, 2013 Posted by China Briefing Reading Time: 3 minutes

As increasing numbers of foreign companies come to China seeking to do business and trade with Chinese companies, an area of concern revolves around their ability to pay. Just how creditworthy are they?

Apr. 25 – In China, limited liability status is directly linked to the amount of registered capital a company has – an amount which can be determined by requesting to see the actual figure listed on a Chinese company’s business license (this also appears on licenses issued to foreign companies). This amount varies depending from company to company and is typically linked to governmental guidelines concerning the type of industry and the “minimum registered capital amounts” that needs to be injected into a business to qualify for the business scope in question.

However, the problem with this is that the amount is fixed during the registration process before the company has actually deposited any capital into their bank account, as the license is also needed to establish an account with the company bank.

However, just because a business license determines a specific amount of registered capital, it does not actually guarantee that the money was or will be paid – such verification will have to come from the issuance of a document known as a “Capital Verification Certificate” (which is issued by the bank). The interesting thing about such documents is that they are typically used during the annual audit process to ascertain the actual position of a company’s financial standing. They can be issued at any time, and are recognized for six months from the date of issuance as being a fair assessment of a company’s financial health.

Although the system is not perfect – companies can inject money into their bank account(s), have a certificate issued and then withdraw the money afterwards (which is a fraudulent practice when it comes to registered capital injections, but, unfortuately, does occur). Asking for a capital verification certificate is a useful way to gauge the actual financial position of your Chinese customer, especially when it comes to extending credit and other supply terms. It is an easy thing to ask them to provide, and it costs them little in terms of administration. The refusal or reluctance to provide one upon request is a red flag concerning a company’s actual financial health.

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.

For further details or to contact the firm, please email china@dezshira.com, visit www.dezshira.com, or download the company brochure.

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