Factoring in China: Why the Chinese Factoring Market is the Biggest in the World

China is still officially a communist nation, but you really wouldn’t know it from the rising number of multimillionaires living in the country. Theoretically, that’s not supposed to happen in a country where everyone’s supposed to be equal even financially, but times have changed in China. Now they even have billionaires. China has 152 billionaires in 2014, adding 30 more since 2013.

China now also has numerous SMEs (small and medium enterprises), and while these business owners may not become billionaires anytime soon, they do want to be richer. And factoring in China has paved the way for that to happen. The growth of factoring in the country has pushed factoring into a $3-trillion industry worldwide, and now factoring in China is the biggest in the world. Over the last 5 years, factoring in China has increased by 54% per annum.

So what accounts for this phenomenal growth?

  1. Capital flight. China is expanding its overseas investments, and now the country is investing more overseas. Its overseas investments are greater than what the foreign companies are investing in the country. In the first quarter of 2012, China had a $56.1 billion surplus. By the second quarter of 2012, there was a deficit of $71.4 billion.
  2. Lack of SME access to bank funding. According to an estimate made by a Chinese brokerage, only 3% of the 42 million SMEs in China are able to access traditional bank funding. Most traditional lending banks are only providing access to funds for the biggest and safest companies. The banks’ profit margin is protected by the Chinese government, so they lack the motivation to provide loans to SMEs which carry more risks.

As one Chinese banking officer puts it, banks make the same amount of money when they provide a single loan of a million yuan or when they provide 10 loans that total a million yuan. But the 10 loans come with higher costs and greater risks. That has made factoring the obvious go-to option for SMEs to get additional cash to fund operational costs and business growth.

  1. Increasing labor costs. Inflation is rising steadily in China at 1.8%, but the food prices inflation is at 2.4%. This has forced many employees to choose only the businesses which can provide the adequate salaries they need. That gives SMEs an additional problem for its daily operations. These SMEs have higher cash flow requirements.
  2. Slower payments. A business survey conducted by Peking University and Alibaba found that 30% of Chinese businesses were affected by late customer payments in 2011. In 2010, this was just 6%. There’s no central credit history monitoring system in China, so commercial debtors can dictate the terms of how they pay—if they pay at all.

With factoring, this problem is solved for SMEs. In one version of factoring that’s popular in China, the factor is the one collecting the payments from their client’s customers. When customers pay late, that’s the factor’s problem, not yours.

The Chinese government is extending its efforts to persuade banks to provide more funding for SMEs, but whether these efforts will work remains to be seen. Right now, factoring in China is still the way to go for SMEs.