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Guanxi and Karaoke
Lloyd's of London Press |
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Guanxi and Karaoke
Lloyd's of London Press |
It is encouraging to know that China is now determined to put emphasis on stopping corruption. From my experience as a consultant in resolving international trade disputes, many China traders find it difficult to secure payment after shipping out their goods to China. It is not unheard of for a consignee in China to take delivery of the goods from the authorities without needing to present the original bills of lading. Good connections ("guan-xi") with the authorities may work miracles in China trade. This is particularly so when the importer is a SOE (State Owned Enterprise) which, due to its special status, enjoys privileges such as the above mentioned receipt of goods without original documents and receiving a loan from a bank without providing collateral.
For commodities such as steel products and chemicals, which may have volatile price fluctuations, the importer may not wish to pay the exporter if the price has gone down dramatically by the time of arrival. The importer often makes use of excuses such as: inferior quality, rust, denting, leakage and other defects in order to avoid payment.
If the transaction is under a letter of credit (L/C), the issuing bank may take side with the applicant (the importer) and wrongfully dishonour the L/C by "manufacturing" discrepancies, often by picking up obvious typographical errors in the documents presented. If there are no typographical errors in the documents presented, the issuing bank may insist that certain insignificant data (such as packing details) must appear on a document (such as the commercial invoice) in order to make it compliant with the terms and conditions of the L/C. By the time the beneficiary (the exporter) receives the notification of rejection of documents, due to discrepancies, from the issuing bank, the L/C has already expired. It is thus not possible for the beneficiary to amend the documents and re-present them to the issuing bank for payment before the expiry of the L/C. Under such circumstances, the beneficiary is forced to start negotiations with the issuing bank which may occasionally admit that the applicant has no cash flow or foreign exchange to fulfill its payment obligation under the L/C.
If the commodity market later turns favourable to the importer, who then has no difficulty in selling, the issuing bank may waive the discrepancies and effect payment as by that time the applicant, with the proceeds of the sale, should be able to reimburse the issuing bank for its payment. Hence "sight payment L/C" from China often turns out to be "deferred payment L/C" in actual practice.
In a recent shipment of steel products by voyage charter, the goods arrived in exactly the same number of bundles as stipulated in the bills of lading. However, as the price of steel had decreased by the time of the vessel's arrival, the importer delayed payment, using a very creative approach. The importer arranged a surveyor to take measurements on the draft of the vessel, based on the Lloyds Register load line marks on the hull, and, with the formula provided by the captain (or the first mate), worked out the total weight of the steel products on board, after deduction of the weights of the vessel and the bunker. The tonnage of the cargo computed in this way was less than the tonnage as stipulated in the bills of lading. This deviation became an excuse for non-payment.
However, such auditing of arrival quantities is against the international trade practice for steel products. According to the opinion of a master mariner, who is familiar with the carriage of steel products by charter parties, the carrier has fulfilled its obligation if the exact number of bundles as stipulated in the bills of lading has been delivered to the consignee or the holder of the bills of lading. The result of calculations based on the draft survey of the hull cannot be relied upon to represent precisely the gross weight of the cargo delivered, as it is not possible to take accurate measurements of the draft of the vessel due to disturbances such as waves and strong winds.
Indeed, variations in gross weights of certain cargoes, particularly liquid cargoes, are sometimes unavoidable due to evaporation, shrinkage, changes in temperature and humidity. Hence gross weights obtained in this manner cannot be relied upon as valid evidence for short shipment and thus good reason for non-payment.
In China trade certain survey reports from China are not reliable as the surveyors may receive bribes and take side with the importers. An insurer in Hong Kong rejected a claim for contamination damage to the cargo, relying on the excuse that the insured had not followed the claims procedure precisely as they had appointed a regional import & export commodity inspection bureau of the People's Republic of China rather than a private surveyor as specified in the insurance policy.
It is the trade practice for a charterer in Hong Kong to send a representative to a Chinese port before the vessel's departure to establish the "quan xi" with the port authorities by Karaoke parties and other means, so that when the chartered vessel arrives at that particular port, she will be berthed without delay and the various formalities such as quarantine, inspection and survey can be performed speedily. This pre-shipment entertainment will invariably increase the cost of goods and services. It also creates inequality in terms of fair treatment to all charterers. The government of China should look into this matter and clear this obstacle to free trade, which is important to China as a candidate for the World Trade Organisation. This pre-shipment entertainment may also be considered as a kind of corruption, all depending on the definition of the term "corruption" by the law makers in China.
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