Does Hong Kong’s instability jeopardize invoice factoring and trade financing in the greater China region. In fact, it does and it jeopardizes many things because Hong Kong is still seen as the legitimate free market and financial gateway for China. If President Xi pushes too hard against the separate system approach that China agreed to maintain when the British left, then commercial lending’s progress into the region may be derailed as well as many types of other new investments. This would be especially bad timing with the Chinese economy sputtering, high internal inflation, and their currency appreciation giving thought to many new companies to invest in other less expensive Asian and African countries.
Hong Kong has been a natural hub of competitive lending and liquidity for China through many well capitalized banks. Commercial lending has been the domain of banks in Hong Kong, but factoring companies do exist. Although growing, factoring is still not a major source of financing for small businesses in HK so its growth could easily be derailed with political instability. Larger banks are the main source of factoring in Hong Kong and Asia at present, but their factoring services cannot be considered real invoice factoring. In order to cultivate the smaller commercial lenders, there needs to be stability.
The current Chief Executive Officer of the Special Administrative Region of Hong Kong (aka Hong Kong SAR) used to be elected. Under Chinese Rule, the Chief Executive Officer is still elected, but it is from a pool of three candidates that Beijing hand picks so you can see why Hong Kong is not happy.
If instability from Hong Kong persists, there will be an increase in risk from the pragmatic as well as the technical side of commercial lending in great China. On a pragmatic note, the riots in Hong Kong created physical problems in conducting business due to street barricades and simple logistics of traveling to the office or to seeing clients. PMF Bancorp’s Hong Kong Offices (PMF is based Los Angeles, CA) which provides invoice factoring as well were almost inaccessible by taxi for almost a month. Also, there is the technical aspect of the business environment being affected by the political turbulence. For example, PMF Bancorp is often asked to perform invoice factoring for the trading arms of the Chinese State Owned Enterprises (SOEs), but with an increase in political turbulence, there is more risk of non-payment from these quasi State owned companies and little recourse if payment does not occur due to unstable environment. Additionally, judicial recourse is not great as the courts will not easily allow a foreign owned firm to win a material claim against a local State owned company that employs a significant amount of workers (this is just the reality at this time).
If the political situation in Hong Kong is not stabilized completely, then it will affect long term prospects for the continued development of factoring since many of the financial companies and banks’ lending operations are stationed in Hong Kong and/or have significant operational bases in HK. Capital must be free flowing across borders to truly grow efficiently. The Chinese government recognizes this thankfully which can be seen through the New Shanghai Special Economic Zone and the Shanghai Stock Market to soon be linked to Hong Kong Stock Market for direct investments.
A good trait about China is that things that do not work well are often quickly changed. I was working in my office in 2005 in Shenzhen, China when I received a Circular from the Chinese government that stated that invoices could no longer be assigned. As you could imagine, this was the kind of info that was detrimental to the invoice factoring business (and also made my stomach turn); however, in the Chinese government’s wisdom within a few weeks the Circular was amended to allow assignments again. In these extreme cases, it would be very helpful to remember that the overall goal of the Chinese government is to maintain social stability (at any cost). The people in China believe that Social Stability and Harmony are the main goals and duties of their government. Therefore, if the stability is not present politically and socially, then the Chinese government will lose its mandate to rule.
It is painfully obvious that the leadership in Beijing and Hong Kong understand this and will manage the situation quickly back to stability and health which will allow the invoice factoring industry and other commercial lending to continue to grow in the great China region.
Stephen Perl, CEO
Author: Secrets of Doing Business with China: Dancing with the Dragon (2012) (Amazon)
Stephen M. Perl, MS, MBA is the CEO of 1st PMF Bancorp, a leading US commercial bank lender, and the founder and CEO of ChinaMart® Los Angeles, a platform that assists Chinese companies in their investment in the USA.
Mr. Perl has successfully grown 1st PMF Bancorp’s lending portfolio to one of the largest private, short-term business lenders in the US with specialty in factoring and trade finance for companies with annual sales from $1 to $50 million. He designed PMF Bancorp’s, “Supply Chain Plus Financing Program™ ” to provide the most comprehensive supply chain financing platform in the US for small to medium sized companies doing business between the US and China. Mr. Perl established the first private US lender in China in 2004 and has recently published a book called, “Dancing with the Dragon: The Secrets of Doing Business with China” (2012) as an executive’s guide to doing business with China.