China can be simply described as a roller coaster right now. Even though PMF Bancorp is making a/r financing type loans in China, we have had +10 years of experience and we are still on high alert with only a few deal getting done. In actuality, the economic and legal currents were going quickly in the right direction up until last year. China’s economic reversal has created many questions regarding a US factoring company’s strategy as well as for many other industries. Even though there have been many factoring licenses issued in last couple years in China (over 1000 easily), there are literally still only a few companies that know how to conduct a large scale traditional invoice factoring operation.
The current economic environment shows a large slowdown in China’s GDP, a housing glut, high levels of corporate and government debt, and an excess of industrial capacity in many industries. China has kept bank rates for years at artificially low rates, especially when adjusted for risk and inflation. They are paying for it now. In fact, the average borrower pays only 6.7% in China. This may not seem high, but after working with India and many other 3rd world countries in the lending area, the nominal corporate borrowing rate should be a lot higher after adjustments. China is very much still developing and more 2nd world in terms of development than like the US. Alternative financing in the area of factoring has only become an officially sanctioned form of lending since 2010. Everything is still new.
Becoming a factoring company now in China is still difficult, especially if factors are going to achieve their traditional deal pricing that they are accustom to in the US. With the largest factoring companies trying to hit deals in low teens, there is still too much cheap money in China to gather momentum as a new player with only money to offer. The environment is not ease with the bank’s lending at low rates to poor credits and the underground banking system in China providing loans all day long to the rest at from 12% to +40% in the second tier credit category.
Factoring companies like CIT pushed early in to China and then realized this environment was tougher than it looked. Let’s keep watching and studying China’s development because as I have learned from trying to pivot too early into China. China will open in good time and there will be plenty of opportunity for everyone as the economy is huge just like the US with plenty of opportunity, especially for the experienced factoring operations.
Stephen Perl, CEO
1st PMF Bancorp – invoice factoring
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.