Americans are stiffing the Chinese

March 9, 2017

Updated on May. 30, 2010 · 8:33 AM EDT

By Kathleen E. McLaughlin

BEIJING, China — U.S. consumers take note: Many of the Chinese companies that made your toys, clothes, shoes and vast numbers of other products are still waiting to get paid.

For thousands of Chinese manufacturers, America’s credit problem is not just a problem on paper — it’s a financial reality that has cost billions in bad debt. While U.S. companies’ failure to pay their bills to Chinese producers is not a new phenomenon, China’s factory owners and managers now fear the debt will worsen as the economy tightens and more U.S. companies eye bankruptcy.

Liu Haishan was taken aback by the bad debt figures when researching U.S.-China trade issues. Liu, an economist from Zhejiang Province on China’s central coast who now lives in New York, was working on his Ph.D. at the New School a few years ago when he came across a shocking number: Foreign companies, predominantly American, owe Chinese manufacturers an estimated $100 billion in unpaid bills. As much as 5 percent of orders shipped to the U.S. from China go unpaid, and the overall debt is increasing by billions every year.

The reasons for defaults vary from disagreements over product specifications to flat-out cheating. As China-U.S. trade boomed over the past decade, thousands of Chinese companies took risks by allowing foreign buyers to pay weeks after delivery with little in the way of guarantees. But even with bank-backed lines of credit, Chinese court verdicts to collect bad debt have no standing in the U.S., so producers were most often simply out of luck if buyers defaulted.

“In order to win clients, some Chinese companies would give up the need for down payments and didn’t pressure their clients to pay their debts in a hurry,” said Zhang Yansheng, an economist with the Chinese Academy of Social Sciences. “But with the current crisis, as many foreign clients and banks go under, even companies who have done business in safer ways are also facing unavoidable losses.”

Liu, stunned by the debt and eager to get involved, set up U.S. China Assets Management, a debt collection service working with U.S. attorneys to recover money owed to Chinese producers. He’s assembled a fleet of lawyers in the United States working with Chinese companies on contingency. Thus far, his agency has taken on 50 cases and, he said, has a decent collection success rate.

Most of the cases are still open but, as of Nov. 1, the agency has recovered more than $5 million in unpaid bills to Chinese companies. More importantly, Liu said, Chinese companies are becoming less willing to take unnecessary risks just to court American buyers.

“These days, people understand much better the terms of credit,” said Liu. “Ten years ago, credit was exotic to them and they were still doing this all by hand.”

The bad debt is a national problem for China, especially as the screws tighten and orders for Chinese goods slow. Until this year, most factories could absorb the debt and make up the difference with other business.

Now thousands of factories are closing, meaning growing unemployment and social instability in a country where the government’s authority has been based on its economic successes. As part of its $586 billion two-year economic stimulus package, the Chinese government has tagged some money to help relieve Chinese companies saddled with bad foreign debt.

Liu expects his workload to continue, but says his ultimate goal is more than just recovering cash. By working out the flaws in the system, Liu hopes to build trust and encourage responsible behavior. And he’s looking forward to a day when U.S. and Chinese courts recognize each other’s decisions.

"I want more Chinese to learn from their mistakes," Liu said. "We’re doing this for the benefit of the two countries, and to promote a healthy relationship between the largest consumer nation in the world and the largest manufacturing nation. They must have a healthy business relationship."