Saturday, December 08, 2007

Time Are A’Changin’

There have been a lot of changes in the recent macroeconomic environment in China. Banks have raised minimum deposits required to purchase property, across the board. Official inflation numbers could be worse, but interviews with a broad array of China-based manufacturers tell a different story. Raw materials, energy, and labor prices have skyrocketed. VAT tax rebates are down, also across the board. Our ex-works pricing on printed products, steel/iron, and plastics have increased from 15% to 45% over the past 18 months.
We have seen indications that buyers are starting to move business away from China – particularly high-tariff products (e.g. finished textiles) to countries such as Vietnam and Honduras with low-tariff development incentives.

There is little doubt that China’s economy will continue to grow. But there is also little doubt that the growth has slowed, and will never regain its previous momentum. China’s economy has grown to a point where it costs at least as much to manufacture there as in less-developed nations. It’s phenomenal manufacturing infrastructure and business-friendly political and legal environments have to date made up for the increasing costs. But on the other hand the level of environmental pollution caused by the last decade’s industrial growth is staggering, the RMB has been slowly gaining against the dollar, and there is tremendous domestic inflation. These factors are unquestionably causing backlash.

Foreign banks have been absorbing domestic bad debt in China for the privilege of early access to markets, and this has mitigated some of the credit problems. Skyrocketing oil prices have helped China Petroleum, but hurt both in the form of pollution from increased usage of low-grade coal, and greatly increasing transportation and electricity costs.

The Cliff’s notes? Things have changed. If you are a buyer, watch the prices you are getting and start to comparison shop. If you are an investor, think about shifting into services that China’s New Economy will need – drinking water, medical, roads and infrastructure, and environmental cleanup.

Monday, July 18, 2005

Buying Real Estate in China

Hi again all - it's been a while since my last post because I've been busy moving. Authense has sent me to the U.S. for an extended stay, and I'm living in Virginia now. It is beautiful!

I have been hearing a lot of questions in my speaking engagements related to real estate in China. People have heard how much prices have run up in the primary markets there (like Shanghai, Beijing, etc.) and many westerners are getting interested in real estate in China as an investment.

First, I'd like to clarify the way land use works on a country-wide level. When you buy property in China, you are actually leasing it from the government - not buying it. The amount of time left on the lease can range from decades to almost 100 years, depending on how (and how long ago) the deed it was written. You own the building(s) on the property - it is the land itself that is leased.

This doesn't always have a huge effect on the price. The value of a property for the next 50 years overshadows its value from the 51st year on because of discounting due to inflation. In fact, there is almost no difference in the discounted current value of a property over a 50 year period and an infinite period. This is true because 50 years of inflation discounts the "future" income stream from the property so much that it converges to near-zero.

The long and short of this is that you shouldn't worry much about the "leasing factor" when looking at property in China. However, you should strongly consider the underlying value of a property - how much income does it generate? When adjusted for inflation, does this suggest a value commensurate with the asking price? If not, are you sure enough that the property will go up in value to compensate you for the gap? No area is immune to bubbles. If you think there is something magical about China's growth, keep in mind that between 1900 and 1990 in the U.S. - a period of great economic growth - increases in real estate values were flat in real terms - only keeping up with inflation.

There are title search firms and mortgage brokers in the China market, just like in the U.S. The process of valuing and researching a property is similar. Don't be afraid - just keep your head and look for value.

Signing off - Ruobing

Wednesday, January 12, 2005

Tariffs and Taxes

A tax is a general word that describes any fee charged for a government on any type of transaction. It is a general word that has no specific use in trade.

A tariff is a tax levied by a government on goods imported into its country. This is also known as an import duty. This tax may be computed based on the value of the goods, a unit of measurement (a dimension or quantity), or a combination of the two. Tariffs may also depend on where the goods are coming from. Remember all that buzz about China entering the WTO? WTO members enjoy lower tariffs when their goods enter the United States than non-members. In some cases the difference is quite large - like 2% versus 60%. No wonder WTO accession is such a big deal!

Also, note that some countries enjoy specific penalties or priveledges. Vietnam gets special breaks on exporting textiles to the United States that are much better than those enjoyed by standard WTO members. These breaks are typically used to help developing countries develop industry and create jobs. There is also the opposite - penaties imposed on specific countries to punish price dumping or other unwanted behavior. This type of action is called a sanction and may involve a percentage penalty or the complete dissolution of trade in one or more categories with a country.

If you want to lookup complete information on the tariffs and other taxes imposed by a country, you have to find where they publish this information and lookup your goods, cross-referencing the country of origin. For the U.S. this can be done here. Be forewarned - it isn't organanized very well. To find a specific item you will either already need to know what Chapter it is in, or you will have to download the .pdf files for all Chapters and then search from within Acrobat. If you want general FAQ on import/export duties there is one here.

Also note that the E.U. charges a VAT (or Value Added Tax) in addition to a tariff. If you export to the E.U. you will have to pay both. It is typically much, much more expensive to get goods into the E.U. than the United States.

One last thing to keep in mind - occasionally countries put an export tax on certain items. This is often done to avoid protective tariffs from other countries. For example, if the U.S. is concerned that cheap cotton shirts from China are damaging U.S. firms, it may threaten to start charging a specific duty on cotton shirts from China. In response, China could charge an export tax on these items destined for the U.S. This would raise the price for U.S. buyers of the Chinese shirts, but the tax would go to China instead of to the U.S. This is a typical type of situation, and the WTO is involved in resolving hundreds of disputes like this.

International Finance and Payments

China is unique in that many small/mid-sized vendors have very little in-house knowledge of international banking or finance, and work solely through another China-side trade partner to accept international payments and deal with the bureacratic mechanisms of export. Partly because of this, unless your order is very large your supplier is going to want you to make full payment by the time the goods leave their factory and reach port. There is also typically a deposit when an order is placed in the 20-40% range. This is often sensitive to the price of raw materials and the resale/liquidation value of the final goods. For instance, if you are ordering steel I-beams or computer parts, there may be no deposit if they are a stock item. However, if you are ordering custom injection molded teflon parts the deposit may be equal to the price of the raw materials plus 10%.

There is not usually a major problem with the issue of the deposit. The problems come with making the rest of the payment. Most factories in China strongly prefer full payment ex-works, meaning they want payment in full as soon as the product leaves their factory. The issue of payment for orders from China is not terribly complex, but is often a source of great contention between buyers and sellers.

If your order is large or if you are dealing with a large company, you can probably negotiate payment via a Letter of Credit, or "LC". You will also see this instrument referred to as an L/C, or as "Documentary Credit".

Our friends at have a good detailed explanation here, but I would like to provide an overview for those of you that are too lazy to click on a link. :) When opening a Letter of Credit, you the buyer instruct your bank to freeze money that you have in your account and hold it until a condition is met which allows them to release the money to a 3rd party. The mechanics of the transfer are too detailed for this article - you should work with your banker if you are thinking about using an LC. There are many different kinds of LC, and the largest differences between them relate to the time window during which they are active, and the trigger condition that causes the release. For example, a "Sight LC" will trigger as soon as you take physical possession of the goods. An "Irrevocable LC" is valid until the product arrives, no matter how long it takes (even a year!). Be very careful when working with LCs. Also, note that the use of an LC does NOT intrinsically provide any guarantee of quality. To ensure quality, it is critical that you have a trusted and capable entity perform preshipment inspection at the factory.

Thursday, January 06, 2005

How Much Stuff Can I Put into a Container?

This question (as compared to the last topic) is very easy to answer - both because it is quantitative and because others have answered it well before. There is a wonderful page published by Export 911 here that gives all manner of detail on containers, dimensions, etc. They are a great resource and I encourage you to explore their site.

For those of you that just need some quick information...first you have to know the packing details of your product. Is it palletized? What are the pallet dimensions? If non palletized is it stackable, and if so how many boxes high can it be stacked? After you gather this information, you have to decide whether you will be purchasing LCL (less than a container load) or FCL (a full container load).

If LCL you will be paying by the cubic meter, and all you will need to get a quote from your logistics provider is the volume and weight of your product. Of course, if it is hazardous this will change things as well. If FCL, you will need to figure out what kind of container you need. The basic types are 20' and 40'. Either size may be normal height, hicube, or half height. By far the most common are normal height. All sizes are 8' wide externally, and heights vary from 4'3" (half height) to 9'6" (hicube). Normal sized containers are 8' 6". Please see the Export 911 page for more detailed information including internal dimensions, volume, and load capacity.

International Shipping and Logistics

The quick answer to "How do I get something from a factory in China to my warehouse?" is...find a good logistics agent in the U.S. The long answer is that this topic is a source of great frustration for many businesses. It should be simple, but it isn't. Why?

There are just too many levels involved in international freight. Too many moving parts causes things to go wrong often, resulting in delays. In a typical LCL (less than container load) transaction, your logistics provider (Entity 1) has a partner in China (Entity 2), who arranges for a trucking firm (Entity 3) to pick up the goods and take them to a logistics firm's (Entity 4) warehouse at port in China. The China-side logistics partner (Entity 2) hires another China firm (Entity 5) to help clear export customs, and also works through a shipping aggregator (Entity 6) that serves as wholesaler to help the operator of the ocean liner (Entity 7) sell space. Your logistics provider will also buy insurance from an indemnity firm (Entity 8) to insure against loss and damage.

The operator (Entity 7) depends on Port services (Entity 9) to help load and unload their vessel. When the liner arrives at it's destination (e.g. the USA), it is unloaded at the dock (Entity 10) and moved to a contractor warehouse (Entity 11). It may be x-rayed by the Department of Homeland Security (Entity 12). It may be inspected by U.S. Customs (Entity 13). If either of these things happen there will be an additional charge. Customs will probably accept the Harmonized System Code declared by your logistics provider, but if they change the category there could be a change in the tariff. This is unusual.

At any rate, now that it has cleared customs, and your logistics provider contracts with a U.S. based freight services firm (Entity 14) to pickup the product at the warehouse and bring it to you. It is likely that they subcontract to another firm, or to an owner operator (Entity 15).

If you are thinking, "This is scary and horrifically complex!", you aren't the first and you won't be the last to react this way. Things are made even worse by the fact that many people that work in shipping and logistics are truly incompetent. It is a commodity market that doesn't pay very well and requires little education. Companies come and go, and the barriers to entry are small. You might think larger companies are better - but they aren't necessarily. There is a pandemic problem in this industry.

So what to do about it? Find a partner with both an office in your country (near you and your clients if possible) and an office or partner in China. If they work overseas via partners and not branch offices, make sure their relationship with their partners is strong. If you don't like their performance, try a new partner. Keep looking until you find someone you can trust.

Wednesday, January 05, 2005

Quick Fact - International Phone Calls

There is no way to avoid long international calls. On one of our projects I spent 29 hours on the phone from China to the U.S. in just one week. That can add up. Did you know that you can call China from the U.S. (or vice versa) for around 5 cents per minute?

I use two companies for phone calls. If I will be at a computer, I use the IP telephony application, This is the same company that powers Yahoo! IP telephony. The quality is generally decent, and this firm currently charges $.05 per minute to call China.

If I can't be at a computer, I use They have US-based toll free access numbers, and if you are travelling internationally and have Internet access you can request an international callback. This feature is very useful from China, since it let's me request a phone call between a telephone number in the U.S. and a number in China. They also currently charge $.05 per minute to call China. This company has a lot of useful additional features, including nationwide dialup Internet access in the US - useful when travelling.

Quick Fact - Time Zones in China

Did you know that there is only 1 time zone for all of China, called Beijing Time, even though China is roughly as large as the U.S.? In Western China it doesn't get dark until 11:30PM in the summer! Hard to imagine, eh?

Between Spring and Fall (during the summer), China is 12 hours ahead of Eastern Standard Time. China does not observe Daylight Savings Time, so between Fall and Spring (during the winter), China is 13 hours ahead of EST.

If you need help calculating time differences, there is a wonderful website at They have time zone converters, world clocks, and many other useful tools.

Up and Running!

Hello and Welcome! It is 12:30PM here in Shanghai, and our trade blog is officially up and running. Authense is a consulting agent that has worked on many kinds of projects. Although our core competency is in helping overseas firms purchase/sell non-commodity goods, we have also helped clients setup factories, form strategic alliances, and solve complex problems. One similarity that connects all of our projects is that our clients often need education with regard to the mechanics of doing business with China. In the past we have conducted speaking engagements to help educate - and now we are starting an open weblog. We believe that the more educated people are, the better their decisions will be.

Over the next several weeks, I will be adding many articles about buying from China - including tariff and quota information, shipping and logistics, buyers agents, letters of credit (LCs), intellectual property protection, and more. Registered users may make comments or requests. I look forward to helping you!

Ruobing Yu, Senior Partner
Authense Corporation