Sending money to Chinese supplier

We have been advising our clients to make payment to company account only, however,when sourcing from china, oftentimes you find you have to send money to third party account, it might be a business account of export company, a business account of offshore company in Hongkong or a personal account of the factory owner. How can you secure your payment if you have to make payment to a third party account?

Generally, in following situations, the suppliers will ask you to make payment to a third party account:
1) Make payment to export company
Many suppliers in China don’t have direct import and export certificates. Import and export certificate is not difficult to apply, however, you will need to hire 2 to 3 experienced professionals to handle tax rebate, customs clearance, document preparation etc, that is why so many small and medium sized suppliers don’t apply for the import and export right.

In trade industry, companies without import and export certificate are not entitled to open foreign currency to accept international payments. Meanwhile due to currency control policy, overseas buyers can’t send Renminbi to suppliers’ Renminbi account.

Comment: As we aware, huge number of small sized suppliers in China operate this way. It is okay to send payment to a third party company account(opened state-run banks in mainland China only). It is highly advised to add the third party account to the purchase contract just in case dispute arises.

In this case, the export/shipping documents will be issued by export agent according to the contract between supplier and export agent. That don’t affect buyer’s benefit as long as those documents can be used to declare customs and accept delivery.

Even though the buyer will be given a set of documents such as commercial invoice, packing list, B/L etc issued under the name of export agent, the buyer should sign a contract directly with the supplier for the transaction.

2) Make payment to offshore company account
Hongkong is a tax heaven. The tax difference between Hongkong and mainland China stimulate many south China suppliers to set up offshore company account in Hongkong to accept payment, which is mainly used to avoid tax.

Comment: Payment to Hongkong offshore account instead of supplier’s company account in mainland China will cause potential dispute later. If the supplier asks to pay to their Hongkong offshore company account, they will also asked you to contract with their offshore company. So from the legal point of view, you are trading with a shell company in Hongkong, not a brick and motor company in mainland China. If disputes arises, Hongkong company can’t protenct you since that company in Hongkong has nothing but a name. Mainland China law can’t protect you too because you contracted with a Hongkong company which is governed by Hongkong laws.

3) Make payment to suppliers’ personal account
In this case, the supplier don’t have foreign currency company account to accept overseas payment, they don’t use export agent or offshore accounts as well, they use personal account to accept foreign currency payment.

Comment: This is acceptable if the personal account is specified in the purchase contract. According to China laws, a personal multi currency account can accept no more than 50,000USD yearly. So that is an evidence showing that this supplier’s export volume didn’t exceed 50,000USD yet – They are newbie to export business.