Purchasing from China: The Checklist

TO: SME & E-Commerce Business Owners  

If you are the owner of an e-commerce shop, and you are ordering products from China through your agent either from Alibaba or other channels, please check the followings before making the payment.

1.     Who Is Your Counterparty?

Are you purchasing the product from the agent (individual) or a company (in most cases, the factory)?

If you are purchasing the cargo from an individual agent, make sure that he or she is reliable enough to help you handle all the ground work from sourcing, negotiations, logistics, to customs clearings. If there is any hiccups during the process, this person will be the primary contact point to solve the problem together you. You do not want to encounter a disappearing agent whenever there is a challenging situation occurs, such as customs requiring additional shipping documents.

If you want to purchase cargo from factories directly in China, make sure that your counterparty has export license. It is important to know that not every factory in China has export license. Some factories prefer to focus on production and let the trading company who has export license and English expertise to handle international business. In this case, your counterparty will be the trading company, not the factory.

Due to tax benefit and free flow of capital in Hong Kong, some factories or trading companies might set up a Hong Kong company to be their trading department for international business. Koh’s Development is the offshore branch under our Shenzhen trading company to provide integrated trading solution for customers like you.

2.     Are you asking a random Chinese friend to help?

It is not unusual that many SME owners or startups like you do not have experience in buying bulk from another country. Due to trust issues, you might simply ask a Chinese friend to help you find a factory online and act as the messenger between you and the factory.

The risk of asking a random friend who is not professional in sourcing and procurement is that:

• The basic checking work will take forever. He/she might not be familiar with the process of sourcing, thus it takes long time for price discovery and factory qualification validation. And if the friend is working full time with another company, then it is very likely that the communication with the factory will be scheduled to  a timeframe that works for your friend rather than you.  

• Poor negotiations. Negotiation is based on the goal to reach a deal between the buyer and the seller with mutual benefit, and it is definitely not about asking for a lower price without the knowledge of the genernal market condition. Price negotiation requires the knowledge of the industry and a clear strategy to know where to ask for a lower price so that the supplier will not lose interest in talking to your agent and thinking that the agent is a novice in the industry, which might lead you to miss a good quality producer.

• Payment issue and foreign exchange control. China has foreign exchange control. Each individual has only US$50,000 quota per annum to  change foreign currency into RMB and the vice versa.  Since most factories in China accept RMB, if your friend does not have oversea business account, he might not be able to receive money from you and make payment to the factory. Payment to his friend, or through another 3rd party will be a big risk for you, since they are not licensed money exchanger nor exporter,  no invoice will be issued to you as proper record of trade for further customs clearing purpose.  

If the payment does not go through a company account but through an individual account, the customs clearing document will be a mess at later stage. Without proper customs clearing document, there is high risks that your cargo cannot be cleared for export from China nor import at destination.

3.     Does the factory or the company you make payment to have export license?

There are two types of Companies in China that are eligible to receive foreign currencies: 1) Trading Company with import and export license, and 2) Investment Holding Company with foreign investment account.

So if the factory you are dealing with has acquired import and export license, you can make payment directly to the factory; if the factory does not have the license, then you can purchase the product from a trading company, such as Koh’s Development.

4.     Have you clarified shipping terms with your agent? Is it EXW, FOB, CIF or DAP?

Some agents might agree to send cargo to your designated receiver in another country. If there is no clear contract between you and the agent, please always double check with your agent the applicable Incoterms, is it EXW, FOB, CIF or DAP?

Usually the buyer and importer will take care of the import customs clearing process by submitting shipping documents to the customs. However, if you are new in international shipping and not sure about what documents to submit, you can appoint a local customs clearing agent to do the paperwork for you.

Now it is your turn.

Do you have a question for Koh’s team? Feel free to share a comment or leave a message to us.