Several regulations on the protection of small and medium-sized enterprises (SMEs) in China took effect on September 1, 2020, following the national decree issued by the State Council. The regulations aim to secure a timely payment to SMEs and give sanctions to those who fail to do so. Hence, the goal is to safeguard the legitimate rights and interests of SMEs and improve the business environment for SMEs.
Have a look at our previous article about Setting Up a Business in China: Before and After
What are the details of the new regulations? How can SMEs benefit from them? Below are the key points of the “Regulations Guaranteeing Payments for Small and Medium-sized Enterprises“.
Payment regulation on the purchase from SMEs
According to the new regulation, government organizations and public institutions must pay for their purchases (i.e. goods, projects, or services) within 30 days from the date of delivery. Furthermore, the payment term should not exceed 60 days unless otherwise agreed upon in the contract.
Large enterprises that carry out similar transactions with SMEs should set a reasonable payment period and stick to on-time payments.
No to non-cash payments
Government agencies, public institutions, and large enterprises cannot force SMEs to accept commercial bills or other non-cash payment methods. Accordingly, they cannot extend the payment term as disguised in such forms of payments or force SMEs to unfair payment terms in contracts.
The new regulation prohibits the illegal collection of security deposits. It also mandates the verification or settlement of security deposits in a timely manner. Moreover, security deposits should not be limited to cash. Thus, the said purchasing entities cannot refuse to accept a letter of guarantee issued to SMEs by financial institutions.
Interests for overdue payments to SMEs
The interest rate should not be lower than the one-year loan prime rate at the time of closing the contract. If not agreed, the responsible parties should pay the overdue interests at 0.05 percent of the daily interest rate.
No excuses for delay or refusal of payment
The mentioned entities cannot delay or refuse payments to SMEs under the following reasons unless stipulated in the contract:
- Using the legal representative or main person in charge to perform internal payment procedures;
- Waiting for the approval of completed projects or audits of final accounts.
Moreover, Article 11 of the new regulation states that they cannot require the audit results issued by an audit agency to be the basis for the settlement of payment to SMEs. This shall only be allowable if otherwise stated in the contract, laws, or administrative regulations.
Meanwhile, auditing agencies shall carry out audit supervision over the payment to SMEs made by government agencies, public institutions, and large state-owned enterprises
Announcement of late payments
Any late payments or payables to SMEs must be announced before March 31 each year. It can be communicated by means of websites and newspapers or magazines that facilitate public awareness. This should be done by the purchasing government departments and public institutions. For large enterprises, the unpaid overdue debts must be mentioned or published along with their annual corporate report.
Supporting SMEs in fund-raising
SMEs that seek financing through accounts receivable will be supported and a 30-day debtor-creditor relationship must be confirmed.
The Chinese authorities warn of the failure to follow the aforementioned regulations. It is also not acceptable to use superiority or intimidate SMEs to accept deferment or refusal to pay. Furthermore, the government will establish specific mechanisms to handle SME-related concerns such as:
- Addressing complaints;
- Disclosing payment information;
- Supervising or evaluating relevant purchasers in terms of payment conditions.
Those who are guilty of prohibited acts will face restrictive measures on their respective benefits such as expenditure and house occupancy for official duties, fund allocation, and others.