A Guide on How To Pay Your Suppliers in Mainland China from Hong Kong

Which Currency Should I Use?

Most Hong Kong importers pay their mainland China suppliers in US dollars, although payments in renminbi (RMB) and yuan (¥) are also accepted. China’s currency is officially known as renminbi, which means the people’s currency, and yuan is the term for a unit of measurement. This is similar to the way that people refer to ‘10 pounds’ instead of ‘10 pounds sterling’ in the United Kingdom.

Both renminbi and yuan have respective buy, sell, and mid-market rates that are worth different amounts in USD. Having two exchange rates makes things a bit tricker - the best way to transfer money really depends on which exchange rate is most favourable at the time of the payment. If you have a trustworthy service provider, they can facilitate the conversion at the best available exchange rate every time.

How Does The Payment Process Work?

When it comes to paying your suppliers in mainland China, there are generally two steps:

• you’re expected to pay a 30% deposit to secure your order before starting production
• the remaining 70% should then be paid once the order has been fulfilled

This means that you’ll have to make two payments per order, both of which involve processing fees and exchange rates. It’s important to choose your payment method carefully so you’re not stung by extra fees, as these can quickly add up with two lots of processing.

What Are The Available Payment Methods?

Here’s a list of the available payment methods you can use in mainland China:

1 Bank-to-bank transfer

Bank transfers have been around for a long time and are a widely accepted form of payment among mainland China suppliers. If you choose to opt for this payment method, we recommend that you open a business bank account in Hong Kong, as separating your business finances from your personal finances can benefit your company in the long run.

As with every other country, China's largest and most reputable international banks use the standard international SWIFT code system for reliable money transfer between accounts, with a transfer fee of $35-$45, excluding currency conversion fees.

There are no capital controls in Hong Kong, so many mainland China suppliers have business accounts in Hong Kong to facilitate the transfer of money. If both you and your supplier have USD accounts in Hong Kong, you can simply transfer money locally and save on the logistics as well as international transfer fees and foreign exchange conversion fees.

The downside to bank-to-bank transfers is that it’s relatively slow, ranging from a few days to a few weeks to complete the payment. There is also little-to-no recourse once you transfer your payment, which means some degree of risk for both the buyer and supplier if things go wrong.

2 PayPal

With nearly 400 million active accounts worldwide, this global leader accepts a variety of credit and debit cards, along with seller protection, 24/7 fraud monitoring and even two-factor authentication. It allows you to transfer money straight from your smartphone, making it an attractive option for those looking for convenience, but you’ll be charged a fixed 3%-5% transfer fee as well as currency conversion fees, which can add up over time.

Thanks to its robust Chinese language interface, PayPal has garnered a significant user base in China. However, many suppliers in mainland China don’t accept payments through PayPal for large or complete orders. As a result, it’s best used for small orders and samples.

Also keep in mind PayPal's complicated protection policies, especially when it comes to cross-border transactions. PayPal accounts in China are also held by individuals instead of businesses, which increases the risk of paying the wrong individual.

3 Letter of credit

A letter of credit (LC) is issued by a bank to guarantee suppliers an agreed sum on the buyer's behalf, when an order has been completed and has fulfilled predetermined conditions such as quality inspection requirements and product specifications.

In general, suppliers in mainland China are more than happy to accept LCs as it’s considered one of the safest ways to pay, so it reduces the supplier’s risk. LCs also safeguard your rights as a buyer because your supplier has to deliver the order before receiving payment.

The disadvantage is that LCs are document-heavy and the most expensive payment method, so they’re typically more suitable for large businesses with transactions over $50,000, rather than small- and medium-sized businesses that are thin on profit.

If you eventually decide on this payment method, bear in mind that there are different LCs, so you should seek professional guidance on choosing the right one for secure transactions.

4 Western Union

While Western Union has been around for a long time, it may not be the best way to pay your suppliers in mainland China. In fact, this method is generally discouraged due to high costs and lack of payment protection policies. Nonetheless, it’s a fast and easy option for anyone short on time.

To send money through Western Union, all you have to do is to head to a post office or a grocery store that allows Western Union payments. You’ll have to detail who the payment is for, and will be given a control number when you pay the cashier. This control number can then be passed on to your supplier, who will head to a Western Union outpost in China to collect the payment.

This payment can be used for small orders and samples, or if you’re rushing for time, but remember the risks involved and how costly it can be.

5 Wise

Looking to make a large, one-time transaction to your supplier in mainland China? If so, Wise (formerly known as TransferWise) will be your best bet for a quick and easy transfer through bank transfer, credit or debit card.

With its multi-currency account and convenient online international transfers, you can effortlessly transfer money to China in Chinese Yuan or US dollars. For money transfers in Hong Kong, you can transfer Hong Kong dollars or US dollars.

Wise boasts better exchange rates compared to Western Union, with a transfer fee of $2.95 USD + 1.19% of your total amount. To transfer money through Wise, simply:

• create an account online and log in
• key in the amount you wish to transfer, along with your supplier’s details
• make a payment to Wise through a bank transfer, or a credit or debit card
• wait for Wise to send the money on your behalf

Your chosen recipient doesn’t need to use this service as the funds will be directly deposited in Chinese Yuan in their bank account within a couple of business days.

6 Debit or credit cards

Another way of transferring money to China is through your debit or credit card. While this is a secure way of making payment, this mode of payment isn’t widely accepted in China as suppliers are charged to receive the payment - a cost they’ll likely pass on to you. Moreover, debit and credit card fees are generally very high, with exchange rate markups.

7 Escrow

The term escrow refers to a contractual agreement where a third party facilitates transactions between a buyer and a seller. In this agreement, the buyer will send payment to a neutral party - the escrow service - before the supplier starts work. When the supplier delivers the goods, the escrow service will release payment to the supplier. If there are any disputes, the escrow service will act as a mediator to help both parties come to an agreement. This helps to protect buyers from unethical suppliers who take the money without delivering the goods, and safeguards suppliers from losing money.

Escrow services usually charge 5% of the transaction amount to the supplier which is handed over to the buyer. Although it’s a safe payment method that requires minimal paperwork, the buyer has to pay upfront, so escrow services aren’t the most popular in China - they’re typically only used for small orders and low-value transactions due to the additional costs involved. It could also mean your money is stuck in an escrow account for some time while your supplier fulfills your order.

8 Third-party sourcing agent

If you have a third-party sourcing agent that takes care of your imports from mainland China, you can pay your suppliers through them.

A third-party sourcing agent specialises in procuring goods from overseas as well as managing the entire sourcing process, from shortlisting and verifying suppliers, to discussing payment terms, arranging quality checks, and shipping the goods

If your sourcing agent has an office in Hong Kong, you can steer clear of an international transaction and its risks. Experienced sourcing agents work with credible suppliers in mainland China, reducing your chances of encountering a fraudulent supplier. Although a third-party sourcing agent fee may be high, your agent can act on your behalf to negotiate for lower product prices from your supplier.

How To Negotiate Better Payment Terms

When negotiating for better payment terms, try to ask for the higher end of what you need while being reasonable. Since it’s a negotiation, expect some back and forth as both parties come to terms. For example, if you require more time than your usual 30-day payment terms, negotiate for 60 days.

• Weigh the pros and cons of each payment method, and choose your mode of payment wisely
• Build a positive working relationship with your supplier by being considerate of their risk and costs, which will benefit you in the long run
• Opt for the standard 30:70 payment terms instead of paying the full amount in advance, to avoid dealing with inferior goods or delays
• Never make payment to an individual account, and insist on paying the supplier's business account instead
• Look into the charges and exchange rates of various service providers before choosing one
• Read up on customer reviews and customer support in case any issues arise

Summing Up

While it’s now a lot easier to send money from Hong Kong to China, there are still certain barriers to overcome to ensure your business is transferring money cost effectively and safely. Cross-border payments are dependent on processing fees and exchange rates, and a comprehensive understanding of how to transfer money to China is required.

Before deciding on your payment method, remember to factor in speed, ease of transaction, process transparency and cost.

Advantages

Bank-to-bank transfer

• Reliable
• Widely accepted form of payment

PayPal

• Convenient and allows you to make payment from your smartphone
• Robust Chinese language interface

Letter of credit (LC)

• Most reliable payment method
• Recommended for large businesses for transactions over $50,000

Western Union

• Easy payment mode
• Perfect for those short on time due to its fast transfer

Wise

• Easy to use with its multi-currency account and convenient online international transfers
• Attractive exchange rates

Debit or credit cards

• Convenient
• Secure way of making payment

Escrow

• Safe
• Requires minimal paperwork
• Little risks involved

Third-party sourcing agent

• Avoid international transactions and its risks
• Experienced sourcing agents work with credible suppliers in mainland China, reducing your chances of encountering a fraudulent supplier

Disadvantages

Bank-to-bank transfer

• Fees are imposed by the importer’s bank, the recipient bank, and other banks, plus currency conversion charges
• Can be relatively slow, ranging from a few days to a few weeks
• Certain risks involved for both the buyer and supplier, since there is little-to-no recourse once you transfer your payment and if things go wrong

PayPal

• A fixed 3%-5% transfer fee along with currency conversion fees can add up over time
• Complicated protection policies
• Accounts are held by individuals and not businesses, increasing risk of transferring to wrong person
• Many suppliers in mainland China don’t accept payments through PayPal for large or complete orders

Letter of credit (LC)

• The most expensive option
• Can be a hassle, with many documents required
• Not suitable for small- and medium-sized businesses that are thin on profit

Western Union

• High currency conversion rates
• Non-existent payment protection policies
• Risks involved, difficult for you to get your money back if supplier doesn’t deliver

Wise

• Not recommended for multiple transactions since there are still transfer fees and exchange rates

Debit or credit cards

• Not widely accepted in China
• Suppliers will have a charge imposed on them when receiving the payment and will likely pass this charge to you
• Debit and credit card fees are generally very high, with exchange rate markups

Escrow

• Usually a fee of 5% of the transaction amount
• Typically used for small orders and low-value transactions due to the additional costs involved
• Your money could be stuck in an escrow account for some time

Third-party sourcing agent

• A third-party sourcing agent fee may be high

Save time, free your mind and focus on your business

We know how time-consuming the payment process can be. Why not outsource the accounting to us so you can focus on what matters most to your business?

Our experts can handle all of your accounting and optimise tax for your business. We can advise which tax exemptions and tax reliefs your company is entitled to and our experienced corporate secretaries will help you file documents to the authorities on time, organising your reports exactly as needed for compliance.

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