If you buy products from China or have your products made in China, there is a good chance you are familiar with Sinosure. This post discusses how Sinosure has greatly changed just in the last few months in terms of how it treats foreign companies. For a comprehensive report on how Sinosure interacts with foreign companies, check out China Sinosure as Existential Threat. If Sinosure is knocking at your door, I urge you to read the “Sinosure as Existential Threat” post, because the existential threat is to your business and that threat has increased.
1. What is Sinosure?
Sinosure is China’s Export and Credit Insurance Corporation and it insures most of China’s exports and it then pays its manufacturer-policyholders when a foreign company fails to pay for product received from those manufacturers. Sinosure is a Chinese government-funded insurance company established to support China’s foreign and trade development and cooperation.
Nearly all Chinese companies that provide credit to foreign businesses do so only because Sinosure insures their invoices.
2. How does Sinosure Work?
As explained by Wikipedia, Sinosure is a massive China-based export and credit insurance company:
Sinosure offers coverage against political risks, commercial and credit risks. This includes short-, medium- and long-term export credit insurance, investment insurance, bond and guarantee business, debt and capital retrieval business and credit assessment business. Investment guarantees cover political risks such as currency and remittance restrictions, expropriation and nationalization, sovereign breaches of contract and war.
Sinosure also provides support for export financing. In March 2011, in reached an agreement with J.P. Morgan to provide a wide array of financial services to exporters, with SINOSURE covering J.P. Morgan’s exposure.
Sinosure also covers SMEs (since 2005, even those with export volumes of under 2 million dollars a year that are unable to bear the political and commercial risks of international trade). The company also provides coverage for foreign investment by Chinese companies, this time most often by large SOEs.
Foreign companies usually first deal with Sinosure when they have a payment dispute with their Chinese product supplier. When that happens, Sinosure usually steps in and threatens to sue the foreign company with the problems. Sinosure does this by hiring debt collection lawyers in the alleged debtor’s country to pursue the debts of the Chinese manufacturers it insures. Sinosure is very aggressive in pursuing collection outside China so you need to take its threats seriously.
Within China, Sinosure — which is for all intents and purposes the Chinese government — wields incredible power, but until recently, it for whatever reason, seldom excercised it. Now that, it is suing foreign companies in China and then taking the judgments it receives in those cases overseas and asking foreign courts to enforce them. Once the judgment is enforced, Sinosure is then free to pursue/seize the foreign company’s assets pursuant to the laws in which the foreign company is based or has assets.
3. The Sinking Economy is Increasing AND Changing Sinosure Problems
Due to the economy, the typical Sinosure case has changed.
In China Sinosure as Existential Threat, I wrote that Sinosure “involvement virtually always stems from a China factory problem”:
Chinese factories experiencing problems are more likely to ship bad products, no products, and/or late products to foreign product buyers that then refuse to pay in full. Sinosure then steps in to collect the alleged payment “shortfall” from the foreign product buyer. Because so many Chinese factories are having problems these days due to COVID, COVID lockdowns, and various other supply chain issues, our China lawyers have been getting a ton of inquiries from companies that are being hounded by Sinosure, Brown & Joseph, and/or Leviton Law Firm for payment.
I then described “a composite of the many Sinosure cases our law firm has handled, and it is in many respects a typical Sinosure case”:
1. Foreign company (for purposes of this example, a U.S. company) buys $2 million of widgets from Chinese manufacturer.
2. U.S company pays Chinese company $1.4 million upfront for widgets, with the remaining $600,000 to be paid on delivery.
3. The widgets that arrive in the United States are of terrible quality, to the point of being nearly worthless.
4. The U.S. company refuses to pay the remaining $600,000 it allegedly owes its Chinese supplier and it asks its Chinese supplier for new and better product.
5. The Chinese manufacturer goes radio silent and two months later, Sinosure knocks on the door of the American company, via a threatening letter or phone call from one of Sinosure’s U.S. law firms or collection agencies. OR, the Chinese manufacturer and the U.S. company seek to work out a deal and while that is happening, the U.S. company gets a threatening letter or phone call from from one of Sinosure’s U.S. law firms or collection agencies.
6. The U.S. sells the bad widgets at fire-sale prices, netting $850,000 or $550,000 less than the $1.4 million it is already out of pocket to the Chinese company.
7. The Chinese manufacturer threatens the U.S. company with a lawsuit and the U.S. company threatens the Chinese company with its own lawsuit or with counter-claims for “the bad product and for the damage caused to our reputation.”
8. The U.S. company then does nothing for months, figuring there is no way the Chinese company will sue it in the United States and also figuring that suing the Chinese company would be more trouble than it is worth.
9. All of a sudden, a U.S. collection agency/lawyer retained by Sinosure contacts the U.S. company and says that unless the U.S. company immediately pays the remaining $600,000 it allegedly owes to its by now former China manufacturer, Sinosure will soon sue the U.S. company in the United States.
10. The Chinese manufacturer will insist to its U.S. buyer that it never contacted Sinosure and that the U.S. company should just ignore Sinosure. This is virtually never true and it is important that you not fall for this.
11. The Chinese manufacturer will deny that Sinosure has any authority to act on its behalf and it will tell the U.S. company to pay it all or even just some of the money directly and if it does so all will be fine. This is virtually never true and it is important that you not fall for this.
12. In the meantime, Sinosure is likely claiming that if the U.S. company just pays Sinosure, all will be fine. This is also virtually never true and it is important that you not fall for this.
13. Oftentimes, sub-suppliers of the Chinese manufacturer will start contacting the U.S. company to get paid.
14. The U.S. company starts out defiant, telling Sinosure’s collection agency/lawyer that it will never pay anything because it does not owe anything and if the Chinese company sues in the United States, it will counterclaim.
15. The U.S. company then learns that it can no longer buy any of its products on credit from any manufacturer in China because Sinosure put the U.S. company on a list of companies whose China purchases will not be insured. Once a company makes this list, no Chinese manufacturer will extend that company any credit.
16. The U.S. company’s inability to buy from China on credit is tough on them, especially because it is already reeling from having lost money on the bad product it received.
17. The U.S. company then calls our law firm to have us try to work out a “win-win” settlement. We tell them that China virtually never does win-win settlements and this is most certainly true of Sinosure as well. We then map out another plan for them.
But as I said above, the typical Sinosure case has changed. In the last three months the composite of our typical Sinosure case our lawyers are seeing is the following:
1. Foreign company (for purposes of this example, a U.S. company) bought $10 million of widgets from three different Chinese manufacturers. Foreign company bought more than it usually buys because demand was so high and COVID lockdowns and/or shipping delays were slowing down its widget deliveries.
2. U.S company pays Chinese companies a total of $3 million upfront for the widgets, with the remaining $7 million to be paid in 30, 60 or 90 days after delivery.
3. The widgets that arrive in the United States arrive way late, and in the meantime, demand for the American company’s widgets have greatly declined, largely due to the economy having gone into a downturn.
4. The U.S. company tries to negotiate new payment terms with its Chinese suppliers, but that does not go terribly well.
5. The Chinese manufacturers go radio silent and a month or so later, Sinosure knocks on the door of the American company, via a threatening letter or phone call from one of Sinosure’s U.S. law firms or collection agencies. OR, the Chinese manufacturers and the U.S. company seek to work out a deal and while that is happening, the U.S. company gets a threatening letter or phone call from from one of Sinosure’s U.S. law firms or collection agencies. In addition to seeking the $7 million the U.S. company owes to the three manufacturers for delivered goods, Sinosure is also seeking an additional $2 million for goods ordered by the American company but not delivered.
6. The Chinese manufacturers threaten the U.S. company with a lawsuit and the U.S. company threatens the Chinese manufacturers with its own lawsuit or with counter-claims for the late deliveries. OR, the Chinese manufacturers keep trying to achieve some sort of resolution, but don’t really know how to do that because Sinosure now owns (via assignment) the Chinese manufacturers’ claims against the U.S. company. The American company may or may not be aware of Sinosure’s involvement by this point.
7. All of a sudden, a U.S. collection agency/lawyer retained by Sinosure contacts the U.S. company and says that unless the U.S. company immediately pays the $9 million it allegedly owes to its Chinese manufacturers, Sinosure will soon sue the U.S. company in the United States.
8. The Chinese manufacturers often will insist to their U.S. buyer that they never contacted Sinosure and that the U.S. company should just ignore Sinosure. This is virtually never true and it is important that you not fall for this.
9. The Chinese manufacturers may deny that Sinosure has authority to act on its behalf and they often will tell the U.S. company to pay them all or even just some of the money directly and if it does so all will be fine. This is virtually never true and it is important that you not fall for this.
10. In the meantime, Sinosure is likely claiming that if the US company just pays Sinosure, all will be fine. This is also virtually never true and it is important that you not fall for this.
11. Oftentimes, sub-suppliers of the Chinese manufacturers will start contacting the U.S. company to get paid.
12. The U.S. company then learns that it can no longer buy any of its products on credit from any manufacturer in China because Sinosure put the U.S. company on a list of companies whose China purchases will not be insured. Once a company makes this list, no Chinese manufacturer will extend that company any credit.
13. The U.S. company’s inability to buy from China on credit is tough on them, especially because it is already reeling from having lost money on the bad product it received. This makes it even harder for it to pay off its three Chinese manufacturers.
14. The U.S. company then calls our law firm to have us try to work out a “win-win” settlement. We tell them that China virtually never does win-win settlements and this is most certainly true of Sinosure as well. We then work with them to get products from China and to deal with Sinosure.
4. Sinosure’s Tactics Have Also Changed
Though Sinosure may seem like a monolithic entity, it is in fact a governmental amalgamation of a bunch of regional Sinosures, each with their own fiefdoms. I mention this because each of them are run differently and each of them treat the foreign companies they pursue differently. Our law firm has for years been compiling a list of how each of these Sinosures treats foreign companies and in some instances we are starting to see patterns arise. But even within each region, there are really tough and less tough Sinosure agents in charge of a particular case. I mention all of this because everything I have said or will say in this post about Sinosure is dependent, at least in part, on the actual Sinosure regional entity on the case.
As recently as a few months ago, we would tell our clients that their biggest immediate risks were in China, not in their home country. We would discuss how Sinosure has the ability to seize assets (including IP) in China and to put the squeeze on foreign companies that do business there. We would then explain the sort of situations in which Sinosure would pursue foreign companies in their home country’s courts and assess the liklihood of this. Our lawyers had good reason to believe Sinosure was reluctant to sue in a foreign court and we would act accordingly.
We would tell our clients that negotiating a reasonable settlement with Sinosure was impossible. As I once told a client that allegedly owed Sinosure 1.5 million: Sinosure’s idea of a settlement is that you pay this $1.5 million in two weeks, rather than tomorrow.
But Sinosure has all of a sudden gotten smarter and more free-wheeling in terms of how it pursues foreign debtor companies. Sinosure is now encouraging (and almost certainly funding) its insureds (the Chinese manufacturers to which the foreign company owes the money) to sue the foreign company in its own country.
Also, where possible (and in many cases this is possible), the Chinese manufacturers (with Sinosure’s assistance) are suing the foreign companies in China. As mentioned above, the prevailing party in these China lawsuits then takes their Chinese judgment overseas (including to the United States) where it can get the overseas court to enforce that judgment against the debtor company.
A client recently asked me if a U.S. court would enforce a Chinese judgment and my answer was that they have. The United States’ Uniform Foreign Money Judgments Recognition Act can be surprisingly liberal in enforcing foreign judgments (including from China) and there are published cases where U.S. courts have done so, most famously in the Robinson Helicopter case. My law firm once took a China court judgment and got it enforced in the United States, without any pushback whatsover from the court in which we sought the enforcement.
The big (and nearly always complicated) question for any foreign company sued in China by Sinosure or by its Chinese manufacturer is whether it makes sense to defend the lawsuit in China or simply let a default judgment be taken against it in China and then fight against enforcement of that judgment in their home country.
Sinosure also seems to be taking on the role of government provider to Chinese manufacturers in trouble. The Chinese government knows that foreign companies are moving their manufacturing out of China in response to the COVID lockdowns and China’s gradual decoupling from the rest of the world. In an apparent effort to assist the Chinese factories that are hurting (like those that are owed money) Sinosure is paying these factories in full for their losses and then it is seeking fast reimbursement from the foreign companies that allegedly necessistated these payments. This has meant that Sinosure has become a bit more reasonable on settlement, both in terms of the amount it will accept and its willingness to agree to payment plans.
What are you seeing out there?
