China has opened its economy to international trade. And for its international trade China mainly uses LC. LC VIEWS is tempted to find from a young Chinese LC specialist how China conducts its international trade with the LC. The specialist is Jia Hao, only 30 years in age. He works for Bank of China, China's biggest state-owned bank, as a Financial Product Manager in the Bank's indigenous branch.

From my experience of handling LC operations and frequent communications with Chinese traders,it is not difficult to find there are some considerations in Chinese traders’ minds in choosing LC as their mode of payment in international trade.

The first and main consideration is to seek safety and protection as Chinese traders always know that the letter of credit is Bank’s credit instead of merchant’s. This concept is deeply rooted in their minds. Thus when they have a deal with a new client they usually favor LC. China is a nation well known for its great prudence.

The second consideration is to obtain financing. A Chinese exporter with enough credit line in his bank may obtain financing by packing loan (a pre-loading short-term financing) against the letter of credit held in possession of the bank, export bill purchase against documents presented (better including full set of negotiable transport documents as mortgage, even under collection), discounting of the drafts accepted by issuing bank/confirming bank and forfaiting. The different methods of financing require different levels of credit line. Among the said kinds of export financing, only forfaiting operates without recourse except in case of fraud. As to export bill purchase against compliant documents under LC, one thing should be mentioned that some banks distinguish it from negotiation whilst some banks not, because till now there is no legal definition of export bill purchase under China law. The controversial issue is that whether the payment by the nominated bank against some collaterals under a mortgage or pledge agreement can be deemed as “giving of value”. Therefore, before the concept of “negotiation” is defined well, it is an open question whether the nominated bank making export bill purchase under a mortgage or pledge agreement can be deemed as a qualified negotiating bank.

2. It is said open account payment method is not suitable for developing and transitional economies. It is recommended that LC is suitable for such economies because LC covers risks and traders in low-income countries may lack risk management knowledge and skills. Do you agree? Why?

Open account (O/A) trading is most commonly applied in a situation where the exporter and importer trust well each other with a long established trade relationship. However, if the import is located in a developing country and is not well known to the exporter, the exporter will be not be sure of his creditworthiness and thus will be reluctant to conduct business with him on O/A terms. That would be the reasoning underlying in the view referred in the said question. That is common sense. However, one thing I should emphasize is that now in China O/A is often mixed with advance payment, e.g., upon receipt of the down payment of 30% invoice value the exporter will get goods ready and effect shipment; then O/A 30 or more days after shipment date is used covering the left amount unpaid. Of course there is still 100% advance payment and 100% O/A with little proportion. As a whole the proportion of T/T payment including advance payment, O/A and mixture of advance payment and O/A is biggest, maybe approximately 60-70%, in the export trade payment, and the left is comprised of LC and documentary collections.

3. How did China acquire LC expertise when it started international trade?

As China became an open country, need arose for it to acquire LC expertise by importing training services; attending LC seminars and meetings; translating LC rules, ICC Opinions and authoritative books and so on. So we can see now there are more and more Chinese bankers, scholars, lawyers, judgers and traders who have acquired the requisite expertise in LC operations and in LC law so as to keep up with the global LC process. Now I should proudly say China never lacks LC expertise.

4. Is LC training/learning in China trainer-assisted or computer-based?

Both. In China, traders and bankers may acquire LC knowledge and expertise through online LC forums on some LC websites as well as through offline LC seminars/workshops always organized by the ICC China. Some authoritative LC experts such as Gary Collyer and Fung King Tak were often invited for their workshops.

5. Has LC-based international trade helped China accelerate its economic development?

Yes, it has helped to provide Chinese traders with proper financing and comfortable security for payment. It is indispensable to China’s booming economic development.

6. It is said that in low-income countries some banks take physical collateral for financing LC-based export trade. How about China - do its indigenous banks take physical collateral for issuing LCs and for financing LC-based export trade?

In China, as far as I know, the exporter who applies for trade financing under LC must have such a credit line in his bank much enough to cover the open exposure. The credit line should be accessed and fixed by his bank in advance. To obtain the credit line facilitating its trade financing, the exporter may supply proper securities to his bank such as the guarantee by a competent third party or the physical collaterals. Only very big companies with high creditworthiness and good financial standing may not be asked to provide such securities.

7. For financing its exports does China's exporter use:

• back- to- back LC
• transferable LC
• red clause LC or
• bank finance against LC as a collateral?

As far as I know, China’s exporters except those in Hong Kong seldom request their banks to issue back- to- back LC and transferable LC in favor of the true manufacturer. However, they feel not reluctant to accept back- to- back LC and transferable LC as the second beneficiary. Chinese banks, for example, our bank,will advise them of the disadvantages and risks involved in the operation of transferable LC. With a transferable LC the exporter will be a little more in difficult position to apply for packing loan. As to red clause LC, frankly speaking, I rarely encounter it, may be because importer’s bank is reluctant to issue or China’s exporters are not familiar with.

8. For post-shipment financing does Chinese exporter use:

• negotiation of compliant documents presented under LC or
• assignment of LC proceeds?

For post-shipment financing, as far as I know our bank usually supplies export bill purchase service for post-shipment financing. If the purchasing bank fails to receive the payment from the issuing bank, it may claim repayment from the exporter; and if repayment fails, it may have recourse to the collaterals. For example, in our bank in the contract of export bill purchase there is a condition that the bank will have recourse to the collaterals in which it has acquired interest under any applicable law .I understand that in China few banks want to negotiate, as the negotiating bank in the LC, the compliant documents without acquiring any security interest in the collaterals provided by the exporter-beneficiary.

9. If a Chinese exporter has irrevocable confirmed LC does he still need to credit insure?

Export credit insurance was not very popular in China since long. But from 2001, with the establishment of China Export & Credit Insurance Corporation (SINOSURE), more and more exporters have come to realize the importance of export credit insurance and have found benefits brought by it. As to the credit insurance under LC, there is a specific product under export credit insurance categories called LC insurance, which is covers commercial and political risks under LC payment terms. As far as I know, an exporter having a confirmed LC may be reluctant to apply for LC insurance where confirmation is done by a reputed bank.

10. Is export financing by banks federally administered?

As far as I know at present there is no central administration of export financing.

11. China is involved in so many LC disputes. What steps China is taking to minimize documents rejection, disputes and delays?

In my opinion, so many LC disputes are not due to Chinese bankers’ lack of enough expertise of LC operations. With many seminars and training classes held by some well known LC experts in China, Chinese bankers and traders are supplied with good opportunities to have a deeper understanding of LC operations and to be more and more familiar with relative international rules , ICC opinions and legal cases. The higher rate of passing the CDCS Exam than the world average rate can evidence Chinese bankers’ qualification and competence. Disputes arise between the issuing bank and applicant when the applicant fails to reimburse and the issuing bank lacks collateral. China’s banks are now attaching more importance to review of applicant’s financial standing and collateralization. China has improved its document examination practice as well to reduce international disputes over discrepancies. The ICC publication well known by the acronym ISBP is very helpful in examination improvement and in document/ dispute reduction

12. What most common discrepancies China finds in export documents received under LC from abroad?

In my experience, the discrepancies listed below seems most common:

1) Maturity can not be established from the data in the draft itself (basing on ISBP 45)

2) When LC requires full set of insurance documents, more than one insurance documents presented fail to indicate the number of originals.

3) When LC requires certified copy of shipment advice, a copy of shipment advice presented shows no original signature, mark, stamp or label for the purpose of certification. Instead, the wording of the copy advice is “we certify that the shipment details are listed as follows:……”.

4) When LC requires FCR indicating the date of receipt of cargo, the FCR presented usually indicates shipment date instead of the date of receipt of cargo.

5) Inconsistency among documents.

13. What are the documents unique to China that its banks usually stipulate?

As far as I know, our bank's LC calls for normal documents including commercial invoice, packing list, transport documents, insurance documents if applicable, certificate of origin, copy of shipment advice, beneficiary certificate certifying one set of non-negotiable documents have been sent to applicant within xxx days after shipment. The document seemed a little bit unusual may be the requirement “certified copy of shipment advice”, because a copy which is certified with an original signature, stamp and so on as per UCP500 article 20(d) will be deemed as an original according to ICC’s policy. A little bit tricky.

14. What are the most common errors in LCs issued by China? What steps China is taking to improve its LC issuance and delivery practice?

In my opinion LCs issued by our bank may be improved in the following ways:

(1) by avoiding the use of slash “/” when stipulating documents as it has an indefinite meaning.

(2) by stipulating “issuance date of bill of lading or bill of lading date” instead of “shipment date”.

(3) When to stipulate insurance documents, to mention “full set”

(4) The disclaimer clause as the similar wording: “……upon receipt of applicant’s waiver prior to your contrary instructions we will release the documents to the applicant without any responsibility……” will be more watertight by emphasizing that the release must be at issuing bank’s sole judgment.”)

15. What language China uses in its LC banking - Chinese or English? Does China has UCP in its native language?

China has its own LC rules in Chinese for domestic trade. It is fashioned as per UCP but is quite different from UCP. China has the Chinese version of UCP500 and other ICC rules such as ISBP and ISP98.

16. Does China use silent confirmation?

Few Chinese banks use silent confirmation, considering great risks involved. However, with the use of it by many foreign banks China banks set out to use it as a kind of financing. But they have to review the whole process of silent confirmation operation especially some operation details and access the balance of benefits and risks involved before they will have involved in silent confirmation.

17. How has China mechanized its practices of LC issuance, LC delivery to foreign beneficiary, LC advising/confirmation, LC payment/reimbursement?

As far as I know, all Chinese banks use SWIFT and computers. But internet is not used for conduct of LC operations.

18. How are costs/fees of LC services determined? Do banks have freedom to fix costs?

Cost determination depends upon a bank’s internal rules. The banks have freedom to fix costs/fee. Thus, LC service charges are competitive.

19. There are foreign banks in China. Do Chinese consumers of LC services prefer indigenous or foreign banks and why? How indigenous banks compete with foreign banks?

The competition and cooperation between indigenous banks and foreign banks has become the hot issue in Chinese finance community. Frankly speaking, both indigenous banks and foreign banks have their own advantages. The most important advantage of indigenous banks is their “history”. Many traders have a long relationship with their indigenous banks . Also they have their credit facilities from Chinese banks, without which they are hard to do their business. Another thing should not be ignored is indigenous banks’ so many branches which may provide their customers great service convenience. However, foreign banks have their distinct advantages such as their ample capitals, advanced management level, more competitive marketing skills, high level global services and detailed but user-friendly operation procedures. Generally, as I know, now much more Chinese consumers of LC services prefer Chinese/indigenous banks.

20. Do applicants (buyers) interfere in/influence the banks' documents examination practice ?

I feel regret they will sometimes, or more exactly seldom. But at least in Bank of China we take efforts to avoid this bad practice and insist on the LC’s independence. With the popularization of UCP Chinese banks and courts have realized the importance of adhering to, instead of interfering in, the rule of LC.

21. What currency China mainly uses in its import LCs? What methods Chinese traders/bankers use to hedge foreign exchange risks in LC transactions?

US dollar. Usually we select two ways to hedge foreign exchange risks. First doing financing to advance funds so as to avoid the foreign exchange fluctuation at the maturity. Second, doing Forward Transaction of Foreign Exchange to avoid foreign exchange risks and fix foreign change cost.

22. Do Chinese exporters outsource LC documentation to freight forwarders? Do freight forwarders have significant role in trade?

Yes, in China freight forwarder services are popular, but the relative law is not good as in US and UK. Freight forwarder services are supplied with in the whole chains of international trade such as goods storage, goods package, container consolidation, goods insurance, customs clearance and so on. No doubt, they are very important.

23. What are the most common INCOTERMS on Chines import LCs and why?

CIF, FOB and CFR, as most international trades are involved in marine transport. But among CIF, FOB and CFR it is hard for me to say which is most common.