Chinese Rejection of L/Cs

The financing of trade transactions in China is relatively straightforward following international practice regarding letters of credit (L/Cs). In China the main attraction of L/Cs is that they guarantee payment and receipt of title from an independent party (a bank), as long as commercial and shipping documents are presented in accordance with the L/C, regardless of the underlying contract.What makes L/C use unique in the PRC is that the government does not allow foreign banks to confirm L/Cs issued by domestic banks, a practice common overseas. Normally, the confirming bank assumes the responsibility to pay on the issuing bank’s behalf. This is quite valuable when the transaction is on the riskier side. Today, the Agricultural Bank of China and Everbright Bank of China are willing to issue (open) confirmation L/Cs on behalf of other smaller Chinese banks. A single bank, the Bank of China, is often the only option for Chinese companies who desire a L/C, because the other banks, including the big four commercial banks are often not very conversant with international trade practices, international banking and transaction.This gives the Bank of China a monotony type control over the L/C process and leads to very strict control as they get thousands of L/Cs.
Chinese contracts may contain a clause stating that payment will be made only after clearing Customs. This puts the foreign seller in a precarious position as even the smallest discrepancy may cause delay in customs clearance and thus delay payment. These types of delays are not uncommon. For example if market price has dropped, the buyer may simply refuse to begin customs clearance or find a trivial technical excuse to avoid paying for the goods. Therefore the contract should be appropriately worded.
To avoid these types of problems one should screen the trade partners carefully. A number of consulting firms are present who assist in verifying the legitimacy of trade partn…

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