Article

China

China is developing its own unique approach to the market economy. The double aim of its planners is to foster the resumption of robust growth and contain runaway inflation as part of a medium- to long-term strategy. The government continues to make rapid adjustments to the ever-changing global economy, especially in this prolonged period of recession, as evidenced in its massive $586 billion fiscal stimulus.

For those who believe China is an unstoppable economic machine, more evidence to support that view was out in late October 2009, with third quarter growth at an impressive 8.9 per cent, up from 7.9 per cent in the second quarter. The Chinese government's fiscal stimulus and its soaring loan growth - with some $1.28 trillion in new loans, up more than 150 per cent in 2009 - shielded China from the worst effects of the global recession.

Over the longer term, China will seek sustainable economic drivers, such as private consumption, to support its GDP growth. In the past, its growth came largely from investment. In fact, the bulk of the 34.4 per cent growth in fixed asset investment over the first nine months came from government stimulus spending. But the Chinese economy is also showing a revival in private real estate investment and a resilient consumer sector. The most recent economic data suggests that China's economic recovery is broadening, demonstrated especially by the decline in unsold housing inventory.

A 15.3 per cent rise in retail sales in the first three quarters of 2009 was seen as encouraging, as was the 9.5 per cent growth in urban incomes and 8.9 per cent growth in countryside incomes.

China has also begun to implement its exit strategy, a gradual reduction in the level of stimulus for credit and infrastructure spending in response to rising private investment and consumption.

It is difficult to quantify how easy it will be for China to break its reliance on state spending in order to become a more sustainable and balanced economy. The government has a vision of building an economy driven more by innovative private enterprises, one in which the consumer is the engine of growth. But consumption has actually declined from 47 per cent of GDP a decade ago to around 33 per cent today. Moreover, China's record of creating truly innovative companies has been lackluster to date, and the vast majority of new lending still goes to well-connected state companies rather than to smaller, private ones.

In short, the basis of the economic recovery still needs to be consolidated, and the country faces the arduous task of expanding domestic demand. To maintain sustainable growth, China needs consistent and stable macroeconomic policies, proactive fiscal policies and moderately lenient monetary policies.

In 2010, meanwhile, with the implementation of the current economic stimulus, economic growth is likely to continue at a sustainable rate. This is consistent with the government's objective of containing inflation while achieving healthy growth.

Simon Jian
Chairman
Edward Trading LLC
Email: simonjian@edwardtrading.com

South Korea

My job involves reviewing bank guarantees issued by our bank. When the Uniform Rules for Demand Guarantees (URDG) were created, a number of standard bank forms were suggested in the process. They were simple and to the point; the forms covered the role of the banks in the bank guarantee process. The standard forms are now being revised by ICC to accompany the new URDG, which was approved in November 2009.

Although the forms are quite good, in most cases customers require the issuance of a bank guarantee that is individually drafted. This can be quite complex. If there was an MT700 equivalent to the bank guarantee, i.e., a formatted bank guarantee message type, the banker could simply offer the customer the use of this message instead of the much more complicated bank guarantee form specially drafted.

Although the contract between the parties requiring a bank guarantee may be complex, the main points of the guarantee remain simple. There is an issuing bank undertaking to pay in the event that the beneficiary sends a default notice to the issuing bank. The default notice states that the applicant of the bank guarantee has failed to fulfil its contractual obligations towards the beneficiary. There is the amount of the bank guarantee, an expiry date, and finally the beneficiary.

Although individually drafted bank guarantees tend to be very long, amounting to several pages of text whose many points are relevant to lawyers and the law, the majority of these points are not relevant to the bank issuing the bank guarantee.

For banks that can dictate the form of bank guarantee, the formatted bank guarantee will not be necessary, as there will already be a bank guarantee form prepared by the bank specialist. However, for banks that cannot dictate the form, but have to issue it according to the request of the applicant, a formatted bank guarantee can be a good alternative to the often complicated bank guarantee form presented to the bank.

The formatting of the bank guarantee would be the job of SWIFT and, if enough bankers suggest this to SWIFT through its national SWIFT user groups, SWIFT would study its feasibility and, if it is both doable and worth doing, might provide it. Of course, if the beneficiary and applicant insist on a customized bank guarantee, they can always use their preferred form specially drafted.

But such a customized bank guarantee will not ensure more certainty of payment than a SWIFT-formatted bank guarantee form. Once such a form is available, bankers and customers will have a convenient and secure tool when a contract requires a bank guarantee.

Chang-Soon Thomas Song
Attorney at Law (Arizona)
First Expert, International Dispute Resolution (Letters of Credit), Trade and Services Division
Korea Exchange Bank, Seoul
E-mail: thomas@keb.co.kr