Documentary Credit World

Digital transition in trade and trade finance has gained unprecedented attention over the past three years, largely impacted by interruptions in transport and communication due to temporary lockdowns in various countries and regions during the Covid-19 pandemic. We have witnessed great efforts made by international organizations, states, and industries in the promotion of digital mechanisms in trade and trade finance. However, trade digitalization is advancing slower than expected. This article mainly focuses on the current status of trade finance digitalization in China, especially the application of electronic transferable records.

Let us first briefly look at the general evolution of electronic transferable records and cross-border paperless trade internationally. In a 2021 report, Digitalizing Trade in Asia Needs Legislative Reform, ADB and ICC found that the adoption of legislation that enables electronic transferable records had been slow in Asia and the rest of the world. Another report, “Digital and Sustainable Trade Facilitation in Asia and the Pacific 2021”_{1 .} found that while the pandemic contributed to “Paperless Trade” being implemented at a rate of 62.4%, the implementation level of ‘Cross-Border Paperless Trade’ was only 38.5%. The Report also found out that more than 70% of countries surveyed in the Asia-Pacific region had partially developed legal and regulatory frameworks to support electronic transactions, most frameworks were incomplete and may not readily support legal recognition of electronic data or documents received from stakeholders in other countries. In international shipping, almost 96% of trade documents are still paper–based._{2 .}

The 11 billion metric tons of cargo shipped every year is supported by 44.5 million paper documents._{3 .} In February 2023, the Digital Container Shipping Association (DCSA) announced an ambitious multi-carrier agreement to get to 100% usage of electronic Bills of Lading (eBL) by 2030.

According to the Civil Code of the People’s Republic of China,_{4 .} transferable documents used in trade finance field mainly include bills of exchange, warehouse warrants, bills of lading, and accounts receivables. The legal status of electronic records and electronic signatures are recognized in China, however, there are no specific laws for electronic transferable documents. Transactions involving such electronic documents are mainly based on government administrative measures, digital platform rules, or contractual arrangements. Let us look at some of the electronic documents used in trade finance practice in China.

I. Electronic Bills of Lading

According to the ICC Digital Standards Initiative (DSI), only 0.1% of all B/Ls issued globally in 2020 were electronic bills of lading and the percentage grew to 1.2% in 2021. The FIT Alliance₅ reported that only 2.1% of bills of lading and waybills used in the container trade were electronic.

E-B/Ls have been used for a dozen years in China in LC and documentary collection transactions subject to ICC eUCP and eURC rules, respectively. However, usage of these electronic instruments is very low. According to an ICC China Trade Finance Digitalization Survey released in September 2023, 11 of 17 banks responding to the survey indicated that they had processed eUCP or eURC transactions, with the state-owned banks and large commercial banks as the major players in electronic presentation transactions. The total number of eUCP LCs issued by these banks was only 684 for a combined amount of USD 3.12 billion from 2021 to the first half of 2022.

Generally speaking, five reasons may contribute to the low use of eUCP LCs and eURC transactions involving e-B/Ls:

1. Imbalance of client concentration.Usage of eB/Ls is minimal and mainly concentrated in commodity transactions with high demand for speedy payments to avoid the fluctuation of commodity prices. In addition, eUCP or eURC transactions are usually large commodity exporter- driven initiatives because these exporters often have bargaining power over their importing partners.

2. Imbalance of interests for the trading parties. In LC or collection transactions subject to ICC e- rules, payments will be made more promptly against electronic documents while the cargo may still be en-route. Therefore, although most exporters would benefit from use of eB/Ls, many importers are unwilling to accept eUCP LCs or eURC collection requests by exporters because they do not wish to make earlier payment than those required in paper transactions. Though some may argue that in paper presentations the issuing bank usually would honor before the arrival of the goods, most importers would still feel they are at a disadvantage because they would have to pay about 3 days quicker under an electronic presentation than under a physical presentation when the LC is available at sight.

The most frequently asked question by importers typically is: “What benefits will I have in eUCP LCs?” This question arises especially when importers and exporters have a good long-standing relationship and do not worry about fake B/Ls in transactions. The imbalance of interests is one of the major obstacles impeding wider use of eUCP LCs or eURC transactions.

3. Imbalance of digital solutions offering. Another factor hampering use of eUCP LC and eURC transactions involving eB/Ls is that the electronic platforms offering capabilities varies in different countries. Many shipping companies do not offer eB/L issuance services although we have seen positive signs that some industry alliances have made commitments to issue eB/Ls in recent years.

As previously mentioned, DCSA’s nine ocean member carriers have committed to accelerating the digitalization of container trade by striving to convert 50% of original B/Ls to digital within five years and achieving the goal of 100% eB/L adoption by 2030. Furthermore, many banks do not have capabilities or experience of offering eUCP LC or eURC transactions in the developing or under- developed countries and regions.

4. Insufficient legal recognition. Legal uncertainty is also a major obstacle in broader use of electronic trade documents, especially electronic transferrable records such as eB/Ls, in China and most countries around the world.

In 2018, the Maritime Code of P.R. China (Revised Draft for Comments) added the term “electronic transport record” to the category of “transport documents”,₆ distinguishing “transferable electronic transport record” from “non-transferable electronic transport record”, and attempting to recognize the equivalent legal status of electronic bills of lading and paper bills of lading. However, the revised draft law has not yet been officially adopted.

5. Inability in complete electronic presentation conversion. Digitalization in trade has never been given as much attention as that it received following the outbreak of COVID-19 due to the interruptions in the transmission of trade documents because of lockdowns in various areas. During the pandemic, the practice of using e-mail to transmit pdf and word documents emerged as an alternative solution under LCs subject to UCP600. The ICC Banking Commission issued its Guidance paper on the impact of COVID-19 on trade finance transactions issued subject to ICC rules. However, such e- mail solution cannot satisfy the requirements of almost all shipping companies which still require original paper B/Ls to deliver goods under most circumstances.

Despite the fact that an LC can be amended to allow electronic presentation, the majority of LCs are not amended either because of timing issues, reluctance of importers, or because original paper B/Ls were already issued. However, there are potential risks in email presentations. In June 2023, the ICC Banking Commission published a Digital Commercialisation Briefing Paper, “Risk of email presentations and file attachments under Documentary Credits subject to UCP 600”, pointing out technical and operational challenges associated with email presentations, such as duplicate delivery, identity and source of data content, and malicious software which can taint attachments. The paper concludes with ICC’s strong recommendation to avoid email presentation of documents under credits.

Because eUCP and eURC are supplements to practice rules, these eRules cannot be automatically applied in LC or documentary collection transactions unless clearly incorporated. Such arrangement may have the benefit of adjusting the eRules more flexibly, but the disadvantages of inflexibility also exist.

II. Other Electronic Transferable Records

Other electronic transferable records in trade finance are mainly used domestically and have developed rapidly in recent years.

1. Electronic transferable debt records. With the rapid development of supply chain finance techniques, some digital SCF platforms in China have created transferable account receivables records which can be transferred from the first tier supplier to subsequent suppliers along the supply chain. The amounts of the transferable account receivables records can also be broken down into several records with different amounts. Such electronic transferable account receivables records are issued and transferred mainly based on the
rules of the digital platform and the agreements of participating parties.

The application of electronic transferable account receivables records is mainly reflected in two fields:

a. Supply chain finance: The establishment of a SCF service platform by factors or anchor parties has become a trend in SCF business. SCF platform participants usually include anchor parties and their affiliated enterprises (accounts receivable debtors), factors, re- factors, and suppliers (accounts receivable creditors). In supply chain finance, especially in payable finance, after the supplier fulfills the underlying transaction contract, the anchor party (the accounts receivable debtor) issues an electronic debt voucher on the supply chain platform that can be settled, split, circulated, financed, or held until maturity on the platform.

The financial solution “deep-tier supply chain finance” (DTSCF)₇ discussed by ADB reflects above practice. ADB considers DTSCF a compelling solution to fill the financing gap for SMEs and a means of penetrating into the deeper tiers of global supply chains by extending financing beyond the top- tier, down the chain to small suppliers in tiers 2, 3, 4, and beyond. The paper discussed the success of established DTSCF models that were first used in the PRC around 2016 when the peer-to-peer lending crisis sparked a strong regulatory push for “inclusive finance”. However, ADB considered that differences in regulations, trade structures, and digital penetration across jurisdictions were scaling challenges for DTSCF models globally.

ADB has also introduced cross-border DTSCF applications similar to PRC’s DTSCF practice, for example, the Irrevocable Payment Undertaking (IPU)₈ issued on banco platform by RABC Group and the Digital Promissory Note (DPN)₉ on KashBanc platform by KashLab. The IPU and DPN are legally binding digital obligations of payment to the holder.

Since 2015, some large anchor parties in China have started issuing electronic account receivables records to suppliers through electronic supply chain finance platforms, such as “Yunxin”₁₀ on the China Enterprise Cloud Chain Co. (CSCC) Finance’s supply chain finance platform. There are currently three types of supply chain finance platforms capable of handling electronic account receivables records in the market, namely, anchor party SCF platforms, banks’ SCF platforms, and third-party SCF platforms.

Due to the lack of legal provisions, there are differing opinions on whether transferable account receivables records should be classified as banker ’s acceptance bills of exchange or commercial acceptance bills of exchange, resulting in confusion in their treatment for accounting purposes.

There are no laws stipulating the legal nature of electronic transferable account receivables records. However, a recent court decision ₁₁ in China ruled that the electronic transferable receivables records “Yunxin” circulation order should not be treated as a bill of exchange, but can only be recognized as a debt voucher because the “Yunxin” circulation order does not contain the necessary information required by the PRC’s Bill of Exchange Law. Therefore, the court considered that the transfer of the “Yunxin” circulation order could only be considered as a transfer of creditor ’s rights. The court denied the plaintiff’s claim that the “Yunxin” circulation order should be subject to the relevant provisions of the Bill of Exchange Law for lacking any legal basis.

In 2023, the Minutes of the National Conference on Financial Judgment Work of Courts (Draft for comments) of the Supreme People’s Court recognized the legal effects of electronic debt vouchers in respect of the notification legal effect₁₂ and the defense rights of the electronic debt vouchers,₁₃ but the Minutes have not yet been officially finalized and released.

Given the various methods of accounting treatment for electronic debt vouchers, the Ministry of Finance and other four departments in China clarified in December 2021 that digital accounts receivable debt vouchers should not be listed as a “notes receivable” item, but should be listed as an “accounts receivable” or “accounts receivable financing” item.

b. Forfaiting secondary market: Another main area in the transfer of assets is in the forfaiting secondary market. In November 2020, the Shanghai Commercial Paper Exchange Corporation launched a cross-border RMB trade financing transfer service platform, providing online transfer services for cross-border trade financing. The first phase of business includes forfaiting.

2. Electronic commercial bills of exchange. Electronic commercial bills of exchange are used in domestic transactions in China and are considered transferable instruments. The practice of electronic commercial bills of exchange is governed by the Electronic Commercial Bill of Exchange Business Management Regulations promulgated by the People’s Bank of China in 2009.

3. Electronic warehouse warrants. In 2006, the Shanghai Futures Exchange first launched an electronic standard warehouse warrant management system which can generate warehouse warrants, delivery and cash transfer, use warehouse warrants as margin, and transfer, pledge, and cancel warehouse warrants. Now major commodity exchanges across China have set up their own electronic warehouse warrant systems that support warehouse warrant transfer transactions according to their own management rules.

III. Electronic Insurance Documents

Insurance policies are not considered transferable documents by law, but in international trade, a party may be afforded the right to claim under an insurance document by endorsement of an entity to whose order or in whose favour claims are payable. In other words, the claiming right may be transferred by endorsement. Therefore, this article also discusses insurance documents.

ISBP 821, formulated in 2023, provides standards for the examination of insurance documents in respect of endorsement as follows:

ISBP 821 (K19) states: “An insurance document is to be in the form required by the credit and, where necessary, be endorsed by the entity to whose order or in whose favour claims
are payable.”
ISBP 821 (K21)b states: “An insurance document is to be issued or endorsed so that the right to receive so that the right to receive payment under it passes upon, or prior to, the release of the documents.”

Currently, electronic insurance documents are widely used in China. However, in LC transactions, as most LCs are subject to UCP600, the beneficiary still must convert electronic insurance documents into paper documents when making presentation.

There are inconsistent regulations on the printing and uniqueness of electronic insurance documents among insurance companies. Two main application issues are as follows:

a. Endorsement: The functions of some insurance companies’ electronic insurance document issuance platforms are incomplete. For example, the transfer of insured claims by endorsement has not been considered.

b. Conversion rules: The conversion rules between electronic insurance documents and paper documents are not clear. Under non-eUCP LCs, companies are required to convert electronic insurance documents into paper documents, but there is no legal regulation for this conversion and different insurance companies have different policies regarding the effectiveness and uniqueness of printed electronic insurance documents. In practice, queries have been raised from time to time regarding the standards for examination of such documents. For instance, ICC Opinion TA.929rev (January 2023) addressed the image signature that forms part of the endorsement of an eB/L after being converted to a paper B/L.

IV. Conclusion

Problems arise when there is no legislation of electronic transferable records, including security risks, low economic efficiency, digital islands, uncertainty in laws regarding the way for electronic transferable records to acquire the equivalent legal effects of “paper” documents, and the singularity, control, and integrity of the electronic record.

A 2022 WTO and World Economic Forum report, Policy Approaches to Harness Trade Digitalization, contends that: “Digitizing transferable documents is an essential step towards trade digitalization, but it is not sufficient. To be used in cross-border trade transactions and transferred across borders, electronic transferable documents need to be recognized as functionally equivalent to paper documents.” The report therefore considers that international standards and guidelines such as UNCITRAL Model Law on Electronic Transferable Records (MLETR) adopted in 2017 to be a useful foundation upon which governments can work towards regulatory convergence. ICC DSI has also noted very positive promotion of digital trade in several countries towards the adoption of MLETR.₁₄

ICC has made a series of eRules and e-compatibility standards and guidelines related to trade and trade finance, covering letters of credit, collections, guarantees, digital trade transaction frameworks, and other instruments. The electronic-related provisions contained within are compatible with MLETR. However, to facilitate e-documents in the trade finance field, significant work needs to be done not only in legislative reforms of various states regarding electronic transferable records, uniform standards for trade and trade finance platforms, regional or bilateral cooperation in digital trade area, but also that international rules be adjusted to accommodate electronic presentations in a more simplistic and economically advantageous way, for example, by integrating the eRule supplements into the UCP or URC rules so as to allow electronic presentations automatically.

* Jun Xu is Director Senior Manager at Bank of China, Jiangsu Branch, China. She is Vice Chair of ICC Banking Commission Steering Committee, member of ICC Banking Commission Guarantee Task Force ,Co-leader of ICC SCF Rules Drafting Team, member of Payment and Infrastructure Committee Cross-border Payment Interoperability and Extension Taskforce of Bank of International Settlement, Chair of ICC China Banking Committee Translation Expert Group, member of Global Supply Chain Finance Forum(GSCFF) and ICC China Banking Committee Forfaiting and Factoring Expert Group, ICC DOCDEX expert, member of Distinguished Expert Committee of Nanjing University Free Trade Zone Comprehensive Research Institute, undergraduate industry professor (part-time) of Nanjing University of Finance & Economics, Off-campus Master ’s Supervisor of Southeast University. She is also a DCW Editorial Advisory Board member.

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