Last month the International Chamber of Commerce's (ICC's) anti-crime arm reported that Chinese banks are using technicalities to dishonour documentary credits on behalf of clients who are unable or unwilling to pay for imports.

The current spate of rejections of valid documents may be mainly limited to transactions involving steel, but the practice that apparently involves around US$100 million of letters of credits (L/Cs) is an unwelcome reminder of practices that many observers thought were being quashed.

Bad old times

A Melbourne banker cites an example of the kind of practice that bankers hoped was fading into history. "We had a set of documents rejected four years ago because the word 'suite' in the address had been typed as 'suit'," said the banker, who asked not to be named.

But the International Maritime Bureau (IMB) says it is finding "a growing number of banks are unnecessarily rejecting valid banking documents, hindering the import of steel to the country." This is resulting in losses are primarily with respect to L/Cs payable at sight or deferred for a maximum of 90 days.

Disregarding rules

"A rash of Chinese banks appear to be disregarding the ICC's universally accepted rules on L/Cs, known as the UCP 500," according to IMB Director Captain Pottengal Mukundan.

He maintains banks have no grounds for rejecting documents. "Banks confirming these reports indicate that the grounds for rejecting the documents are simply not justified under the UCP 500," Captain Mukundan said in an ICC statement.

Causes and effects

The development coincides with the recent drop in the steel market, where prices have slumped by 15-20 per cent in recent months, and has had similar impacts to those witnessed several years ago when the Chinese soya bean market collapsed.

One banker suggests banks competing for L/C business by asking for low levels of collateral from importers to cover a contract are to blame. "When a client warns a bank it will not be able to meet its commitment, the bank faces losses of up to 70 per cent of the contract value. The bank has no way to enforce payment...that's when they start looking for discrepancies," he says.

Limited impact

The practices reported by the IMB are apparently also affecting exports of wool and other commodities to China but according to one London banker, the steel industry's problem is not apparent in other metals sales to China.

"We last heard of these problems in 1998, with copper," said the banker whose bank now writes much aluminium and copper but very little steel business. He maintains that by and large "the problems disappeared" when China joined the ICC.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.