Hong Kong investors have called on China to accept letters of credit (L/Cs) in lieu of cash deposits under Beijing's new trade policy.

The new policy says that manufacturers of the cheap goods that have helped China's rapid economic growth over recent years must now pay big cash deposits on the raw materials they import.

Negative impact

Hong Kong investors have stakes in nearly half of China's manufacturing companies, and the new policy is likely to have a negative impact on their investments.

Companies that import nearly two thousand types of raw materials such as plastics, metals and textiles that are used to make cheaper goods will have to pay at least a 50 per cent deposit on their import taxes under the new regulations.

Cash flow strains

Some companies backed by investors based in the former British colony will not be able pay the cash deposit required by the new policy, according to Jeffrey Lam, a Hong Kong legislative council member representing the General Chamber of Commerce.

A cash deposit would "tie up two, three months of extra cash flow... it will become an extra burden," he said.

L/C lobby

Lam says he also hopes the Chinese authorities will relax the new rules, perhaps until the end of the year when the peak selling-season ends.

Lam says he is lobbying the Chinese government to delay imposing the new rule and to allow companies to use bank guarantees or L/Cs rather than cash deposits.

Higher value

The new restrictions aim to discourage investment in labour-intensive manufacturing companies that produce cheap goods for export.

The authorities say the restrictions will improve tensions between China and other countries over its trading policies, encourage Chinese factories to make higher value products and stimulate investment in some of China's poorer regions.

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