Chinese firms are using bank guarantees and letters of credit (L/Cs) to obtain credit for their subsidiaries from overseas banks.

They are doing this because of a credit shortage at banks on mainland China.

Credit shortage

Firms on the Chinese mainland have been able to obtain overseas loans by applying to a domestic bank for a bank guarantee or a standby L/C for their overseas subsidiaries, which can then obtain credit from overseas banks.

Now it appears that banks on the mainland are running up to or have reached their quotas for writing such business.

Hong Kong

This, in turn, has apparently prompted some of this business to move to banks in Hong Kong.

Bankers there say that firms on mainland China find this an attractive proposition because of the domestic credit shortage, higher interest rates on the mainland and an appreciating renminbi.

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