China's exporters appear reluctant to use letters of credit (L/Cs) or employ credit control strategies as they seek to conquer new and wider markets worldwide.

This is apparently resulting in bad export debts growing at an alarming rate, while exporters' reluctance to use L/Cs may be due to banks' charges.

Growing export debt

An official report quoted by the weekly China Business Post says mainland China's exporters may be owed up to US$100 billion by clients. This sum is equivalent to around 20 per cent of China's projected 2004 export earnings.

The debt is also growing, at a rate of US$15 billion annually, the report added.

Ministry research

According to a researcher at the Ministry of Commerce, Chai Haitao, the problem is partly due to so many exporters having no systematic debt-collection procedures. This means they deal with bad debts on an ad hoc basis.

The ministry's research found that just 11 per cent of exporters had credit-control systems and of these, 93 per cent were multinationals or companies with foreign investments.

No control

That means that virtually no domestic companies employ a credit control system, neither do they have strategies for collecting bad debts.

Compounding this situation, China's laws do not allow for a debt collection industry. Only local lawyers working with foreign counterparts can collect debts.

Trade financing

The China Business Post report suggests that one cause of China's growing export trade debt is down to exporters' choice of trade financing instrument. It says eighty per cent of China's international trade is transacted on a delivery on acceptance basis.

Just 20 per cent of business is transacted on an L/C basis according to the weekly, which reports that exporters may be shying away from L/Cs because banks levy a 5 per cent handling fee on these transactions.

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