The way Chinese banks handle letters of credit (L/Cs) is causing concern in the US and India.

Concerns heard from the US say Chinese banks do not allow US banks to confirm L/Cs while Indian concerns centre on a lack of transparency in China's banks.

Unexpected bankruptcy

India and China are currently hammering out a Comprehensive Economic Cooperation Agreement that could open the doors for Chinese banks to set up branches in India.

But according to negotiators in this process, Indian banks are reluctant to accept L/Cs issued by their Chinese counterparts because information about bank resources and reserves is not made available. Thus, there is potential for Chinese banks to go bankrupt and fail to pay on L/Cs without warning.

No confirmation

A US-based banker meanwhile is concerned about L/C confirmation arrangements with China.

"For US exporters, the commercial/trade L/C is a good payment option, but the Chinese banking system has internal problems, and exporters risk not getting paid if the Chinese bank that issued the L/C closes due to a financial failure," says Graham Martin, AmSouth International Sales Specialist.

Commitment to negotiate

Martin goes on to say that typically exporters will ask a local bank to confirm an L/C if they are worried about an overseas bank defaulting, but "unfortunately, Chinese banks don't permit US banks to confirm their L/Cs."

He does however add that AmSouth, a 670 branch regional bank in the southeast US, can issue a commitment to negotiate that Martin says provides exporters the same protection as a standard confirmation.

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