Recent data from global payments network Swift showed that the Chinese renminbi (RMB) has overtaken the Japanese yen to become the third biggest currency in the global issuance of letters of credit (L/Cs) by value.

Several trade finance related reasons have been put forward to explain the growth of such L/Cs (DC World News, 15 June 2012), but some bankers are proposing an alternative and rather curious explanation.

Capital controls

They suggest that Chinese companies are using RMB-denominated L/Cs to arbitrage onshore and offshore financial markets.

In other words, L/Cs denominated in RMB are being used to bypass China's strict controls over the movement of capital by Chinese companies looking to borrow at cheaper rates than they can on mainland China.

Analysts suggest that the RMB is only the sixteenth most used currency in international payments overall, which they say is at odds with it being the third most used L/C currency.

Old tricks

There is nothing new in the use of L/Cs to obtain cheaper credit than is available from Chinese banks.

Copper imports appear to have been used to obtain L/Cs for the real purpose of bypassing China's strict lending conditions (DC World News, 15 July 2008).

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