A leading banker in Asia has warned about the role played by letters of credit (L/Cs) in increasing the size of China's growing debt mountain.

Head of Asia banks research in Hong Kong at UBS, Stephen Andrews, also says the world's second-largest economy is exposed to currency shifts and interest rate volatility due to expanding international trade and easing foreign-exchange regulations.

L/C borrowings

China has an estimated US$1 trillion of unsecured debts and according to Andrews, L/Cs are an essential cog in the mechanism for obtaining such debts.

He says that mainland Chinese companies take L/Cs to obtain a low-interest US dollar loan from a Hong Kong bank, which treat the credits like no-risk instruments fully backed by a guarantor.

Risky investments

Andrews says the borrowers then transfer the US dollars back to the mainland, where they use them as collateral to obtain yet more L/Cs, thus increasing their debt burden still further.

The borrowed money is then used to invest in China's high-yield and often risky trust products or in the booming stock market according to Andrews.

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