Earlier this year it emerged that duplicate storage certificates used by a minerals trader at the port ofQingdao made Chinese banks reluctant to provide letters of credit (L/Cs) for commodities traders (DC World News, 2 July 2014 and 9 July 2014).

After an extensive investigation, it has now emerged that China has identified almost US$10 billion offalsifiedtradetransactions, causing banks to remain cautious when it comes to writing L/C business.

SAFE findings

The investigation found that "many companies forge, alter, and reuse trade documents to create artificial transactions to turn trade into a speculative arbitrage tool," according to a deputy head of foreign exchange management and inspection at China's State Administration of Foreign Exchange (SAFE), Wu Ruilin.

Speaking at a press conference, he said that the administration had found, throughout the country, nearly US$10 billion of such frauds, including those at Qingdao Port fraud. SAFE has referred 15 cases to the police.

Crackdown

China has been cracking down on falsified export invoices that essentially mask cross-border capital flows since April 2013 after some traders were found forging trade transactions to bypass China's strict capital controls or obtain relatively cheap credit.

Some banks failed in their obligations to verify trade documents, which according to the SAFE official, "helped aggravate fraudulent behaviour."

L/C impact

The crackdown has had an impact on L/C availability according to one metals analyst who told local media that, "compared with the total trade volume, US$10 billion in falsified trade transactions is not a large sum."

"But the Qingdao case has definitely prompted banks to tighten their control on trade financing and issuance of L/Cs," he added.

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