Hot competition amongst banks for some very high value Australian exports is leading to cut price letter of credit (L/C) confirmations for some Chinese trades. But several trade financiers continue to express concerns over transactions involving Chinese financial institutions.

Bankers are attributing marked price cuts for Chinese trade risks not just to specific trades and generally improved trading conditions, but also to tighter controls across the Chinese banking system. Documentary discrepancies in L/C transactions are not as frequent as they were in the run up to the Asian crisis, regulation of the banking sector is stricter and payment delays are shorter. This has improved perception of and therefore reduced pricing of Chinese risk.

Australian exports to China

One of Australia's leading trading banks is reported to have said it is aware of "particularly low prices for the major Chinese banks" competing for business for Australian exports. In less than a year, pricing on Chinese trade paper has reduced from 1.5 per cent to just 1 per cent.

A particular impetus behind competitive pricing for Australian exports is that most of these are sales to China of metals and minerals by leading blue chip miners such as BHP and WMC. These mega transactions attract the interest of bankers worldwide, not just those in Australia, thereby driving competition for business up and risk pricing down.

Australian bankers are reportedly willing to assume risk on paper up to 180 days from China's top five banks and around half a dozen second tier institutions.

Financial sector security

Old fears remain in some quarters about the credibility of China's financial institutions, still in the shadow cast by Guangdong International Trust & Investment Corp., which filed for bankruptcy in January 1999 with US$4.7 billion of debt (see past DC-PRO Focus articles on this fraud.)

More specific fears concerning L/C business are sustained by the ongoing Guangnan corruption saga, in which one of the latest instalments featured the flight of a deputy general manager of Guangnan subsidiary Asian Honour International. She failed to show up at a Hong Kong court after officers from the Independent Commission Against Corruption raided her apartment earlier this year.

Tang is one of six people charged with conspiracy to defraud banks and others through fictitious transactions with the mainland Chinese holding company, Guangnan, and its subsidiaries. The US$260 million frauds involved the use of bogus documents to apply for and use L/Cs from 23 banks.

Efforts to contain fraud

In a separate case, Hong Kong's fraudbusters, the Independent Commission Against Corruption (ICAC), issued arrest warrants in January for a Chinese city official and his son. They failed to appear in court on charges related to an alleged multi-million-dollar credit fraud.

The official, Li Runquan, and his son Lai Yu-hong were charged last year with five counts of conspiracy to defraud. The charges relate to alleged attempts to defraud the Bank of China, the Bank of Communications and the Kwangtung Provincial Bank between May 1997 and October 1998 using L/Cs to the value of about US$14 million. The pair are said to have used false documents to apply for a total of 27 letters of credit from the banks.

The views in this article are those of the author and not necessarily those of ICC or the other partners in DC-PRO.