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Devalued and Risky: Should You Proactively Finance Chinese Suppliers?

The level of nuanced arguments surrounding China’s dual-move to a more freely floating currency, combined with an immediate devaluation – close to 5% at the time of writing this piece – has reached a fever pitch in international business circles. Aside from my own views about China’s general behavior from a business context, I personally believe it’s an ingenious move of desperation that would have been difficult to predict ahead of time.

From a sourcing perspective in terms of negotiation with suppliers over price decreases, we recently shared some advice for our subscribers on Spend Matters in a research brief, What a Devalued Chinese RMB Means For China Sourcing Strategies. But speaking more broadly than negotiating price decreases as a result of the devaluation, there is the broader question of supply risk with Chinese vendors – and the level of action companies should take to protect their supply chains through active trade financing programs.

Is the Letter of Credit Waning?

e-invoicing

Where is the letter of credit today? Different sources of data suggest that trading activities involving the letter of credit are alive and well, despite a trend to open account trade. But others suggest both anecdotally and from third-party research that the L/C is on the wane. There’s probably some truth to both sides of the argument, depending on how one defines the question. For example, are we counting absolute number of transactions, overall volume, new buyers or sellers, different or specific geographies or something else? Still, a Barclays banker makes a great case in this TFX News article that L/C use is declining as non-recourse receivables finance growth accelerates. As he observes with open account trade, there has been a “dramatic shift from traditional trade instruments, such as import L/Cs, advanced payments or collections to open account terms with counterparties in recent years with close to 90% of all global trade transactions now being on an open account basis.”