China Causing Banks Trade Finance Shops Nightmares


As commodity prices increase in volatility, banks are getting much more involved in technical cases where buyers in China using Letters of Credit use the discrepancy management process to get out of paying for goods or ask for price reductions because an “i” wasn’t dotted or a “T” wasn’t crossed.  This is putting a lot of pressure on trade operations and the compliance checkers that are responsible for looking at various exporter documents (eg. packing lists, inspection certificates, insurance documents, etc.) to make sure they comply with the original letter of credit issued.

With the IHS Materials Price Index, which tracks commodities (including energy), down about 55% since July 2014, more banks tell me Chinese buyers and their banks are playing tricks by stonewalling documentation and finding ways to delay taking shipment and requesting price reductions.

For banks that claim they have low to zero losses in trade finance (see my posts here and here), the reality is that legal fees can be very high in these cases.  Banks are spending thousands on attorney fees to get recovery on these deals.  Ironically, in many banks, non trade finance executives tend not to understand the risks involved.   Bank trade operations are now conditioned to have zero principal losses at the expense of incurring large legal bills.

The principle appears to be if I write this off, I am not going to let you do any more business with one banker telling me “This is supposed to be secure and safe, it’s trade after all.”

Yes its trade, but with banks, in this day of RFID, GPS, blockchain, etc. the fundamental fact remains - Banks check documents – Not Goods.

The challenge with China is the inevitable tie of politics and economy.

The irony in all of this is that Letter of credit discrepancy management is now front and center, despite all this move to digitization of documents through networks like Bolero or the SWIFT’s Bank Payment Obligation.

This should remind all of us – while various supplier networks can support a broad range of document types, combined with capable matching engines , the reality is cross border trade does have risk and trade between two parties is private and games will be played in the name of survival, especially in emerging markets as commodity prices continue to tumble.

Don't forget to sign up for TFMs weekly digest delivered to your inbox every Monday here

And get your company listed in the Alternative Business Finance Almanac by signing up for a FREE Almanac listing today.

Related Articles

Discuss this:

Your email address will not be published. Required fields are marked *