The Bank of China is the leading institution in China for the financing of international trade. China has also established an Export-Import Bank for the promotion of its international trade.

Documentary credits

Chinese banks generally dealing with letters of credit subjected them to UCP 500 with respect to documentary credits. Indications are that the new UCP 600 will be widely accepted in the country as well.
 
In principle, customers requesting the issue of documentary credits are required to have an authorization to carry on an import and export business. Before acceptance of the application, Chinese banks routinely carry out qualification investigations, for example by checking the business licence and import-export licence presented by its customers.
 
The issuing bank has the option of choosing the advising bank, but in practice it accommodates its customers' wishes within the limits of its correspondent policies and agreements. The issuing bank assumes an irrevocable definite undertaking to pay if the stipulated documents are presented and the terms and conditions of the credit are respected. Generally, Chinese banks will only issue transferable credits in favour of designated transferees.
 
Most of the credits issued by Chinese banks are sight negotiable credits subject to presentation of documents to the issuing bank. They may also issue credits with such clauses as "reimbursement claim through telex/swift accepted" or "designated reimbursing bank accepted". In accordance with the UCP, Chinese banks are expected, when examining all documents presented by the beneficiary, to use reasonable care to determine whether on their face they are in compliance with the terms and conditions of the credit and whether they are consistent with one another. If the credit is available at the counters of a designated bank for negotiation, payment, acceptance or deferred payment, the documents should be presented to the designated bank. The issuing bank may request the confirmation of the designated bank.
 
Chinese banks will pay, incur a deferred payment undertaking or accept drafts and pay at the maturity date within seven banking days following the day of receipt of the documents. When there are discrepancies in the documents, a Chinese bank may reject the documents and it must then give notice to such effect to the presenting bank within seven banking days of receipt of the documents. These, of course, will be shortened to five days under UCP 600.

Bill purchases

Bill purchases fall into two categories: bill purchases in the context of letters of credit and bill purchases for collection. Bill purchases in the context of letters of credit are commonly referred to as "negotiation". A negotiating bank in China reviews the following matters:
 
- the political and economic situation of the country where the issuing bank is located;
- the credit status of the issuing bank;
- whether the terms and conditions of the credit comply with international practice;
- who is entitled to the goods; and
- the credit status of the exporter.
 
If the documents are presented on a collection basis, the exporter may make early payment of part or all of the amount of the bill. The main difference between bill purchase for collection and bill purchases in the context of letters of credit is that the former relies on commercial credit whereas the latter relies on banking credit.
 
Collecting banks in China will consider the following matters when evaluating such credit applications:

- the credit status of the exporter;
- the availability of export credit insurance;
- whether the documents will be released against payment or against acceptance;
- the terms of transportation insurance; and
- the options of the collecting bank.

 The risk in bill purchases for collection is higher than that involved in bill purchases in the context of letters of credit. Accordingly, the former yield higher rates of interest. The term of the former is longer than that of the latter.
 
When the collecting bank cannot obtain reimbursement, it is entitled to recourse for the principal of, and interest on, the credit plus other commissions.

Bank guarantees

In international business, Chinese banks usually adopt the Uniform Rules for Demand Guarantees (Publication 458)of the ICC. The most commonly used bank guarantees are bid bonds, performance bonds, repayment guarantees, loan guarantees, overdraft guarantees, deferred payment guarantees and leasing guarantees.
 
In international practice, most bank guarantees are not accessory to the principal contract. The duty of the guarantor to make payment is not conditional on actual default by the principal in the underlying transaction. Such guarantees are called demand guarantees.
 
The measures of control over the provision of guarantees to foreign creditors by organizations within the PRC (Guarantee Measures) promulgated by PBOC, which came into effect on 1 October 1996, govern all guarantees issued by Chinese residents to non-residents. According to the Guarantee Measures, foreign invested financial institutions and the branches of foreign financial institutions are deemed to be non-residents.
 
SAFE is responsible for the approval, administration and registration of guarantees given to foreign creditors by Chinese organizations. According to the Guarantee Measures prior to their issue, all guarantees must be approved by the SAFE. Guarantees issued without the approval of the SAFE are void. However with regard to Chinese banks, only those guarantees involving financing from abroad, such as loan guarantees, overdrawn guarantees, finance leasing guarantees, etc., and deferred payment guarantees with a repayment tenor of more than one year are subject to pre-issuance approval of the SAFE. All other types of guarantees issued by Chinese banks need not be approved by the SAFE before issuance.
 
For financial institutions, the sum of their total outstanding balance of guarantees to foreign creditors and their total foreign exchange liabilities may not exceed 20 times their self-owned foreign exchange funds.  For non-financial enterprise legal persons, the total outstanding balance of guarantees to foreign creditors may not exceed 50 per cent of their net assets, and may not exceed the amount of their foreign exchange income of the previous year.

Factoring

In export factoring, an exporter signs a factoring agreement with a factor whereby all trade receivables are assigned to the factor that assumes the responsibility of collecting payments.
 
On the domestic market, in 1992 the Bank of China (BOC) launched the market for international factoring operations. Chinese factors provide full service factoring and recourse factoring on both the export and the import sides. They also provide invoice discounting.

Forfaiting

Forfaiting involves a medium- to long-term loan to finance exports without recourse to the exporter. The importer signs the contract with the exporter and clearly states "using the facility of forfaiting".
 
In practice, the draft drawn by the exporter must be guaranteed by the importer's bank. The guarantor may put its signature on the bill to guarantee payment at maturity. This is called an "aval". Or it may issue a letter of guarantee of the future payment. The exporter may discount the accepted bills or issued promissory notes of the importer, as guaranteed by its bank, at the counters of approved forfaiting institutions.

Trust receipts

The issuing bank may release the documents to the applicant against a trust receipt signed by the importer. The applicant may take delivery of the goods for processing or sale and repay the principal of, and interest on, the credit to the issuing bank in a certain period of time.
 
The applicant acting as the trustee of the issuing bank
 
- acts as bailee of the goods;
- provides for their storage;
- processes them and stores them; or
- makes arrangements to sell the goods and repay the credit from the proceeds of the sales.

 If the applicant files for bankruptcy, the goods covered by the trust receipt belong to the bank and are excluded from the assets liquidated to pay creditors. The issuing bank may claim payments due from the buyer directly if goods sold were not completely paid.

 The validity of trust receipts does not usually exceed six months.

This article is adapted from the author's book, Business Law in China.

Daniel Arthur Lapres is Avocat à la Cour d'Appel de Paris, Barrister and Solicitor, Nova Scotia, Canada, and Professeur de droit et de finance. His book, Business Law in China (2008 revision), will soon be available from the ICC bookstore (www.iccbooks.com). Mr Lapres' email is daniel@lapres.net

Jin Mo is with Kunlun Law Firm in Beijing.