The Legal Perspective of Using a Letter of Credit in China

Chinese exports have been increasing constantly and this country exports goods worldwide. The EU and the United States of America are the major importers of Chinese goods from Chinese suppliers and manufacturers. Most of the foreign businesses use bank transfer to pay their Chinese suppliers. Surprisingly, using a letter of credit is becoming a preferred mode of transaction with Chinese suppliers.

A letter of credit, or “credit letter” is a letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. A letter of credit is issued against a pledge of securities or cash. Banks typically collect a fee, ie, a percentage of the size/amount of the letter of credit. Banks act as “disinterested” third parties (they don’t take anybody’s side), and they release funds only after certain conditions are met.

China, as a member of the International Chamber of Commerce since 1995, is subject to the Unified Customs and Practice (UCP) 600 code that governs letters of credit. “Although China has not yet enacted any LC law, over the past 20 years, the Supreme People’s Court has promulgated a series of judicial interpretations, provisions and meeting minutes that combine to form the legal authority on LCs in China,” said Li Jian, general counsel of the Export-Import Bank of China.

Types of Letter of Credit

  • Export/Import Letter of Credit
  • Revocable Letter of Credit
  • Irrevocable Letter of Credit
  • Confirmed Letter of Credit
  • Sight Credit and Usance Credit
  • Back to Back Letter of Credit
  • Sight Letter of Credit
  • Deferred Payment Letter of Credit
  • Direct Pay Letter of Credit
  • Transferable Letter of Credit
  • Standby Letter of Credit
  • Direct Pay Letter of Credit

2 Key Advantages of using Letter of Credit

Using LC for China trading is safe– For importers, an L/C removes the risk of making an upfront deposit payment, before production, while the supplier can be sure that they will indeed receive the money when the batch is completed.

Renowned Chinese & foreign banks offer LC facilities

Most Chinese commercial banks, e.g., Bank of China, China Construction Bank, Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of Communications, China Merchants Bank, and CITIC Bank, have the authority to issue letters of credit (L/C) for both imports and exports. Foreign banks with the branch or representative offices in China can also issue letters of credit.

Final Thoughts

A Letter of Credit is relevant where there is an exporter and an importer; and there needs to be prepayment or a confirmation of payment in order for goods to be shipped. Letters of credit are becoming hugely popular in China sourcing and international trade.

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