Risks and Documentary Credits in China's International Metals Trade

China's international trade in ferrous and non-ferrous metals products is not risk free. Of course, international trade is never entirely risk free, and practitioners are naturally concerned to adopt measures to mitigate risks. In practice, Documentary credits (otherwise known as letters of credit, or "LCs") are one of the standard instruments employed. It is well known that LCs are not "fail-safe", but foreign steel traders selling product to China have been saddled with a greater degree of risk than would "normally" be the case. Whilst there is no conclusive statistical evidence to prove that the number of contract disputes is higher for trade with China than for trade with other Asian countries, anecdotal evidence suggests that for the metals trade such may indeed be the case, at least for the 1993 to mid-1996 period. This paper investigates risk issues primarily from the perspective of the foreign exporter to China (although the position of foreigners importing from China is also examined), concentrating on credit and transfer risks. Systemic reasons affecting the contract performance of Chinese partners include the partially reformed nature of China's banking, trade and foreign exchange regimes.