Wednesday, November 12, 2008

B.C. Exporters to China Say ‘Seller Beware’ (More than two bits)

B.C. Exporters to China Say ‘Seller Beware’(Vancouver Sun – Joanne Lee-Young)

Some Chinese banks cite typos to help clients avoid paying for deals

The deal was signed, the lumber was shipped and received, and the B.C. company had sent off all the usual trade documentation so that it could collect payment from a buyer in China. But the buyer's bank in China refused to release funds because of a single typo. Instead of specifying "anti-surfaced stain," the B.C. company submitted a corresponding page that mistakenly read "anti-surfac stain."

Commentary: This might explain why many companies are demanding cash in advance at this time.

In another case, a B.C. company listed its name, for example, as "ABC Limited" on one sheet, which didn't exactly match the "ABC Ltd." that the Chinese bank had on its copy. Again, no money. In yet another example, a Chinese bank declined to pay, citing that pages in a document were numbered incorrectly, as one page was unmarked.

Commentary: Documentary requirements are being closely monitored for exactly these reasons, typos, incorrect details, descriptions, spellings, etc.

It's no surprise that it is becoming harder to get the so-called "letters of credit" that companies in different countries use to trade with each other via international banks. Markets are tight everywhere.

Commentary: Typically confirmed and irrevocable letters of credit will not impede payments due to small clerical errors which may be easily corrected especially if the two banks are quite familiar and the buyers and sellers are regular customers.

But B.C. companies exporting to China should, in particular, be aware that some banks in China are taking it to another level, nitpicking through already signed-and-sealed contracts and citing minor typos, spelling and punctuation mistakes so that their clients can wriggle away without paying.

Commentary: There can be no loss on an irrevocable and confirmed letter of credit.

"We had a meeting last week and [several trade officers from various banks] shared the same experience – whether from Vancouver, Toronto, New York or Hong Kong – that the Chinese LCs [letters of credit] are beginning to take the worse practices of their past," said Alban Lo, a Vancouver-based trade finance officer. "They are recently re-practicing a bad habit of digging up frivolous discrepancies. By finding these, they have a good pretext not to pay."

Commentary: This is against international chamber of commerce practices.

Observers – the bankers and the B.C. exporters themselves – have some reasonable guesses about why this is happening. For one, the prices of many commodities that are traded from B.C. to China via letters of credit have plunged. "The prices have worked against the Chinese buyers. If they commit to the payment, they are inheriting a loss," said Lo. "If they [don't] pick up the goods and if they can get out of [a contract], they can save a ton of money." This would make the reneging a one-off, commercially-driven decision.

In a worse scenario, a deeper drop-off in demand for these goods could be at play. Indeed, the situation comes as lofty academics, online bloggers and ordinary factory owners and workers alike are all vying to share their two bits about a slowing Chinese economy. How severe a slump? Hard landing versus soft landing? Many views are chicken-and-egg, citing China's place as a reprocessor of the world's commodities, both importing and exporting in vast quantities.

Commentary: Two bits? Am I sharing just two bits? I thought I was sharing well over six figures of bits in actual and opportunities costs for education and more than a dozen years of international contracts experience? Lofty? I think I am down and dirty?

Lo emphasized that "we don't believe that this is the practice of the major banks in China, especially the ones from larger centres like Beijing and Shanghai. We suspect that it is happening out of smaller pockets of China, where banks have more allegiance to their customer than to a head office."

Commentary: The Golden Rule needs to be applied. Do not accept letters of credit from banks of unknown or questionable reputation or a history of such practices. As well as not accepting credit orders from unknown buyers.

Whatever the case, B.C. exporters are also being pressured to make amendments to existing letters of credit. These include extending expiry dates, reducing order sizes and deferring delivery dates.

Commentary: These are reasonable requests and are permissable if in agreement between the buyers and sellers and represent further amendments to agreements on general terms and conditions in the original contract.

Even if they are eager to fire up stalled trade, local companies should not rush out these amendments as they might have before. There are some basic ways to take heed, according to Gary Kwan, a Vancouver-based vice-president at CTC Bank of Canada.

Commentary: Amendments are made on mutual agreement only and the trade relationship is based on mutual agreement.

Get letters of credit from reputable banks: "You are now relying on them to get paid. In China, there are a few banks that are well-established and widely accepted. If you go through a smaller one, insist that a bigger bank confirm the LC," said Kwan.

Commentary: There is no new development in this as this has always been the case.

Do everything you can to make sure documents are completely in order – the simpler, the better. "From the buyer's position, the tougher the conditions, the stronger their position," said Kwan. "On the other hand, for the seller, the more straightforward, the more favourable."Exporters are already getting the message.

Commentary: These have always been the principles of good international contracts as one should never sign anything that is not mutually understood or agreed to.

"You always have to be perfect with LCs in order to be paid. But what you have right now is that you have to be more than perfect because if there is a way for the customer to say, 'I don't want to pick up these documents,' it could be as minor as centre spelled as center, e-r not r-e," said Ken Grenier, co-owner of New Westminster North Rim Pulp and Paper, a year-old business that trades pulp.

Commentary: In that case find new customers.

Tracey Orr, who heads a Vancouver-based trade finance department at a major bank, put it this way: "What is old is new again. Letters of credit have officially been around for 70 years, with a uniform rulebook that is published out of Paris by the International Chamber of Commerce. There are revisions every 10 years, and it was last revised in July 2007.

"This cleared up a lot of the frivolous discrepancies, and we haven't seen many issues under these revised rules. Now [with tightened credit], what we are seeing is that you have got to pay attention to the rule book. Common sense. Dot your i's. Cross your t's. It doesn't matter what country you are in in the world, we are back to basics of international trade finance."

Commentary: Spelling counts!

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