Explainer | How are letters of credit helping Chinese exporters pivot to home market amid trade war?
Domestic L/Cs help companies ensure payment security and enhance credit, providing an answer to concerns about delays and defaults
After the United States imposed so-called reciprocal tariffs on imports from China in April, Beijing took steps to help Chinese exporters sell their products domestically.
In addition to the staging of product promotion events across the country and the offering of fiscal and financial incentives, Beijing also encouraged the increased use of letters of credit (L/Cs) to help such businesses switch focus to the domestic market.
What is a domestic letter of credit?
A letter of credit, also known as a documentary credit in the US, is widely used in international trade. It is a financial tool, presented in document form, that serves as a guarantee to the seller that the agreed amount of money, services or goods will be paid by the buyer in time.
The domestic version has similar functions, helping to ensure payment security and enhance credit, both major concerns for many Chinese firms.
The payment period for domestic L/Cs, which can be issued by major Chinese banks, is generally one year.
While international L/Cs can only be used in transactions involving physical goods, domestic ones can also be used in the trade in services.