This is a guest post from Renaud Anjoran. Renaud runs a product quality inspection business in Shenzhen and he also writes the truly excellent and perennially helpful Quality Inspection Tips. My firm has worked with Renaud on a number of China product matters and we have consistently found him to be highly knowledgeable about China product sourcing. This post arose from a long email “conversation” between co-blogger Steve Dickinson and Renaud, which ended as so many of those do: with me suggesting that it be turned into a blog post.

So here’s the blog post, written by Renaud Anjoran.


Most transactions with Chinese suppliers are done through bank transfers. This payment method was described in a previous China Law Blog post, China Manufacturing Payment Terms. Limit Your Risks.

Many importers/foreign manufacturers are not familiar with Letters of Credit (LC) as an alternative to bank transfers. Letters of Credit were designed to protect both product buyers and product supplier in international trade. In practice, they are usually more favorable to the buyer.

How a letter of credit protects the buyer

An importer that pays by LC does not have to wire a deposit before production and it usually has the option to cancel the payment in the following cases:

  • If a supplier does not ship at the right time.  Typically if this happens, the LC simply expires, but the buyer still has the choice to pay if it wants the goods.
  • If a supplier does not honor the product specification or if there are too many defects. One of the conditions of the LC should be that the LC will not be paid on unless and until the product buyer has signed off on product quality or a specified third party QC agency has issued its certificate of inspection.
  • If the seller fails to provide any document listed as required in the LC or the documents do not fully conform to the LC’s requirements.

Why letters of credit can be cancelled by the buyer in most cases

Even something as small as a typo in the LC, or the fact that a quantity is written in dozens rather than in pieces in the invoice is usually enough to cause a discrepancy in the LC, which in turn allows the buyer to cancel payment.

In practice, a small minority of LCs are “clean,” i.e., without any discrepancy. In all other cases, the buyer has the option to refuse payment and cancel the transaction, even if the goods are already on a boat (in which case the buyer will not get the documents to get the products out of custom).

CLB Note:  We are aware of a Seattle buyer company that refused goods that had already arrived in Seattle because the street address (which was irrelevant) of one of the parties in the letter of credit was off by a single letter.

Tips for negotiating payment by letter of credit

For the reasons mentioned above, Chinese suppliers typically refuse to accept Letters of Credit. Here is how you can increase your chances of finding a Chinese company that accepts this payment method:

  • When sourcing your product, try to identify as many potential suppliers as possible. This will at least increase your chances of finding one that will accept an LC.
  • In your first conversation with your potential suppliers, mention that you always pay by LC on your first order. Try to get the supplier to accept this payment method in writing
  • Sell your project to your potential suppliers. Good manufacturers are inundated with customer inquiries, so you need to make yourself stand out. Explain why they should work with you. Call the Chinese company’s sales manager if necessary
  • Send your potential Chinese manufacturer a draft of the LC before opening it. You will usually need the commercial invoice, the packing list, the certificate of origin and/or GSM form A, the bill of lading, and an inspection certificate. Try to avoid putting “soft terms” into your Letter of Credit that will make it even more difficult for suppliers to collect payment.
  • If possible, use a major international bank. This will tend to reassure your suppliers.
  • Unfortunately, bank fees are much higher for an LC than they are for a bank wire, so an LC only makes sense for transactions of at least USD$30,000.
  • Chinese exporters are good at guessing whether a project is likely to become a source of long-term business. When they see what they think will be a a one-shot deal, they generally insist on getting a deposit and will not agree to an LC payment arrangement.

In summary, Letter of Credit are a payment tool that makes it unnecessary to transfer a 30% (or more) deposit to your Chinese manufacturer. They are usually more favorable to the buyer’s side, and for that reason, many Chinese companies refuse to accept them. But some Chinese product suppliers have been paid via Letters of Credit from some of their foreign customers for years, and sometimes Chinese manufacturers will accept your Letter of Credit if they really want your orders.


What do you think?

Many months ago, a friend of mine at Samsara Biopharma Consulting told me of a matter his company had taken on to try to help a company that appeared to have been scammed by a Chinese chemical seller. I frequently hear of such scams in the chemical industry so I asked my friend if he would write a post for us on this matter once it was concluded. The below is the first part of that post, written by Jennie Shi, Felix Zhang, Wendy Zheng and Robert Walsh of Samsara:

About 2 years ago we were asked by a friend of a friend to source some specialty chemicals for his US-based inks company.  As a courtesy, and because we were in the middle of a similar exercise for another client, we went ahead and added the request to the list of what we were already working on.

After a few weeks we found sources of what the inks company was looking for, and went a few steps further to vet the suppliers and get lowest reference prices.  When we passed these to the inks company, they pointed out that the prices were not that much lower than the suppliers they were currently using, and decided to pass on the offers.

A year passes, and we get a call from this same company, this time asking for help in untangling a mess they’ve waded into with a new set of Chinese suppliers.

It seems that the inks company had responded to an unsolicited offer from a pair of Hebei chemical companies, who’d contacted them through Alibaba.  The prices offered for the same subset of chemicals we’d previously sourced for them were significantly lower, say, by 30% or more.  The inks company requested and received samples from the Hebei companies. Needless to say, these samples were right on spec.

Subsequently, the US inks company places a sizable order with the two Hebei companies, and the terms demanded are payment by 100% irrevocable LC at sight, which the US company agrees to.

A few months later, a number of containers are delivered to the US inks company’s facility, and upon opening are found to contain 44 tons of some mysterious white powder (not what they ordered) and blue plastic barrels of water.  The US company initially contacts the Hebei companies to demand an explanation and repayment, but after a few email exchanges, the Hebei companies stop responding.

At about this time, the US inks company remembers our company, and calls us for help.  We don’t do this sort of thing, but then we are regularly asked to do stuff nobody else has any idea how to do.  We agree to help the US inks company track down the Hebei companies and attempt to get some resolution.

The inks company sent us all related documents, as well as email correspondence dating back to their first contact with the two Hebei companies.  A number of things stood out right away:

  • The seals/chops used by both companies were quite similar, and also in no way conformed to the legal convention for such instruments in China, so it was unlikely that either company was actually  registered.
  • The personalities at the Hebei companies seemed to change frequently, with everybody using weird foreign first names.
  • The companies’ websites were registered to a person who had also registered a number of other chemical company websites.
  • As for the shipping documents, we could see no indication that what was shipped had left China having gone through commodities inspection.  The classes of materials shipped should have gone through this procedure.
  • The inks company’s set of pictures taken after opening up the shipping containers revealed that none of the barrels or bags had been properly marked with product descriptions, which is another curious thing pointing to a lack of outbound customs inspection.

We initially tried contacting both Hebei companies, and at first had some success, but after a few days, all signs were that thei mobile and fax lines had been disconnected.  Elvis had left the building.

Eventually we decided to send people to Hebei to look into things.

We Visit AIC

Our first stop was the local office of the Administration for Industry & Commerce (AIC), to check on the validity and standing of the two companies’ registrations. The report from our AIC visit noted the following:

From Company #1’s registration information, we concluded the following:

  1. Company #1  is a small company established in year 2009.
  2. Company #1’s’s scope of business is limited to trade. They don’t have any manufacturing facilities, contrary to what is shown on their website.
  3. Company #1’s’s registration address is a small apartment in a residential community. The address on their website eliminates the room number and building number so as to make them appear to be a big company.
  4. If you look carefully at the picture of Company #1’s’s entrance on its website, you will see that they added the company name to the picture by Photoshop. “

From Company 2’s registration information, we concluded the following:

  1. Company #2 is a small company established in 2010 not 1994 as stated on its website
  2. Company #2’s scope of business is limited to trade. Company #2 doesn’t have any manufacturing facilities, contrary to what they show on their website.
  3. Company #2’s registration address is a small apartment in a residential community. Their website eliminates the room number and building number so as to look like a big company. fact easily.

So both Company #1 and Company #2 are real companies and their business statuses in Administration for Industry & Commerce’s records are normal. But their behavior is well-planned scammer’s behavior….”

We Visit Company Premises

We noted that the addresses on the websites and in the correspondence for both companies were different from their registered addresses.  We went to all four places to make sure we weren’t missing something.

In the case of Company #1, the address listed on the website turned out to be the staff activities center for a well-known power company, replete with all sorts of sports facilities.  The registered address was in a middle-class apartment complex. The actual apartment had no company sign and it did not appear to be occupied during business hours.

As for Company #2, the address listed on the website was in a decidedly down-market set of apartments Again, no sign on the door, but there was a lattice window through which we saw nothing but a table, some chairs, and a whiteboard.  No activity during normal business hours was noted.

We Visit the Commodities Inspection Bureau

We next visited the Chemical and Mineral Department of the local Commodities Inspection Bureau (CIB) where we were met with a genuinely warm and interested reception by the officers of this bureau.  What we found from this visit was the following:

  • Neither company submitted required samples for CIB inspection.
  • Neither company was even registered with the CIB as an exporter of the materials in question.
  • The CIB officers told us that the companies probably deliberately mislabeled the material to duck proper inspection.
  • The officers flatly rejected the idea that any Chinese company could manufacture or sell such material at the quoted price since the only qualified manufacturer of the material in China of which the officers were aware sold the same product at more than 30 percent more.

We Visit the Bank of China, Hebei Branch

The bank would not give us any information regarding either companys’ accounts without being under the orders of the police or the court to do so.

We Visit the Police

We next met with the Municipal PSB, who while sympathetic, referred us to the individual district-level PSB stations with jurisdiction over the two Chinese companies. With respect to Company #1, we met with an informative and helpful officer who immediately recognized the case for the commercial fraud that it is.  Interestingly enough, he had handled a number of similar cases, some for the very same chemicals involved in this one.  He provided us with a list of materials he’d need to initiate a case against Company #1 and to take action. He said we would need the following:

  • An authorization letter and copy of an ID card or passport of the authorized person
  • Purchase contract. In this case, that would be the Proforma Invoice
  • Documentary evidence proving that Company #1 recieved payment for the goods
  • The Bill of lading
  • The inspection report
  • Documentary evidence proving that the Inspection report is for the production sample of Company #1
  • Pictures of received material

We must translate all of the above documents into Chinese stamp them with the inks company’s company seal on every page. Notarization is not required.

The officer representing the PSB station in Company #2’s district gave us similar guidance.  As luck would have it, he had just cracked a similar case in which an Indian company was defrauded.  In this instance, the Indian CEO and an interpreter came personally to present facts and evidence.

In Part II of this series, Anatomy Of A China Scam. Part II. Conclusion And Advice, Samsara will discuss what ended up happening on this particular case, analyze how the inks company could have better handled this particular case, and give recommendations on how to prevent this sort of thing from happening to you.