China Crisis Watch (5)

via WikipediaLet's today ask you a question, in stead of trying to find answers. The question is: what is happening to the letters of credit (l/c's)? The question has been asked before, but it is worthwhile to give the question some more prominence.
When governments all over the world started to pump hundreds of billions into a collapsing financial system, Joe the Plumber - as Mr. and Mrs. Average seem to be called today - were wondering what was actually happening. What were all these banks doing and why were so many transactions between banks happening? For people in the trade industry that is a no-brainer: the letters of credit or l/c's are a major source of activity and revenue. Some people have been writing to me, complaining the costs for l/c went up to USD 1,000 over the past few months, making the tool rather hard to use for smaller companies.
When you need a container of teddy bears from China, in most cases you need a letter of credit. That is the payment for your order in China that is being stalled with a trusted bank, to guarantee the order is paid when the container arrives in good order. So, you do not pay directly to your supplier, but use this tool that give a guarantee to both the buyer and the seller.
When no l/c's are created anymore, or against too high costs, trade is coming to a stand-still. One of the purpuses of refinancing banks by their different national governments is not only to keep mortages going, but also to keep the l/c's going.
I did get some indirect signals that things are not well, but the trade industry has kept rather silent, maybe also because they were afraid to open a box of Pandorra, making the problems even bigger than they are. But now massive government subsidies are getting the place it is an obvious question: have there been problems with l/c's? And are they now being solved with all this government support?

Links
China Law Blog: Business Bankruptcy In China. The Five Fold Path
Reuters: GE private equity arm holding off on new China buy
Forbes: How Slow Can China Go?Amy Sommers
by Fons1 via Flickr
The Economist: China may weather a global downturn
China Daily: Exporters come to terms with global slowdown
China Briefing: CIC denies major losses in the U.S.
Economic Observer: Santa Claus' China Operation Not So Jolly
The Guardian: The crisis crosses the Pacific: Rio Tinto warns of Chinese economy's 'pause for breath'
The Independent: Markets feel the chill from China

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