Money

Banks see 'controllable risk' in letters of guarantee in Libya

By Wang Xiaotian (China Daily)
Updated: 2011-04-07 11:16

BEIJING - Two Chinese banks that received applications for extending letters of guarantee from two Libyan banks said no "actual loss" has occurred from related business and the potential risks are controllable, and analysts say more banks might become involved if local tensions don't ease soon.

The business of China Construction Bank Corp (CCB) in Libya is on a limited scale and currently there is no related "actual loss", the world's second-largest bank by market capitalization said in a statement on its website on Wednesday.

Its business in Libya concerns mainly advance payments for contracted projects and guarantees, it said.

"Before accepting letters-of-guarantee business, we assess the customer's qualifications and business risk very carefully, and have already taken relevant risk-mitigation measures to counter losses," according to the statement.

The CCB has received an application from a Libyan bank to extend a letter of guarantee, it said, adding that the lender sees no "actual loss" from business related to it, and risks are within control.

Zhao Rong, a spokeswoman for the Bank of China (BOC), was quoted by Xinhua News Agency on Monday as saying that the lender has been very concerned about the potential risks brought by the recent situation in Libya, and the BOC has already taken necessary precautions to protect against risks.

"Currently there is no related actual loss, and risks are controllable," she said. The BOC has received an application for extending letters of guarantee from two Libyan banks.

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According to a statement the Ministry of Commerce on April 2, Libya's Sahara Bank and Gumhouria Bank submitted applications to three Chinese lenders for 11 letters of guarantee involving nearly $500 million.

Applications were submitted for six letters of guarantee from the Export-Import Bank of China, involving $225 million, four from the BOC, involving $230 million, and one from the CCB, involving $31.85 million.

The 11 letters concerned eight projects of seven Chinese companies. Most of the letters would mature in April, May, July, or August.

The ministry said that it will work with the State-owned Assets Supervision and Administration Commission, the China Banking Regulatory Commission and the Supreme People's Court, to help the banks and companies concerned to respond "appropriately".

"Judging from the current situation, the problem is not big, because banks usually take risk-control measures when they provide guarantees for Chinese companies," said Guo Tianyong, an economist and director of the Research Center of the Chinese Banking Industry at the Central University of Finance and Economics.

He said the capital strength of the companies going into Libya for investment also provides powerful back up.

"Most companies have a reliable long-term cooperative relationship with the banks, so the extension of the letter of guarantee is very practical, especially given that the companies are very likely to go back to Libya when the local situation gets better."

Guo said that theoretically, more banks will probably become involved if the turmoil lasts for a long time. For example, the China Development Bank has a lot of business in Africa, but details of the amount in Libya are not clear, he said.