What can go wrong in structured trade and commodity finance — lessons for China

Structured trade and commodity finance (STCF) is central to international trade and is progressively becoming an important source of finance for Chinese companies, given that China is now the most significant player in the commodities market. Since the introduction of the free-trade zones (FTZs) in China, there has been increasing discussion among Chinese leaders on how to implement a robust legal framework and infrastructure to attract more global companies into the market. While this is unlikely to have any significant effect on the STCF market, it is a step in the right direction provided that financiers do not lose sight of the risks inherent in STCF.

STCF structures have a long history in the Russian and Latin American markets and some of the risks arising from these structures offer valuable lessons to any player in the market. Typically, the structures themselves are robust, but as these transactions depend largely on verifiable and secure tracking of physical goods the primary risk in these structures has always been, and remains, that of fraud. This article examines some of the common things that can go wrong in STCF and what financiers can do to protect their position, particularly in China…

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