Foreign banks are up in arms about newly imposed foreign-exchange controls to curb illegal capital flight. The banks say the curbs are strangling legitimate business and denting the mainland's already fragile overseas credit standing. Overseas banks have written to the State Administration of Foreign Exchange (SAFE) Shanghai branch saying the new rules, implemented in September, have created severe operational difficulties and give an impression abroad that the mainland is slow to honour standard financial obligations such as import letters of credit. In particular, the banks brought to SAFE Shanghai's attention delays in payments to overseas creditors for imports and a host of other problems stemming from the new rules. Some bankers said the problems, if unresolved, could set off a blacklash as serious as that of the closure of Guangdong International Trust and Investment Corp, which triggered a cutback in mainland firms' credit lines. A Shanghai-based foreign banker said: 'China's forex rules are stringent enough even without the new changes.' A Shenzhen-based foreign banker said: 'We understand the need to plug illegal forex leaks, but the rules are hurting the good boys along with the bad.' The nub of the complaints focuses on delays in import payments to foreign creditors, which depend on foreign banks on the mainland for trade financing. If import payments are delayed, financing from the banks will also be adversely affected. SAFE implemented the rules in September as some mainland companies falsified import invoices and letters of credit to obtain foreign currency illegally as they tried to hedge against the risk of a yuan devaluation. Beijing was alarmed by the illegal capital leakage, which led to stagnant foreign reserves. The reserves barely rose in the first six months of last year, despite a healthy trade surplus and robust inflow of foreign direct investment. Former SAFE official Wu Xiaoling, now PBOC Shanghai head, last month said that reserves would have gone up by US$15 billion from $139.9 billion at the end of 1997 if it had been not for the illegal leakage. As it turned out, reserves were up by just $5.06 billion to $144.95 billion by December. Under the new rules, SAFE has to approve all import letters of credit of over 90 days, from 180 days previously. All letters of credit must also be registered. The rules also require customs officials to confirm bank documents, which means the documents have to be physically taken or posted to customs for examination. Customs confirmation for all bank payments on transactions of more than $100,000 is needed. The problem here is, when imported goods are en route to the mainland, customs officials refuse to produce confirmation documents, making it impossible for mainland banks to make good the import LCs issued on their clients' behalf for payment to foreign creditors. As a result, foreign banks, which are taking the trade liabilities on foreign clients' behalf, are unable to collect payment and are filing complaints against domestic banks for non-fulfilment of financial obligations. In an usually speedy response to the letter from the foreign bankers, the People's Bank of China Shanghai branch called a meeting with them recently to address their grievances. A foreign banker said: 'PBOC and SAFE Shanghai officials said they were concerned about the problems and would try and help, but we will have to wait to see if things will improve.'