Chapter 9: Emerging Issues - Emerging Market ECAs of China (2005)

http://www.exim.gov/about/reports/compet/documents/2005CompetitivenessReport.pdf

I. Introduction

Over the course of the last several years, three emerging market export credit agencies (ECAs) outside of the OECD have surfaced as potentially significant players in the ECA world. The countries are China, India, and Brazil. Of the three, China and its ECAs have shown the most dramatic increase in terms of activity levels: China Eximbank is the lending ECA; Sinosure is the insurer/guarantor ECA, and most recently, the China Development Bank has become an export credit lender in addition to its more traditional international role in the foreign direct investment field. However, none of China’s ECAs are members of the OECD and are under no obligation to follow the OECD Arrangement on Export Credits which sets the rules for official export credits (e.g., credits offered by governments). On the other hand, the insurer/guarantor ECA, Sinosure, is a member of the Berne Union that offers guidelines and general principles for export credits.

The balance of this chapter concentrates on the strategies, programs, and practices of the Chinese ECAs. Collectively, the published reports by China Eximbank, Sinosure, and to a lesser degree, China Development Bank, offer clear evidence that their activity levels are surging dramatically higher. At this pace, the Chinese ECAs, as a collective entity, will become the single largest export credit provider among all countries by 2010. While Sinosure and China Eximbank each note in their annual reports that they generally abide by the Berne Union Guidelines (Sinosure) and the OECD Arrangement (China Eximbank), the latter also acknowledges in the same report that they offer financing on preferential terms through their Concessional/Preferential Loan program and their buyer’s export credit program. However, details regarding specific financing offers in these two programs are not published. Thus, the best information Ex-Im Bank has been able to collect regarding China’s export credit financing practices is a combination of US exporter and/or lender allegations, information from other OECD ECAs regarding their own experiences, and press reports both before and after the contract award process.

The purpose of this special analysis chapter is to provide (1) a more detailed understanding of the objectives, goals, programs, and approaches that the Chinese ECAs have adopted on behalf, and in support, of the Chinese government’s economic and growth strategy, and (2) where these strategies and intent take them in terms of their breadth and incidence as a US competitor if one extrapolates to 2010.

II. Chinese Strategy

A. Background

In 2001, China joined the World Trade Organization (WTO), and as part of that accession, agreed to implement policies and reforms that would lead to broad access to the Chinese market place by other countries. Since then, China has made steady progress towards these goals. One observer characterized this transformation as a methodical pacing of reforms that allows the Chinese industrial and services sectors time to adapt to the pressures of the international competitive marketplace. Accordingly, the balance of this chapter concentrates on the Chinese government’s strategy, programs and practices particularly regarding Chinese exports and the official export credit support for its most important industrial sectors.

B. Chinese Strategy

Key to understanding the vision of China as it applies to its strategy regarding exports and export credit financing is recognizing that export credit strategies are an integral component of an overarching Chinese economic strategy. Specifically, in the 10th 5 Year Plan announced in 2001, the theme was a “going out/going global” strategy in which companies of all types (and the agencies designed to assist them) were strongly encouraged to identify and pursue international recognition and markets where Chinese economic interests could best be served. The recently adopted 11th 5 Year Plan, while very similar to the 10th Year Plan, reflects the recognition that this strategy will require a substantive and timely response to the growing perceptions of inequality (e.g., wages/income, education, employment opportunities) among the population, especially in the rural and less developed provinces in the western and northeastern parts of the country. Accordingly, the current strategy is to broaden and deepen the beneficial impact of the “going out” strategy to all sectors, regions and populations within China’s borders.

One aspect of the overall strategy is to put special support on activities where China benefits from both sides of the “equation”/activity. Hence, an example might be a case in which China gives special financing support to the Indonesian rail sector to both help Chinese exports of locomotives get a foothold in a major market and simultaneously, assist financially in the development of an improved rail system that facilitates the shipments of Indonesia’s many resources to China.

C. Organization of “Export China”

1. Oversight

The State Council (of the People’s Republic of China), also known as the Central People’s government, is the highest executive body of State power. The State Council is chaired by the premier and comprised of the vice premiers, State counselors, and ministries – in total about 50 individuals representing key government agencies/ministries. The State Council is comparable to our cabinet, although the SC is much larger. The three ministries that are members of the State Council, and are directly relevant to and have varying degrees of oversight responsibilities for the two Chinese ECAs, China Eximbank (CXM) and Sinosure, include the Ministry of Commerce (MOFCOM), the Ministry of Finance (MOF), and the Ministry of Foreign Affairs (MOFA). The role that the ministries play in the ECAs is described in more detail in the ECA sections below.

2. Export Credit Agencies

The Chinese agencies that support Chinese exports are the China Eximbank, Sinosure, and the China Development Bank (CDB). Each has a specific responsibility with China Eximbank and, more recently, CDB assigned the task of providing direct lending to foreign buyers. Sinosure provides export credit insurance, assuming the risks of the foreign buyer on behalf of private lenders willing to extend the actual funding. Notwithstanding the discrete functions assigned to each agency, there is the potential for significant overlap among them. This cadre of ECAs as organized today is modeled after the Japanese export credit structure.

a. China Eximbank

China Eximbank (CXM) was formed in 1994 as the official export credit financing agency of the Chinese government, is wholly owned by the Government of China (GOC), and operated as a policy bank. As such, CXM implements the policy of the GoC (as opposed to making it). CXM has a Board of Directors comprised of various members of the State Council and reports directly to the State Council with “authority” over its activities loosely governed by the Ministry of Commerce (MOFCOM) – and, to a lesser degree, the Ministries of Finance and Foreign Affairs. Most recently, the Chinese banking regulators (Chinese Banking Regulatory Commission – CRBC) announced that a special department is being created to provide greater supervision of “policy-oriented banks,” with a special focus on the risk profile of these lending agencies. Supervision of China Eximbank and China Development Bank will fall within this new department.

CXM officials noted that it focuses its support to promote the export of Chinese mechanical and electronic products, complete sets of equipment, high and new tech products, and to support Chinese companies with comparative advantages to go abroad for overseas construction contracts and offshore investment projects. Further, the implementation of a new five point proposal is under consideration in which CXM committed to help developing countries by providing $10 billion of preferential credits within 3 years, another $5 billion preferential credits for the ASEAN countries, as well as the implementation of the $900 million preferential export buyer’s credit for other Shanghai Cooperation Organization (SCO) (1) member states. (See also China Development Bank section.) However, it is not clear under which of the existing programs these commitments would be pursued.

Figure 33: China Eximbank Activity 2000-2005 (in $mns)*

* These data are based on the China Eximbank annual report and/or their press releases. It should be mentioned that the M/LT data is probably overstated by $1 billion or more because it includes investment loans.

** Estimate: In 2005, CXM portion of Chinese exports supported = 2%.

***2% of estimated Chinese exports of $1.720.6 bn in 2010 = $34 bn.

In 2004, CXM reported a commitment level of roughly $10 billion for its medium and long-term export credit business and for 2005, an estimated $15 billion. Based on these figures, CXM is claiming to be the 3rd largest ECA in the world. Also, it intends to keep growing at a rapid clip, and if CXM achieves its goal of supporting a larger share of Chinese exports -- for example a 5% share -- its volume of medium and long term activity could reach $85 billion by 2010.

CXM currently offers three primary products: (1) export credit (buyer and supplier), (2) concessional loans to other governments, and (3) guarantees. (2)

CXM’s buyer credit program is available for medium and long-term tenors to creditworthy foreign borrowers to support the export of Chinese capital goods, services and overseas construction projects in amounts greater than $2 million. According to CXM, these credits are normally in dollars (US $) or other hard currencies and carry a “competitive interest rate” which they define as either a fixed rate based on the OECD CIRR for the currency or a floating rate of LIBOR + a spread. There also appears to be another category of loans within the buyer credit program defined as “special cases” in which the interest rate can be negotiated and decided between the lender and the borrower, possibly on a “preferential” basis. In addition, the buyer credits carry a longer repayment period than supplier credits (e.g. 15 years – 20 years according to the CXM information). A management fee of .5% is charged. In addition, a commitment fee and exposure fees are charged, but it is unclear on what basis.

Regarding CXM’s concessional loan program, CXM provides only an outline of information and does not publish either the overall amount of preferential loans they had made during recent years, nor do they provide the specific terms and conditions (e.g., interest rate, repayment term tenor) that are offered. According to their annual report, these loans are medium and long term, low interest rate renminbi /Yuan credits extended typically to foreign governments to purchase Chinese mechanical and electrical products, sets of equipment, high tech products, services and other materials.

This program is typically used when Chinese benefits can occur on both sides of the transaction. An example would be the sale of Chinese manufactured locomotives and an improved rail system in the buyer’s country. These transactions also generally involve infrastructure development (e.g., energy, transportation and telecommunications), industrial development (e.g., manufacturing and mining), and social welfare (e.g., health care, housing). Discussions with CXM officials revealed that these loans typically are at interest rates in the 2-4% range (RMB) and repayment terms generally at 10 years (but can be up to 20-30 years).

CXM will only provide support to Chinese-owned and domiciled companies. Accordingly, their exporter profile consists of large state owned enterprises (SOEs) or large wholly private or partially government owned companies in certain key sectors: ship building, telecom, power, and high technology.

When compared with the OECD Arrangement, CXM’s terms and conditions for its products are:

• Similar with regard to the minimum fixed rate CIRR lending rate for “standard” buyer credits.

• Probably a little less than the CIRR for the “special”/”preferential rate” cases within the Buyer Credit and the concessional loan programs as the OECD Arrangement does not permit the flexibility for negotiated rates lower than the CIRR.

• Probably a little longer as 15 years is only available for nuclear power plants and renewable energy within the OECD.

• Generally the OECD Arrangement has a protocol for the minimum exposure fees allowable.

During 2004 and 2005, CXM undertook a number of lines of credit and/or loan commitments on behalf of several of the large companies, most of which are SOEs in a range of countries/regions. (NB: the information and specific details provided below are based on information from press reports and other sources deemed highly reliable.)

Country or region-specific export credits:

• 2004/2005: Philippines: CXM extended a concessional loan of $400 million to support the development of Phase 1, Section 1, of the North Rail project. 20 year repayment, including a 5-year grace, 3% interest rate. China National Machinery and Equipment (CNMEG) was awarded the contract.

• 2005: Tunisia: CXM offered 13 years repayment including 3 years grace period at 2.5% $US (3) loan for telecommunications equipment.

• 2005: Uzbekistan: CXM offered a loan with 25 years total maturity, including 5 years grace at 2% interest for computer equipment

• 2002/2004: Indonesia: CXM offered an export credit package of approximately $400 million for three projects of which one involved the construction of a bridge and tied to Chinese exports.

The financing offer included a $US (4) loan with a repayment term of 15 years with a 7 year grace period at 3%.

Exporter-specific “going global” credits (5)

• December 2005: CXM signed agreements totaling 10.3 billion RMB with Beijing Construction Engineering Group Corporation (BCEGC), the Founder Group and CGC Overseas Construction Co. Ltd. to support their “going global” strategies.

• December 2005: CXM signed an export credit financing agreement on behalf of Hunan Valin Steel and Iron valued at RMB 5 billion ($620 million) for world wide exports.

• December 2005: CXM signed an export credit agreement with China Machinery Group (CMGC) for $3 billion to support its exports of electronics and hi tech products and overseas investment.

• March 2005: World-wide: CXM provided RMB 6 billion ($750 million equivalent) export credit support to TCL Group for their exports of mechanical and electronic products, high and new tech products, overseas investment projects and offshore contracting projects and other “going global” activities.

• August 2005: World wide: CXM and China Huaneng Group signed a Strategic Cooperation Agreement for a $5 billion line of credit for 3 years to finance Huaneng Group’s “going global” activities that includes both exports and foreign investments.

b. Sinosure

Sinosure is the official export credit insurance agency of the Government of China, is wholly owned by the GoC, and is operated as a policy agency of the GoC; that is, Sinosure does not develop policy, rather, it implements policy. Sinosure was created in 2001 when PICC, the-then export credit agency that included China Eximbank, was dissolved and China Eximbank and Sinosure were formed as separate entities reporting to different authorities. Sinosure’s primary guardian authority is the Ministry of Finance but the Ministries of Commerce (industrial policy) and Foreign Affairs (diplomatic/political policy) have a tangential relationship with Sinosure as well. Sinosure states that it operates on commercial terms and abides by the guidelines of the Berne Union and the OECD (6) (although it is not a member of the latter).

According to Sinosure, their authority to make independent decisions on transactions is limited primarily to the short-term area and smaller sized deals. In the medium and long term export and investment insurance areas, any (including short term) transaction greater than $30 million requires the Ministry of Finance approval. Moreover, the MoF also plays a more hands-on role in the medium and long-term area, often participating in transaction decisions and setting policy and guiding practices. Sinosure has operated primarily as a short term export credit support institution, with the majority of its medium and long term assistance provided for CXM transactions/projects.

Figure 34: Sinosure Activity 2000-2005 (in $mns)

Sinosure	2001	2002	2003	2004	2005	2010
Short-term	1430	1750	4260	10640	17777	90000
M & L term	940	820	1360	2060	3423	30000
Total	2370	2820	5620	12700	21200	120000

* Estimate

** Projection based on a conservative estimate factoring in the average rate of growth over last 5 years.

As shown in Figure 34, Sinosure’s book of business has grown dramatically: from a low of $ 2.4 billion in 2001 to an estimated $21 billion in 2005 representing roughly 6.4% of Chinese exports. Of that amount, roughly 86% (in dollar volume) is short-term business spread across 160 countries in the developing and developed world (e.g., US, Hong Kong, the EU, South Korea representing the top country exposures). The remaining 14% is spread across the other product lines, with a little over half being medium/long term (while investment finance accounts for the remainder).

The medium/long term portfolio however has a very different and higher risk profile: Sudan, Cuba, Angola, Nigeria, Iran, Philippines, Brazil, and Pakistan. Sinosure’s management has stated that they intend to increase its new business commitments to $30 billion in 2006, increase its share of Chinese exports to 10% by 2007, which could mean an annual volume of $170 billion by 2010 (with a medium/long term volume of $45 billion at the current proportion of 25%).

In its capacity as a credit insurer, Sinosure works closely with the private banking community which is currently dominated almost entirely by foreign banks operating in China, namely Societe Generale, BNP Paribas, and Citigroup as the largest players. Sinosure has also entered into a number of cooperative financing agreements with other ECAs with the most recent being EDC/Canada (others include: Euler Hermes/Germany, Sace/Italy, MIGA/World Bank).

According to Sinosure, it cooperates with China Eximbank and most recently, but to a lesser degree, China Development Bank. Sinosure does provide insurance for transactions funded by China Eximbank and thus far, reportedly roughly 60% of Sinosure’s medium/long term activity is risk cover for transactions originated and funded by China Eximbank. Sinosure indicated that this business is evaluated on the same basis as non-Eximbank directed business – i.e., on commercial terms.

The exporter/sectoral composition of Sinosure’s current portfolio is apparently dominated by large SOEs as well as a number of private or minority government share companies in certain key sectors: Telecommunications (both Huawei which is employee-owned and ZTE, state owned); Sinopec (petroleum); forestry (mainly in Russia); and hydropower.

Sinosure’s medium and long term export credit product is in the form of export credit insurance in which Sinosure assumes the risk of nonpayment by the foreign buyer due to either/or both commercial and political events. Sinosure charges an exposure fee but their fee system and details regarding the levels of fees are not published. Sinosure is a member of the Berne Union and states that its programs operate on a commercial basis and are in compliance with the Berne Union guidelines.

When compared with the Berne Union (and by reference, the OECD Arrangement as previously noted), Sinosure’s terms and conditions for its product are generally:

• Similar with regard to total repayment term and form of repayment

• Similar with regard to down payments (15% minimum)

• Unclear with regard to minimum exposure fees as required by the OECD

However, anecdotal information regarding Sinosure’s practices suggests that there have been a limited number of situations in which their financing has not exactly matched the Berne Union Guidelines. However, because sufficient information/documentation has not been provided, the specific transactions cannot be cited as examples of not matching the Berne Union Guidelines.

c. China Development Bank (CDB)

CDB was formed in 1994 and is under the jurisdiction of the State Council. Similar to CXM and Sinosure, the CDB is a policy bank that has traditionally focused primarily on internal domestic economic development with special emphasis on infrastructure and pillar industries. Given this focus, CDB’s financial support has been concentrated in rural development in the western and northeastern regions of China, all areas around the Yangtze River where efforts are being made to revitalize old industrial bases as well as facilitating the development of new and efficient industries, especially in those sectors of critical importance, e.g., energy independence (oil, coal, electricity), transportation (railways, highways) and telecommunications. More recently, CDB has expanded its focus in several areas considered essential to establishing and maintaining China’s long term competitiveness: R&D/innovation and the development of Chinese high quality “brand name” industries/companies; SME’s; and support for certain companies in their overseas expansion in the form of foreign investments and trade of a “developmental nature.”

CDB offers loans which are divided between short term (less than one year), medium term (1-5 years) and long-term (> than 5 years). For large infrastructure projects, the maturity can be extended based on the needs of the industry and project. The loans are available in RMB and in foreign currencies with interest rates set according to the People’s Bank of China. Based on available information, it appears that export credits in the form of direct loans are available primarily in foreign currencies and are held for CDB’s account. Finally, none of the published information regarding CDB addresses whether an exposure fee is charged for the risks the Bank is assuming.

Activity levels for CDB’s foreign lending for the purposes of “going global” show that during 2004, CDB approved $780 million, and by 2005 yearend, the cumulative total amou nted to roughly $8 billion. Recent examples of CDB funded overseas projects are noted below:

• January 2006: Uzbekistan: CDB to open by mid 2006 a $20 million credit line for Uzbek National Bank for Foreign Economic Activity to support the deliveries of Chinese-made equipment and technology on 9 year terms, 2 year grace period.

• August 2005: World wide: CDB agreed to provide a RMB 8 billion (approximately $1 billion) for TCL’s overseas expansion projects involving multi-media terminals, mobile handsets, accessories and parts and household appliances and as noted by CDB “ a non commercial strategic cooperation intended to promote the Chinese company’s competitiveness in international markets.”

III. Summary

Figure 35: Total Chinese Officially Supported Export Finance (in $mns)*

China	2000	2001	2002	2003	2004	2005	2010
M&L term	1770	940	5380	10050	12940	18423	70000

* This probably overstates the total business done by China Eximbank and Sinosure. This is due to the fact that Sinosure insures a portion of China Eximbank’s business. As mentioned above, the extent to which the two agencies work together is uncertain. ** Projected & does not include any estimate for CDB.

China has defined and is implementing its short and long-term strategy to ensure a prominent position. Export credits play a major and integral role in this strategy. Some implications include:

• China intends to use export credits aggressively and expansively on a global basis as they represent critically useful instruments in achieving an improved position for the country’s key industries.

• To the extent possible, the use of the financing instruments will comport with international guidelines and standards; however if necessary to consolidate this position, the financing offered may be extended on terms and conditions that give them a competitive advantage.

Footnotes

1. Shanghai Cooperation Organization (SCO) is an intergovernmental international organization founded in Shanghai on June 15, 2001 and is comprised of 6 countries: China, Russia, Kazakhstan, Tajikistan, Krygystan, and Uzbekistan. The main purposes of the SCO include strengthening mutual trust, friendship among member states, developing effective cooperation in political affairs, the economy and trade, science and technology, culture, education, energy, transportation, environmental protection, and working together to maintain regional peace, security and stability and promoting the creation of a new international political and economic order featuring democracy, justice and rationality. As part of the economic cooperation strategy, the SCO also adopted a “Process of Trade and Investment Facilitation” and in 2002, mechanisms for economic and trade cooperation were established.

2. CXM also offers an on-lending program to domestic projects with foreign government loan funds and foreign direct investment financing, and in 2006, they intend to offer import credits to support the development of certain industry sectors of strategic importance.

3. , 4. While the information obtained states that these loans were in $US, CXM’s concessional loan program information notes that CXM lends only in RMB in this program whereas the Buyer Credit program can lend in other currencies. Thus, it is not entirely clear under which program these credits were extended or the actual currency of the loan.

5. The exact CXM program, the specific terms and conditions that have been used to fund these credits, and the specific uses of these credits are not known.

6. The Berne Union is an international membership organization comprised of public and private sector export credit insurance providers with 52 members from 42 countries. Its focus is to promote the international acceptance of sound underwriting principles of export credit insurance and the establishment and maintenance of discipline in the terms for international trade and foreign direct investment. To this end, the Berne Union has a set of guidelines which contains guidance regarding repayment terms, form of repayment, lines of credit and down payments.