Feature

posted 10 Apr 2006 in Volume 9 Issue 6

Export authority

China is becoming a net exporter of capital goods, a long-standing shift spurred on by Sinosure’s proactive policies. The credit agency’s splash on the export scene, though, has made it easy to overlook developments within other financial institutions – both public and private – that are having just as much impact in China’s trade finance community. Erika Morphy reports.

In 2003, Société Générale Corporate & Investment Banking (SG CIB) closed a $40m export transaction supporting the sale of Chinese telecom equipment to Algeria’s telecom provider. It was the first deal Sinosure, China’s newly established export credit agency (ECA), closed with a foreign bank – a benchmark achievement for both bank, agency and even, in the grand scheme of things, for China itself.

Fast forward three years. A long brewing trend has solidified in the country: its role as a major capital equipment exporter to the world. “Four or five years ago, Asia was primarily an import market for capital equipment,” says Godwin Chang, SG CIB’s managing director and regional head of export finance Asia.

“But that trend has diminished and now we see China as a net exporter not only to the US and Europe but also to other emerging markets.”

SG CIB has become the leader in Sinosure financing among foreign banks, maintaining a 30% market share among foreign institutions in 2005.

Sinosure, for its part, has grown exponentially each year since it was established in 2001, making it the premier authority on export finance within the country’s policy banks.

“My feeling is that China will catch up with Japan in terms of capital equipment exports and Sinosure will be the vehicle by which it will do that,” says Chang.

It is difficult to overstate the importance Sinosure plays in China’s phenomenal export growth. Wang Tao, Deutsche Bank's head of trade finance, China, notes that in 2002 Sinosure supported some $2.7bn in total exports. That figure increased in 2005 to $22bn. Sinosure also recorded an annual growth of 98% in 2005.

"Just looking at these figures,” he says, “it is clear that Sinosure has come to play a significant role in the country's export finance community."

As Sinosure continues to expand access to its facilities, its profile will continue to grow. Foreign banks, for instance, will be in a better position to easily monitor risk when they have access to Sinosure’s facilities, he notes. "Should there be a claim at maturity, the foreign bank will be able to work with Sinosure to resolve the issue," Tao says.

Pending changes

Sinosure’s splash on to the export scene, though, has made it easy to overlook developments within other financial institutions – both public and private – that are having just as much impact in China’s trade finance community. For starters, few banks have developed inroads with the ECA; many are working towards that goal but the most successful banks appear to be the French and Japanese trade banks, according to Holger Kebernik, managing director of Hong Kong-based China Trade Solutions.

However, more banks have been successful transacting business with China’s other policy banks such as its Export Import Bank and its Development Bank. Now both the China Development Bank and the Chinese Export-Import Bank (China Eximbank) have new mandates to grow their business. China's Eximbank is expected to grow to 1trn RMB by 2010, compared to last year's figure of approximately 340bn RMB.

Western banks that have not been successful in closing deals with Sinosure have closed noteworthy transactions with these institutions. Other Western banks have succeeded with both Sinosure and the other policy banks. BNP Paribas, for example, has been actively working with the China Export-Import Bank as well as Sinosure, says Pierre Joseph Costa, BNP Paribas’ head of export finance, ECEP, Paris.

In September 2005 it co-financed a shipping transaction with the agency – BNP Paribas’ first containers financing transaction for CMA CGM, the third global operator in maritime transport capacity by container. This $210m transaction, structured under a lease scheme, involved China Eximbank in a co-financing position. When it went to market it was significantly oversubscribed from international banks in the commercial portion.

Now these policy banks’ business models are expanding, promising additional avenues of opportunity for banks. In January, for instance, Eximbank signed its first framework import credit agreement, worth $1.5bn, with Shenzhen Airlines to support the firm's imports of aircraft and related equipment.

At the same time, Chinese policy banks are expanding their geographic reach. Well known in Asia and Africa, they are now moving steadily into Latin America as more Chinese firms compete for business in these markets.

Focus on Sinosure

But as China continues to build out its own export finance platform, it is Sinosure that is forging new paths for both China and Western banks. “This has been happening for some time, but it seems that the real shift began three years ago,” BNP Paribas’ Costa says. “That is why the involvement of Sinosure is so important.”

“Sinosure surely has had a major impact on Chinese exports, providing very competitive coverage for a number of risks,” Kebernik agrees. “Only this coverage in the end enabled the Chinese exporters to get certain deals done. We are seeing more and more cooperation between exporters, Sinosure and foreign banks, whereas exporters cover most of their risk with a Sinosure policy and then discount their risk with a foreign bank based on the Sinosure coverage.” Sinosure policy generally covers 95% of the risk, leaving a 5% residual risk that a bank must cover.

Thus far, many foreign banks have been focusing on Sinosure’s medium-term-risk book of business. That has been the case for Deutsche Bank, according to Roger Packham, the regional head of trade finance for Deutsche Bank in Asia Pacific. Now, though, the bank is shifting gears slightly. "We want to increase our business in China, by going after short-term risk,” he says. “We will be looking at the short-term market more aggresively than in the past."

Tao notes that 75% of Sinosure's business is focused on short-term credit insurance. "The rest is medium term. That is another reason we see value in targeting that business."

BNP Paribas has a team of five people in China, located in Beijing and Shanghai, to look at Sinosure’s medium-term business, Costa reports. The bank’s first deal with the ECA was a landmark in that it was the first Sinosure transaction arranged by a foreign institution without the involvement of a Chinese bank. This medium-term transaction, which occurred in 2004, supported Huawei Technologies’ sale of mobile equipment to Algeria Telecom.

Since then BNP Paribas has closed two additional transactions with Sinosure, including the first transaction whereby Sinosure covered a corporate risk in Latin America. In this transaction BNPP partnered with ICBC. Now, Costa says, it is working on several additional mandates.

Not all banks have developed such close ties with the export credit agency; indeed many banks are undecided as to how to classify Sinosure risk. As a relatively new export credit agency, Sinosure could conceivably be viewed as sovereign China risk or quasi-sovereign risk. Sinosure’s charter, for instance, does not cover guarantees or specifically say that its transactions are backed by the full faith and credit of the Chinese government. It does say, though, that the finance ministry will support the budget of Sinosure. Those banks that work with Sinosure have generally come to the conclusion that Sinosure risk is on par with the ministry of finance risk.

Banks active in Sinosure financing have developed close ties with the institution in other ways as well. SG CIB, for example, proactively shares risk and credit information with the export credit agency, Chang says.

“That is an important function for Sinosure – it doesn’t have branches all over the world but we do. So we are able to help monitor the credit of the borrower throughout the life of the loan.”

Since that first transaction in 2003, SG CIB has continued to reach new milestones with the ECA. In 2004, the bank closed two more deals with it; in 2005 that number jumped to six.

Recent transactions, he says, include support for the sale of mobile phone equipment to the third-largest mobile phone operator in the Philippines – a $23m transaction. It was the first private sector Sinosure transaction in the country, Chang says.

Another landmark transaction took place in Vietnam. A smaller deal – $11m – it involved the sale of hydropower plant equipment to an electricity company. The financing will allow the firm to expand its generation capacity, Chang says, as well as provide Chinese contractors with an even bigger footprint in the expanding sector.

SG CIB also financed capital equipment sales totaling $59m to a private sector Turkish steel company – again, the first private sector Sinosure transaction in that particular market.

Unwelcome competition

By and large, foreign banks welcome the new business provided by China’s policy banks. China’s domestic banks, however, are hovering around the growing trade flows as well – a development not greeted as joyfully by competing banks.

It is widely acknowledged China’s domestic banks are on track to be fully competitive for structured export finance deals within five years. Indeed, they are already very aggressive in supporting such activity on a bilateral basis as well as supporting simple trade finance transactions such as letter of credit confirmation.

“Just compare a Chinese bank’s office to what they looked like several years ago,” says Trade Finance Corporation CEO David Sullivan. “They are learning fast.” One way Western banks hope to counteract the competition, he says, is to take strategic shares in the big Chinese banks. “This is the future,” Sullivan says.

One acquisition proposal that is still ongoing is the reported bid by a consortium led by Citigroup for an 85% stake in Guangdong Development Bank. Also competing for the same stake is a French-led consortium of banks led by Société Générale.

Western banks are penetrating the China markets in other ways as well. The liquidity in the domestic market has prompted more than a few to move downstream, targeting mid-market corporate clients for corporate and trade finance. Some US banks, for instance, are positioning themselves to target this niche.

There is still some breathing room for foreign banks. Right now, Chinese commercial banks are not quite geared up to lend to emerging market borrowers, Chang says. “If it is a sovereign borrower, maybe they might take it on. But if the buyer or borrower is a private sector company – especially in an emerging market – then they are not likely to take that risk because they are not yet accustomed to doing that.”

Chinese banks are geared for domestic lending and they will support Chinese exporters, Chang continues. “But they will not go after lending opportunities in, for example, Algeria, unless there is a Chinese exporter involved.”

Not yet, at least. But while the image of China’s enormous domestic banks targeting foreign trade banks’ bread and butter business may seem frightening, it may turn out to be a relatively benign development. That is because the same changes that have occurred in China’s trade finance markets over the past five years are expected to continue remaking the market. In other words, some opportunities will disappear when China banks emerge onto the scene in full gale – but others will develop in the meantime. Much as happened with Sinosure over the past few years.

There will be enough business for everyone in five years, Sullivan says, “with the Chinese banks eventually taking the lead with exports from China. But China will need to import large quantities of infrastructural capital goods as it develops, leaving room for the foreign banks to originate deals offshore. This growth in infrastructure relates to most of Asia too and creates opportunities for insurance as well”.

Also, Chang notes, Chinese banks will have to go through the same risk control processes that foreign banks do. More to the point, he predicts, the influx of new business by China and, to a lesser extent, India, will absorb the additional competition.

“In five years the market will be more competitive because Chinese banks will be participating. But at the same time, the market will be significantly larger than it is today.”

India’s export machine awakens

The nature of India's economic development has not fostered the same level of exports of manufactured goods that has been seen in China, says Aarti Mehra, who heads structured trade for Asia Pacific in Deutsche Bank's trade finance division.

"There has been a huge increase of exports out of India over the past three to four years. Of course, noticeably in knowledge-intensive products such as IT services, labour/professional services – as evidenced by large inward remittances of foreign currency – pharmaceuticals and auto/auto components,” she says.

“The other important exports are garments, textiles, gems and jewellery. But as far as capital equipment exports that offer the need or opportunity for long-term buyer-credit financing to buyers goes – that is not yet significant.”

But it might be if recent trends continue to develop.

Mehra notes that recently certain segments of the Indian manufacturing sector have started to become globally competitive.

"For the few years preceding 2003, India’s economy had been relatively quiet and companies had excess manufacturing capacity – basically there was no need to expand. Since 2002-2003, economic growth rates have picked up and manufacturers have begun to get close to production capacity.”

India has become one of the leading exporting countries and is expected to continue its strong growth, predicts Howard Bascom, managing director of the Bank of New York. “India has been successful in certain categories of exports. When I look at trade finance opportunities for the Bank of New York, I believe they are just as strong in India as they are in China.

To be sure, most banks are examining India’s retail banking opportunities first, followed by the small to mid-sized corporate market.

Roger Packham, the regional head of trade finance for Deutsche Bank in Asia Pacific, says that India is the bank's largest market in the Asia Pacific region for trade operations. "We are expanding our footprint there, not only on the retail side but also to accommodate growing small and medium corporate activity and their trade business."

Mehra adds: “One of our clients, a steel manufacturer, is currently expanding its plant by importing equipment from Germany and Italy, supported by ECA financing in those two countries."

ECA financing is hardly new for India – nor is it the only source of long-term financing for companies. However, corporates are looking again at ECA financing – and ECAs too are more interested in the country – because the need for capital equipment financing is large enough for some Indian conglomerates who wish to diversify their financing sources.

“As a general observation, Indian corporates have a large choice of finance sourcing nowadays – this is not the capital starved 1970s and 1980s when the domestic market offered only a shallow pool of long-term finance. There is enough liquidity to borrow long-term Rupee money and the bigger corporates can readily tap the cross-border syndicated loan market," says Mehra.