Posted on August 24, 2017
By Max Thompson, TXF
Since China Export & Credit Insurance Corporation (Sinosure) was established in 2001 it has played a major role in supporting Chinese foreign trade. According to Sinosure statistics, its total credit and guarantee exposure totalled $2.8 trillion by the end of 2015, with claims paid amounting to $9.5 billion. However, this year there’s been a change in mandate behind the walls of what is one of the world’s most active ECAs, and while the exact details of the revisions are sketchy, two differences are clear; it’s more active and cheaper.
In the first six months of this year, the insured amount of Sinosure totalled $257.4 billion, increasing 14.6% year-on-year. It also paid a total of $520 million in indemnity in H1 of this year, up 0.6% year-on-year. This significant increase in cover volume means that Sinosure now provides about 70,000 exporting companies with insurance, risk management and financing.
Historically, Sinosure’s export credit insurance covers a large number of buyer credit policies and medium and long-term projects within hi-tech, large electro-machinery, heavy equipment, and overseas engineering contracts. More recently, Sinosure has offered more credit support to Chinese companies investing outside China in an attempt to back the Chinese “Going Abroad” policy and lease insurance policies.
For example, Sinosure has recently extended its buyer’s default policy (which was previously generally adapted for trade finance transactions) to ship finance transactions, and in the first six months of 2017 its insured amount for the Chinese shipping industry increased 14.7% year-on-year.
Sinosure has also offered 156 programmes in connection with Belt and Road countries and regions and insurance services in the first half of this year – 33 of them national programmes. Since the Belt and Road Initiative was put forward in 2013, its insured amount for Belt and Road programmes has totalled more than $480 billion.
“Sinosure is more active than ever and currently offers some of the most attractive project and export finance in addition to their buyer’s credit insurance”, says one Singapore-based banker. “The reason for this is China’s heavy industry has suffered for some time due to the global downturn.”
Over the course of the previous few decades the Chinese economy has been heavily reliant on low-value exports and state-sponsored investment. Yet, the recent prolonged financial downturn in the west has led to a fall in demand for Chinese exports and questions over whether the country can maintain its high growth rate.
Chinese policymakers subsequently took measures to boost domestic demand and increase the value of its exports. In July 2015, the government announced a series of steps to enhance growth including tax breaks for small businesses, lower fees for exporters and the opening up of the railway construction market.
But given the recent slowdown in the world’s second largest economy, the Chinese ECAs and development banks have now been given greater freedom by the government to provide trade support to make up the shortfall.
Despite initiatives by Chinese policymakers to change the country’s economic model, there are differing views in the market as to how much government intervention the Chinese ECAs and development banks are receiving, and on what types of transactions they offer financing support.
A change in approach?
Due to the negative effect subdued western demand has had on Chinese exports, borrowers in the country became less active. However, the ECA market remained robust; particularly for longer tenor financings in sectors such as aviation.
A senior underwriter at Sinosure says that though the ECA has experienced changes to the types of financings it supports, that has not been as a result of any direct governmental decree: “We haven’t had any change in our objective. It is a natural process linked to the transition of China exports, part of the evolution of the types of products that are being exported from the country. If something needs support in the market, then we give support regardless of the items and industries involved.
“In our support of trade we concentrate on managing the risk involved. We need to balance the policy and the risk. If we think the risk is acceptable then we will do the transaction.”
One Hong Kong-based banker believes the only significant change in the ECA’s approach has been an increase in activity: “There hasn’t been a sea change in Sinosure’s approach as a result of the recent economic slowdown in the country. As ever, their remit remains to support as many Chinese exports as possible. However, the Chinese agencies have been slightly more aggressive of late.”
The liquidity issues suffered by Chinese commercial banks during the slowdown did not affect state-sponsored entities like Sinosure, China Development Bank and the Export-Import Bank of China (Chexim), to the same extent. Conversely, there has been a pickup in their activity.
However, the Singapore-based banker goes further. He believes that agencies such as Sinosure have recently been afforded a larger degree of commercial freedom by the Ministry of Finance: “Sinosure is doing more now in order to make up for the slowdown. Chinese corporates are increasingly establishing themselves in countries outside China. Therefore, Sinosure is also improving its service to provide significant levels of insurance for those deals, with its remit expanding to allow that.
“China exports have been going through some changes of late, and demands for financing have been changing accordingly. Sinosure is at present trying to evolve its products to meet those new demands.”
Traditionally conservative in nature, Sinosure has become increasingly flexible in recent months. The Honk Kong-based banker says: “For example, they’re willing to consider different requests around tenor, potentially resulting in a combination of policies in order to meet a company’s requirements.”
Sinosure offers a short-term export credit insurance scheme and a medium to long-term programme, covering buyer’s and supplier’s credit. However, any transaction over $30 million needs to get signed off by the Ministry of Finance. This can take up to three months to go through, which has caused some problems for transactions in the past. Although, Sinosure’s new found flexibility has allowed it to provide a number of clients with short-term credit insurance and then move them on to a medium to long-term policy so as to avoid the three-month wait – an unprecedented move that would not have been possible in the past.
It is important to note, as Sinosure says, it will concentrate on offering more insurance to longer term transactions: “We’ll focus more on doing medium to long-term project insurance rather than short-term trade insurance.”
Cheaper than the rest
While western demand for Chinese exports may have slowed in recent years, conversely, European exporters and borrowers are increasingly applying for Sinosure cover on deals instead of from their domestic ECAs, as the cost of debt can be significantly cheaper. For example, TXF understands Dutch dredging company, Royal IHC, has been looking to Sinosure for cover on a number of deals as the price is considerably cheaper than Dutch ECA Atradius.
Such sugar coated pricing is also proving impossible for international banks and borrowers to turn a blind eye to. According to an ex-global head of export finance at one of the most active ECA banks, more and more international banks are coming into Sinosure transactions given the relaxation of lending conditions for the international bank community. “The pricing for Sinosure is coming down,” he tells TXF. “It used to be quite expensive because balance sheet requirements were set against the country’s risk. But the relaxing of regulations a few years ago has allowed banks to do more business with Sinosure, therefore the pricing has decreased.”
New horizons
Geographically, Sinosure has lately been involved in an increasing number of deals in Africa and the Middle East, with further big deals in these markets on the horizon. For example, in May this year the ECA signed a Memorandum of Understanding for an undisclosed amount with the Central Bank of Iran, while a consortium led by China Gezhouba Group is currently eyeing up $2.5 billion of Sinosure-backed export support for its Angolan hydro power project.
The ECA has also extended its cheap pricing into its most recently supported industry – shipping – giving Chinese shipbuilders a signifcant edge in a depressed global market. In March this year, Chexim closed a 15-year $321.6 million term loan, wrapped by Sinosure, to part finance eight new crude oil tankers for Norwegian shipowner Frontline. While Frontline did not disclose the margin, it said it was “in line with existing loan facilities.” According to regulatory filings, Frontline had at least two ship, totalling $1 billion, priced at 190bp over Libor at the end of 2015. In June last year Frontline also secured a $328.4 million term loan wrapped by Sinosure to finance another four Suezmax and four LR2 tankers. Pricing on the deal is also rumoured to be very ‘attractive’.
Likewise, crude oil tanker operator Gener8 Maritime also closed a tightly priced 15-year $385.2 million senior secured Sinosure-backed loan in July 2016 to finance six Very Large Cruise Vessels (VLCCs) from Shanghai Waigaogiao Shipbuilding. Citibank, Chexim and Bank of China lead arranged the loan which has a margin of 200bp over Libor.
Sectorally, the Chinese industries receiving the most support at present are the power generation, industrial products and telecoms sectors. But the Singapore-based banker predicts a shift in industry focus from Sinosure: “Going forward, green industries, such as solar panel production, will see more support from Sinosure as a key policy objective from the Chinese government.”
Sinosure’s solar move is already underway. Earlier this year, Chinese PV solar module manufacturer JA Solar agreed a $145 million buyer’s credit insurance from Sinosure backing the supply of PV modules for a 300MW solar project in Brazil. And with China now Brazil’s largest trading partner, a large portion of Chinese exports to the country will continue towards infrastructure development, especially in the commodities and power generation sectors.
Despite the increased levels of Sinosure support, the source reiterates that rather than following any government directive, it is just part of the organic evolution of Chinese exports: “It’s a natural process. If the exporter or sponsor is going to emerging markers more than before, then our focus will shift to these markets naturally. We aren’t given directions to go there. That’s not our job. We always follow the Chinese companies’ footprint.”
In the wake of the US launch of an investigation into Chinese trade practices, Sinosure announced plans last week to further help Chinese export companies expand into new markets. Zha Weimin, deputy general manager and spokesman of Sinosure, told reporters, if the US slapped on unilateral sanctions it would harm bilateral economic and trade relations: “In the short-term, the default risks of US buyers will be higher and Chinese export companies will suffer losses; in the long term, the trade barrier with the US will make Chinese exports transfer to other countries.”
While it’s hard to second guess US President Donald Trump, it’s even harder to predict how Sinosure will react to US sanctions. One thing is certain, China did not originally have to rely as heavily on export markets to stimulate domestic growth – now it does.
Source: TXF
