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Financing Sytem and Trade In China
A. Banking System
B. Foreign-Exchange Controls
C. General Financing Availability
D. Terms of Payment
E. Insurance
F. Project Financing
A. Banking System
China's banking system has undergone significant changes in the last two decades: banks are now functioning more like banks than before. Nevertheless, China's banking industry has remained in the government's hands even though banks have gained more autonomy. Foreign participation in China's banking industry is severely restricted. China's expected accession to WTO is likely to lead to a significant opening of this industry to foreign participation.
Central Bank:
At the top of the system is China's central bank, the People's Bank of China
(PBOC), which has been charged with managing the money supply and credit, and supervising
the banking system. PBOC, together with the State Administration of Foreign Exchange (SAFE),
set foreign-exchange policies.
The PBOC supervises the banking sector's payment, clearing and settlement systems, and audits the operations and balance sheets of all financial institutions in China, as well as implements the regulations regarding the operation of the Commercial banks.
According to the 1995 Central Bank law, PBOC has full autonomy in applying the monetary instruments, including setting interest rate for commercial banks and trading in government bonds. The State Council maintains oversight of PBOC policies.
Commercial Banks:
In 1995, the government introduced the Commercial Bank Law to
commercialize the operations of the four state banks, the Bank of China (BOC), the China
Construction Bank (CCB), the Agricultural Bank of China (ABC), and the Industrial
and Commercial Bank of China (ICBC).
The Bank of China (BOC) specializes in foreign-exchange transactions and trade finance. It is estimated that BOC holds a 59% share of China's trade-finance business. The China Construction Bank (CCB) provides financing to infrastructure projects and urban housing development. The Agriculture Bank of China (ABC) specializes in providing financing to China's agricultural sector and offers wholesale and retail banking services to farmers, township and village enterprises (TVEs) and other rural institutions. The Industrial & Commerce Bank of China (ICBC), the largest bank in China, is the major supplier of funds to China's urban areas and manufacturing sector.
Years of government-directed lending has presented these banks with large amounts of non-performing loans. In 1999, the government established one asset management corporation (AMC) for each of these four banks to write off their non-performing loans.
Policy Banks:
Three new "policy" banks—the Agricultural Development Bank of China
(ADBC), China Development Bank (CDB), and the Export-Import Bank of China (Chexim)—
were established in 1994 to take over the government-directed spending functions of the four
state commercial banks. These banks are responsible for financing economic and trade
development and state-invested projects.
CDB specializes in infrastructure financing; ADBC provides funds for agricultural development projects in rural areas; and Chexim specializes in trade financing.
Second Tier Commercial Banks:
In addition to the big four commercial banks, there are smaller commercial banks. The largest ones in this group include the Bank of Communication, China Everbright Bank, CITIC Industrial Bank, Shanghai Pudong development bank, Shenzhen Development Bank , Guangdong Development Bank , Mingshen Bank and Hua Xia Bank. The second tier banks are generally healthier in terms of asset quality and profitability and have much lower non-performing loan ratios than the big four.
Trust and Investment Corporations: In the midst of the reforms of the 1980s, the government
established some new investment banks that engage in various forms of merchant and investment
banking activities. Many of the 240 or so international trust and investment corporations (ITICs)
established by government agencies and provincial authorities, however, experienced severe
liquidity problems after the bankruptcy of the Guangdong International Trust and Investment
Corporation (GITIC) in late 1998. The largest surviving ITIC is China International Trust and
Investment Corporation (CITIC), which has a banking subsidiary known as CITIC Industrial
Bank.
B. Foreign-Exchange Controls
The PBOC and SAFE regulate the flow of foreign exchange in and out of the country, and set exchange rates through a "managed float" system. To better control this flow, almost all Chinese enterprises and agencies are required to turn over their foreign currency earnings to the banks in exchange for renminbi. (Large exporters were allowed to retain up to 15% of their earnings beginning in late 1997.) When foreign exchange is required for import and other authorized transactions, they then apply to designated banks that are members of the interbank foreign-exchange market.
Foreign-invested enterprises (FIEs) are permitted to keep foreign exchange in foreign exchange accounts at commercial banks. The Chinese government has eliminated the foreign-exchange swap centers on which FIEs used to trade among themselves, and all FIEs have been integrated into the formal banking system.
Since 1995 China has required that FIEs submit an annual report on their foreign-currency transactions, known as the Foreign-Exchange Examination Report. This report must be prepared by a certified public accountant registered in China and approved by SAFE and is necessary to qualify for foreign-exchange privileges. The purpose of the report is to ensure that FIEs' foreign-exchange earnings from exports are sufficient to meet their own requirements as well as any obligation to repatriate profits. Once the report is approved, firms receive a stamped Foreign Exchange Registration Certificate that enables them to obtain foreign exchange. China's original goal of achieving a fully convertible currency by the year 2000 has been pushed back because of the Asian financial crisis.
On July 1, 1996, China began to allow all FIEs in China to buy and sell foreign currency and exchange RMB in authorized banks for trade and services, debt payment and profit repatriation. The PBOC has lifted limits on exchanging and remitting currency for non-trade purposes and raised the ceilings for the amount of foreign exchange for private use. In mid-1998, however, SAFE cracked down on many of the loopholes used to get around the controls on capital account transactions. Many FIEs complained that delays occurred when SAFE screened their documentation more closely. SAFE has streamlined its system, but the requirement for proof that all relevant local taxes have been paid is a burden for many offshore service providers.
Foreign banks, their branches and foreign joint-venture banks are authorized to buy or sell foreign exchange from or to foreign-funded ventures. Foreign-funded banks or branches are not allowed to accept local currency deposits or to make RMB loans except if they have been specially licensed in the Pudong district of Shanghai and in Shenzhen, near Guangdong. Elsewhere, foreign banks and their branches are prohibited from accepting RMB deposits (liabilities) but may establish RMB accounts to convert currencies for their joint venture and foreign customers. China has pledged to expand the scope of RMB business gradually and to eliminate all geographical restrictions within five years of entering the World Trade Organization (WTO).
C. General Financing Availability
The sources of financing available for U.S. exporters and investors are:
The World Bank:
The World Bank, based in Washington, D.C., maintains a large loan program in China. The World Bank's purpose is to help borrowers reduce poverty and improve living standards through sustainable growth and investment. China represents the World Bank's second largest commitment worldwide. The Bank's program policies in China continue to shift away from key infrastructure projects in transportation and energy toward environmental and agriculture support. The World Bank publishes bidding opportunities in the United Nations publication "Development Business." This is available by subscription from United Nations, P.O. Box 5850, Grand Central Station New York, New York 10163-5850.
The World Bank conducts procurement by the rules of international competitive bidding through Chinese tendering organizations; nonetheless, successful bidding requires close coordination with the Chinese government entity responsible for developing a project at the consulting stage, when specifications are being established. The World Bank has a local office in China, but inquiries are best conducted through its U.S. offices or the local Chinese government entity.
The International Finance Corporation (IFC):
Part of the World Bank, the IFC has become increasingly active in China. It is mandated to assist joint venture and share holding companies with substantial non-state ownership to raise capital in the international markets. The IFC takes equity positions in these companies. The IFC's core business is "project finance," and it currently has over $1.2 billion invested in "project finance" undertakings in China. The projects have anticipated cash flows that can cover repayments to lenders and dividends to shareholders. They do not enjoy a government guarantee. The IFC can be contacted through its Washington, D.C. Headquarters at (202) 473-0631 or at its Beijing office (Fax: (86-10) 6501-5176).
The Asian Development Bank (ADB):
China continues to be one of ADB's largest borrowers. Loans are largely for infrastructure and environmental projects. Once a project is initially approved by the ADB and the Chinese government, it is included in a monthly publication called "ADB Business Opportunities" which is available by subscription from the Publications Unit, Information Office, ADB, P.O. Box 789, Manila, Philippines, Fax: (632) 632-5122 or 632-5841. The Commerce Department has established a Multilateral Development Bank Operations Office (Fax: (202) 273-0927) which publishes information to assist companies in winning such contracts. In early 2000, the ADB set up a representative office in Beijing.
In 1999, the Overseas Economic Cooperation Fund (OECF) and the Japanese Export-Import bank were merged by the Government of Japan and became the Japan Bank for International Cooperation (JBIC). The former OECF extended long-term, below market interest rate loans to countries worldwide. China was a major recipient. Described as 'untied aid,' the loans continue to be available to U.S. exporters under the new organization. Other, medium- and long –term loans at market interest rates will be made available to Japanese exporters, with as much as 30% of being un-tied and thus subject to competitive bidding.
Many U.S. companies have been successful in obtaining contracts under these loans, either on their own or in conjunction with large Japanese trading firms. Potential bidders must begin working with Chinese ministries and end-users at the consultant (pre-feasibility study) stage when specifications are being developed for the project. This is usually a year or two before the tender is formally published. OECF projects tend to be in infrastructure, environmental and agricultural sectors.
The Japanese Export Import Bank (JEXIM) offers medium- or long-term credits at market interest rates. Approximately 30% of JEXIM's credits are untied, and these are subject to international competitive bidding.
Bilateral government loans:
The Chinese actively seek low- interest, long term loans, particularly from European countries. These soft loans are designed to support their country's exporters and are usually offered under annual government-to- government protocols not tied to particular projects. U.S. firms, otherwise competitive on price and quality, sometimes lose contracts because they can not compete with such loans.
The U.S. Export Import Bank (Eximbank) has established a procedure whereby it can consider matching competitors' soft loan terms, once there is proof of such an offer. Eximbank will not initiate a soft-loan offer, however. A U.S. firm should consult with a Commercial Service officer if it believes it is competing against a soft loan.
Export credits: Chinese end-users have become more interested in using foreign export credits to finance imports. Eximbank offers a full range of loans, guarantees, and insurance for firms exporting products with at least 51% U.S. content. Eximbank works with the Bank of China and the China Development Bank, and will work with other banks, including China Construction Bank, Industrial and Commercial Bank of China and Bank of Communication, assuming that full faith and credit guarantees are available from the Chinese government. The rates and terms of such financing are governed by the OECD arrangements on export credits. Lending rates are set by the OECD and are called Commercial Interest Reference Rates (CIRRs).
D. Terms of Payment
In China's liberalized economic regime, there are many ways to finance imports. The most commonplace are the letter of credit and "documents against payment." Under these methods, foreign exchange is allocated by the central government for an approved import.
Letters of credit: Although the Bank of China dominates China's trade-finance business, most Chinese commercial banks have the authority to issue letters of credit for imports. These include China Construction Bank, Industrial and Commercial Bank of China, Agricultural Bank of China and CITIC Industrial Bank. Foreign banks with branch or representative offices in China (see Appendix D) can also issue letters of credit.
There are a few peculiarities about letters of credit issued by Chinese banks. First, from time to time local Chinese courts have issued injunctions that bar Chinese banks from clearing letters of credit whose underlying documentation has been challenged. The central government has issued guidance against this practice, which is gradually disappearing. Second, China is not a member of the International Chamber of Commerce and, therefore, is not subject to the Unified Customs and Practices (UCP) 400 code regarding international trade payments. In Chinese practice, terms and conditions are generally negotiable and set on a transaction-by-transaction basis in the form of a "silent" confirmation. Banks can generally be found to take this small risk.
Documents against payment: This method of payment is similar to a letter of credit, but less formal and more flexible. Just as with letters of credit, the exporter submits a full set of trade documents for payment collection to the bank designated in the contract. The Chinese bank will send the documents to the home office, which examines them and, in some cases, passes them to the buyer for further examination. Payment is made after the documents have met the approval of all parties. This method of payment provides rather thin coverage against default. It can be considerably less expensive than a letter of credit, but should be used with caution.
Other methods:
Bank or Enterprise Loans:
Many Chinese companies have relationships with local banks or other enterprises that will loan funds for the purchase imports.
Foreign Supplier Loan:
The supplier helps to finance, on behalf of the Chinese buyer, the purchase of its equipment.
Proceeds sharing/cooperative joint venture:
Some suppliers will enter into a cooperative joint venture to ensure the sale and financing of their equipment.
E. Insurance
Insurance:
Congress suspended the China operations of the Overseas Private Investment Corporation (OPIC) in 1989 (see section VII M. above). The U.S. Ex-Im Bank has programs that provide guarantees and credit risk insurance to exporters. Contact Ex-Im at (800) 565-EXIM. Some private companies, such as American International Group, also offer export credit insurance policies for China.
F. Project Financing
Chinese officials have for years experimented with limited- recourse project financing schemes. Long awaited Build-Operate-Transfer (BOT) laws have been delayed, however, and the overall private finance climate has cooled during the past few years. The U.S. Ex-Im Bank is seeking to implement a limited-recourse, project-financing program in China. Such a project is one in which anticipated cash flows can cover debt service repayment to lenders and payment of dividends to shareholders, and is without government guarantees. Loans under this program will be available to companies operating investment projects that require imports from the U.S. Project financing is also available from the various multilateral financial institutions as described in Section C above.
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