China’s Export Credit Agencies: Managing the risk of “going-global”

By Tom Durkin

China’s publicly financed support for overseas trade and investment is inspired not by Maoism or colonialism, but rather by the policies developed by the US and Western Europe after World War 2 – and still used today.
Stephen Hayes, the president and CEO of the Corporate Council on Africa, last week warned that unless the US government establishes a comprehensive Africa policy that fosters private investment alongside aid commitments, the US will continue to lose ground to China.[1] His primary concern is the lack of “public-private cooperation” available to US firms through Export Credit and Investment Insurance Agencies (commonly referred to as ECAs). China’s ECAs were created as part of its WTO accession, and have subsequently become central to the “going-global” strategy announced by Beijing in 2002.
China’s relationship with Africa has been criticised in the West. For example, the US Treasury has described China as a ‘rogue creditor’.[2] This reflects a lack of understanding of the importance of ECAs to the global economy, and their role in mitigating political risk and encouraging Africa’s economic development.
Export credit financing may not make the world go round, but it does make goods go round the world. Today the global market for trade finance is estimated by the WTO to be US$10-12tn and supports roughly 80% of all global trade.[3] This financing enables transactions that would not otherwise take place by extending credit, mitigating commercial risks such as default or insolvency of the buyer, and/or political risks such as the inability to transfer foreign exchange, war, government action etc.[4]
Around 90% of world trade takes place on a short term basis (repayment terms of under 1 year) so is largely devoid of political risk, allowing demand for credit or insurance to be met by the private sector in advanced countries. The remaining 10% relies on repayment terms that can be much longer, up to 10 or more years for investments, infrastructure projects or large capital goods deals. Even in countries with well developed financial sectors these longer repayment terms (particularly to higher risk countries) can only be covered by public ECAs.
ECAs functions and fictions
In forming institutions to manage political risk China is emulating institutions dating back to the Soviet Revolution. This first ECA was established in 1919 so UK firms could maintain exports to Russia in a climate of heightened political risk. Since then ECAs have been created in almost all high- and middle- income countries, with the majority dating to the post WW2 period. Today they exist in a regulated environment as part of the global trading regime.
The regulation of ECAs has been driven by pragmatism not ideology. As ECAs proliferated they moved away from correcting market failure towards mercantilist export promotion by ‘winning exports’ on concessional financing terms. As concessionality increased throughout the 1960s and 1970s in an inter-OECD export war, new regulations were introduced to limit concessionality because, as public agencies, the costs were ultimately borne by the taxpayer.
Today there exist a host of regulations such as maximum repayment terms, country risk classifications and minimum interest rates as well as sector specific provisions for aircraft, ships and nuclear power. The main source is the OECD Arrangement which the United States Trade Representative estimates saves US EXIM Bank US$800mn annually in retaliatory concessionality.[5] The Arrangement is now part of WTO law, allowing ECA cover so long as it is not concessional as defined by minimum interest rates set at the OECD, and crucially can be enforced through the dispute settlement mechanism at the WTO.
In the 1990s China dismantled its old export promotion policies in favour of WTO compliant ECAs. Despite persistent grumblings from the OECD countries there has been no complaint brought to the WTO against either of China’s ECAs which have been created to fulfil slightly different functions.
–          China EXIM Bank was created in 1994 and offers a variety of services such as providing export credits (supplier’s credits in renminbi and buyer’s credits in foreign currency), lends on foreign government loans for projects in China and offers foreign exchange guarantees.
–          The China Export and Credit Insurance Corporation (Sinosure) was created in 2001 and is an investment and trade insurer against commercial and political risks.
There are aggregate statistics showing China’s ECAs as giants, but these are misleading because China’s ECAs are involved in short term financing, particularly Sinosure whose business is 80% short term.[6]  This service is now taken over by the private market in OECD states and as mentioned previously accounts for 90% of global trade. Whilst generalised comparisons are inappropriate, it is true to say Chinese ECAs have come from nothing to be among the largest in the world, and that on the continent of Africa they are the largest by some distance.
 
Chinese ECAs in Africa
China-Africa trade has shot up from just US$10bn p.a. in 2000 to a peak of over US$100bn in 2008, almost matching US trade with Africa which peaked in the same year at US$130bn. Both aggregate figures for trade have been driven by the rising commodity prices which dominate exports from Africa (in 2006 African exports to China were over 60% fuel, and to the US were over 80% fuel).[7] The important difference is that China has doubled its exports to Africa between 2005-9 from US$20bn to 40bn, while over the same period US exports to Africa have moved from just US$12bn to 18bn.[8] This is where Mr. Hayes sees the potential for “public-private cooperation” in financing, but to what extent have China’s ECAs been pivotal in opening Africa to Chinese firms?
 
According to Li Ruogu, president of the China EXIM, it has invested one-third of its US$139 billion assets in Africa. On the other hand, Sinosure’s liabilities are only 20% in Africa – yet by number of projects Africa dominates with 84%[9] out of annual global cover of over US$140bn for 2010.[10] Compare this to US EXIM, no minnow, authorising US$21bn of loans guarantees and insurance globally in 2009 but having supported just US$3.8bn in transactions with Africa since 1999.[11] In fact, US EXIM’s business is broadly representative of OECD ECAs who are concentrated in a few middle income countries including China, Russia, Saudi Arabia, Iran, Nigeria, Brazil and Turkey (note the lack of concern paid to ‘good governance’ or human rights).
Far from promoting exports to Africa, particularly large infrastructure projects or capital goods exports, OECD ECAs are not even providing long term cover, so firms have little chance of competing with Chinese businesses. For example, US EXIM does not offer long-term (7 years plus) cover in 27 African states – and for all OECD ECAs African states are found in the highest risk category. Based on the products available it is certainly the case that Chinese ECAs offer their firms an advantage in Africa, but this only goes some way to explain the success of Chinese firms in Africa.
America’s imaginary loss?
There is a lack of support from OECD ECAs relative to Chinese ones in Africa, but what is it that Western firms are losing out on? Sinosure is insuring large numbers of relatively smaller projects compared to its global operations, but contrary to the Western experience of trading with China, this is not evidence of the flooding of local markets with underpriced Chinese manufactures. A UK government study has found that it is only in Uganda that basic consumer goods equalled a fifth or more of goods imported from China. Across the continent these consumer goods imports are displacing imports from elsewhere, and not supplementing them to the detriment of local production.[12]
In fact, imports from China are dominated by machinery, electronic equipment and high- and new-tech products. The UK findings are supported by information from Sinosure which reported that mechanical and electrical products accounted for 53.1% of its global export insurance in the first half of 2010.[13] In this area China is exporting production whilst upgrading the value-added of production at home – something that the US cannot emulate given that it has already exported similar production to East Asia through the second half of the twenty-first century.
China EXIM is a different story. According to Standard & Poor’s research China EXIM gave 90% of it’s loans in 2006 to state owned enterprises or large projects in foreign countries.[14] China EXIM puts the figure in Africa for 2006 at 79% large infrastructure projects across 36 countries.[15] The World Bank has estimated the sectoral concentration of these projects to be 40% in power, 24% multi-sectoral, 20% transport, 12% telecom and 4% water, with 80% of the loans in 2006 going to Angola, Nigeria, Mozambique, Sudan and Zimbabwe – facing little competition as only Nigeria and Mozambique are eligible for long-term cover by US EXIM.
So will the US still lose out to the Chinese even if cover were offered? Probably, but not because of any Chinese advantage in public financing. Rather, it is because as Witney Schneidman, a top Africa advisor to Obama, has noted, “US companies don’t build roads, don’t build dams, don’t do energy infrastructure”, but that “US companies are well represented” in the extractive sectors in a number of countries in Africa where it is competitive. Statistics currently support the notion that China has essentially filled a void rather than stepping on US toes in supplying infrastructure projects and capital goods. Awareness of these facts rather than scaremongering about China enacting a new colonial era has important ramifications for China and the US and their dealings in Africa.
Firstly, the US will not be well served by engaging in an export war through its ECA in Africa. It does not have relevant industries to export production to most of Africa, and it is not competitive in the majority of infrastructure projects on a continent which favours labour intensity over advanced capital intense projects. Secondly, the Chinese need to learn the lessons of the 1970s that lead to the creation of risk perception based regulation at the OECD.
Throughout the 1970s the OECD ECAs loaned out money for large projects in the developing world wherever there was demand, and this strategy ended up being very costly to central government who ultimately bore the cost of non-performing loans. There are promising signs of an increasing sophistication of risk management at China’s ECAs with the China Insurance Regulatory Commission stating that it will transform Sinosure into a joint-stock company thereby giving primacy to profit over national interest. [16]
Finally, there exists a great potential for collaboration in ECA activity. No ECA can be expected to prioritise ‘development’ of another country over its national interest, but there is potential for the ECA activity to ‘complement not compete’ towards achieving Africa’s developmental goals. For example, the US and Europe’s high-tech agricultural solutions can be complemented by Chinese roads, ports and power to give a real kick start to pro-poor growth. However nothing is certain as no ECA has given an indication of how they will respond to the rise of the Chinese ECAs and their businesses reaching into Africa, but as an area with the potential for conflict or progress, it is certainly an area to keep an eye on.
Tom Durkin
t.durkin@lse.ac.uk


[1] Quoted in ‘U.S. Policy Should Spur Private Investment in Africa’ (2/8/2010)http://www.globalatlanta.com/articlevid/24118/1052/
[2] “China-Africa Ties Come Under Fresh Scrutiny,” The Nation (Kenya), December 12, 2006; “Beijing Summit: Implications for Africa,” TD, Nov. 5, 2006; Michael Phillips, “G-7 to Warn China over Costly Loans to Poor Countries,” WSJ, Sept. 15, 2006:A2
[3] Marc Aubin WTO Secretariat, ‘Boosting the availability of trade finance in the current crisis: Background analysis for a substantial G20 package’, Centre for Economic Policy Research – Policy Insight No. 35, July 2009 p.1
[4] Stephens M. 1999. The Changing Role of Export Credit Agencies. IMF p.8
[6] PRI Centre, ‘The business of Investment Insurance in China’ http://www.pri-center.com/documents/south_south/report.pdf, December 2007, p.4
[8] All data calculated from IMF Direction of Trade Statistics Dataset 10th August 2010:http://www.esds.ac.uk/international/support/user_guides/imf/dots.asp
[9] PRI center p.4
[11] US EXIM Annual Report: Management Discussion accessed at:http://www.exim.gov/products/special/africa/afr_exim-in.cfm
[12] Chris Edwards and Rhys Jenkins, The Effect of China and India’s Growth and Trade Liberalisation on Poverty in Africa (London: UK Department for International Development, 2005):28-29, 38
[13] Xinhua Economic News Service, July 13, 2010, ‘China’s export credit insurance keeps expanding in H1’ accessed at: http://insurancenewsnet.com/article.aspx?id=207068&type=newswires
[14] Standard & Poor’s, Bank Credit Report, Export-Import Bank of China, August 10, 2006, pp. 2ff.
[15] Export Import Bank of China, China-Tunisia Cooperation Forum, press release, March 28, 2006.
[16]‘China to improve reform plans of China Eximbank, Sinosure’ accessed at: