What sort of trade finance does SG carry out?
Chang: We play a role with regard to the lender and the borrower. We work with the borrower by helping to finance their capital needs and we work with the suppliers to help them make their sales. Say you have five manufacturing firms bidding for a big project in China. We would hope to provide the financing while also helping the borrower to evaluate the financing bids to put together the best financing package.
How big is this particular line within SG?
As a business line, it's similar to our project finance on a global basis. Although in Aisa, project finance group has a bigger footprint. It's complicated by the fact that we often originate in Asia, but book in Europe. But not many banks have a worldwide team as large as 145 people.
Aisa obviously has a lot of imports of exports. Of our $5 billion annual finance portfolio, 20% comes from Chinese imports, that is selling good into China. The imports consist of power transmission lines, large power plants for the Three Gorges Dam and so on. However, with the Chinese government's insistence on localization, we're finding that the growth of Chinese imports as a revenue generator is much less than previously.
We tend to see two distinct markets now: financing goods on the import side in South East Asia and financing on the export side from North Asia. Japan's exports to the rest of Asia constitute one third of our growth, for example. China is also becoming more important on the export side.
We are also a market leader in Korea, working with the two Korean ECAs. We work with their guarantee programme. Korea has a strong ship building industry, much of which goes to the Middle East and Latin America. Korean banks have not been interested in this business, because their funding costs are higher than ours, so they operate at a competitive disadvantage. In any case, foreign banks are much better equipped to take foreign risk. Korean banks like to support Korean projects, not to finance foreign projects, even if they acquiring Korean products.
How crucial is the role of ECAs?
In depends on the time and place. ECAs were very active after the Asian Financial Crisis in the late 1990s because liquidity had totally dried up. In emerging markets, ECAs are also important because of the political risk. As a commercial bank we are good at working out the commercial risk, but not so much the political risk.
The role of the ECA is to help us mitigate the risk of providing a loan to facilitate imports to, for example, an Indonesian importer. On a $100 million dollar loan to an Indonesian importer, the ECA might take on anything between 50-100% of the risk.
ECAs are also important by being able to take on very long term loans for which we as a commercial bank have less of an appetite. A nuclear power plant can require financing for 22 years, for example.
So the advantages are numerous: We can offer cheaper financing thanks to the ECA guarantee and our return on capital is leveraged, since we may only have 20% exposure to a 100 million loan asset. The borrower get cheaper, longer term financing.
The role of ECAs has gradually moved from guaranteeing loans made only to foreign governments to guaranteeing loans made to the private sector. I would say that 80% of loans guaranteed by ECAs are in the private sector. An important part of the ECAs is that they do not compete with commercial banks. But I would say they have to get their premiums down, though!
Where have you been active recently?
We have been quite active in Malaysia, providing loans in local currency. Malaysian and the Philippines are both active in the telecoms sector especially. We are currently talking to Digital in the Philippines, the number three mobile operator.
In contrast, India is a very difficult market, mainly because it's very competitive due to the many foreign banks which have a presence there. But some deals are coming to market, such as Reliance importing telecom equipment. Indian borrowers have many financing tools, are very difficult negotiators and things take a long time.
Vietnam is turning into a big market for us. Decisions are taken very slowly, but once taken things move fast. We were the sole arrange for Vina Shin , a cement company which needed to finance a power plant. It was an interesting deal because we took an Agricultural Bank guarantee instead of the more usual Ministry of Finance guarantee. We are seeing a revival in import financing in Vietnam as liquidity gets a bit tighter.
Also Indonesia: ECAs becoming more positive. You need lots of ECA support as we do have limits for our credit exposure in such a difficult country. But we see Indonesia as a big market for export finance in the next couple of years.
What's the situation in China regarding export finance?
China is very proud that in 2001 they established a brand new ECA, Sinosure. This is a very important development. After joining WTO, China et up the ECA to support any company manufacturing in China, whether it be joint ventures or wholly-owned foreign enterprises.
We did the first transaction with Sinosure as foreign bank at the end of April. That means Sinosure has now gone international. We understand international borrower and can give advice and 'comfort' to Sinosure through our analysis of borrowers.
Chinese banks don't have a presence in emerging markets, so who is going to monitor credits of the foreign borrower for them? Chinese banks not really geared to finance out of China. They can finance out of China now but only if they follow Chinese exporter, not to help the foreign party import Chinese products.China is on the path to developing a huge capital export capability covering telecom, power and ship building to emerging market economies. Ultimately, it's going to be a big market, although right now it's not that huge.
Take ZTE, the telecom company in Shenzhen. Their export growth is 40% per year. They have same technology as Western companies but their pricing is much more aggressive.
Thanks to Sinosure, there is also now much more pressure on equipment manufacturers to have JVs or WOFEs in China, so we are working with MNCs to help them put together financing for export from China.
For example, mobile phone manufacturer Ericsson used to use its Swedish CEA to support its exports to emerging markets, where risk is relatively significant. When they initially began to manufacture in China, there was no way to find the financing - so they would still rather export from the European Union and get ECA support. But with Sinosure guaranteeing the emerging market borrower to acquire Ericsson goods, Ericsson can manufacture more cheaply in China.
How active has Sinosure been?
Their general policy is still being crafted. There are two to three deals close to completion. European banks are looking to work with Sinosure, but so far SG is the only bank to have signed with them so far.
A strange thing about Sinosure is that there is no explicit guarantee from the government. It's owned by the government, but there is no guarantee.
But when we did our due diligence, we classified it as having the full faith and credit of the Chinese government.
We believe Sinosure is truly an instrument of the central government, supervised by the MOF.
But lots of banks haven't decided how to rate it - is it a financial institute in China, is it quasi-government or does it reflect the full faith and credit of the Chinese government? We made public the Sinosure risk to be equivalent to the central government, that is to say, the same status as international ECAs.
How is Sinosure financed?
Most ECAs get budget allocations from the treasury, as does Sinosure. China Export Import Bank used to do all the export financing, but then Sinosure was broken out as a separate entity. China Ex-Im bank even today retains a very strong position. With a Sinosure insurance policy, they can provide a commercial interest reference rate (CIRR), which is a concessionary fixed rate worked out every month by members of the Organization for Economic Development and Cooperation (OECD).
Sometimes, the CIRR very attractive, but we can't provide it, so it's sometimes we can't compete against it. However, at the moment floating rates are so low that we can at least talk to the customer and tell him to choose floating rate perhaps in the initial stages. Of course, sometimes borrowers are very conservative and want to lock into the fixed rate regardless: That business is won by China Exim Bank. Other Chinese banks are upset about the ability of China Ex-Im bank to offer this service since they can't compete either.
Hopefully, China will offer the kind of interest rate stabilization program that many other countries offer and which is open to all banks. For instance, in France, the CEA will make up any shortfall in the fixed rate I offer a customer. That support is necessary because commercial banks fund themselves via fixed rates not floating rates.
