Taking the risk

Despite the fast growth of china's economy, finding export finance for China is still a struggle. With the financial tightening, the most widely-used method of payment ? letters of credit (L:/Cs) ? have become increasingly difficult to get. The new measures announced by the "economic czar", Zhu Rongji to curtail financial and real estate speculation have made exporting to China even more difficult, the uncertainty over the exchange rate and rumours of a devaluation have made traders uneasy.

Historically, China has been problematic for exports, particularly over the uncertainty of payment and who you are dealing with, explained an American banker. Over the last two years, the situation has steadily improved and major US banks report that there has been a steady increase in requests for export finance.

"Starting in late spring, with the exchange rate fluctuating, Chinese importers, all of a sudden had to come up with additional foreign exchange, sometimes as much as 30 per cent more," explained the veteran? director of successful Sino-US. "We experienced a 'blip' in the opening of letters of credit in June and July. But the last two weeks have been steadier."

"Just as China trade starts building up momentum, the government slows things down. This is not untypical of China, but it causes exporters who were skittish to begin with, to become more skittish," said the head of export finance for a major CIS bank. "From our customer's perspective, he is only worried about his next sale and not the macro economic implications of China's financial tightening." China's clamp down on the importation of goods has adversely affected people who are in the contract stages or who are nearing shipment.

Another serious impediment to exporting to China is the time it takes to process an L/C. Typically L/Cs take 3 4 days to clear, but the Bank of China processes L/ Cs manually. With the room in China trade, the bank has been flooded with requests. Though universally accepted that Bank of China L/Cs are always good, they usually take 21-28 days to clear. This is a huge strain on small and medium sized firms who do not have the financial resources to finance L/Cs up to clearance.

European and Japanese banks offer some advantages over their American counterparts, and are considered to have the upper hand in export finance to China. Many small and mid-size American companies are choosing them over US banks. There are only about two dozen American banks that offer export financing at all. "Most L.IS banks were burned by the Latin American debt crisis of the 1980s and are still hesitant to take on foreign risk," explained an American banker. In addition, American banks are hampered by US government banking regulations which require high insurance premiums.

Of the American banks, Citibank has the largest trade finance units. Most of the Citibank's export finance customers are the larger American firms. "The cost is the same to do a large transaction than a small one, so obviously we are going to do the large one," admitted Michael Quinn, vice president of Citibank. Because of the costs, small and medium sized American firms still find it difficult to get export financing. It is estimated that aggressive foreign banks finance up to a quarter of US exports.

In the last year, China has received over US$2bn in foreign government supported loans. Almost all of the foreign aid programmes that were suspended after June 1989 have been reinstated and many have been expanded. The number of government loans that are tied to exports of the lending country, are on the decline. In 1992, the Organisation for Economic Cooperation and Development (OECD) signed the Helsinki guidelines to untie and monitor aid in a number of ways. Anecdotal evidence suggests that exporters are winning cross-border financing.

The US Export-Import Bank (Exim) loans to China have ballooned to just over US$1bn. This autumn Exim intends to issue its largest loan ever to China for nearly US$400m to finance the export of 6 Boeing aircraft to Shanghai Airlines. But US funding is dwarfed by Japanese funding. Japan's Overseas Economic Cooperation Fund (OECF) is the world's largest foreign lender to China. Under its Third Yen Loan Package, the OECF has pledged US$6.2bn to fund 42 key projects between 1990-1995. Gradually more American and European firms are winning OECF contracts as they become familiar with the bidding process. But many exporters still complain that submitting bids for untied aid is costly and confusing. Though some underdogs have successfully won untied loans, like American hydraulic turbine manufacturer, Voith Hydro Inc which won a US$40m energy contract from OECF, most contract winners are the larger multinational companies.