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Trade and Project
Financing
A. Banking System
China's banking system is changing rapidly under the impetus of
economic reforms. At the top of the system is China's central bank,
the People's Bank of China (PBOC), which sets monetary and, together
with the State Administration of Foreign Exchange (SAFE), foreign-exchange
policies. According to the 1995 Central Bank law, the State Council
maintains oversight of PBOC policies.
Below the central bank are the state-owned commercial banks: Bank
of China, People's Construction Bank of China, Agricultural Bank
of China, Industrial and Commercial Bank of China, and Bank of Communications.
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 companies 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.
Three new government "policy" banks have been established
since 1994. These banks will take much of the financial responsibility
for financing economic and trade development and state-invested
projects included in the government's five-year economic plans.
They are the China Development Bank (formerly the State Development
Bank of China) and Agricultural Development Bank Export-Import Bank
of China.
B. Foreign-Exchange Controls
The PBOC and the 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 all foreign-
exchange earnings to the banking system, 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
to purchase the funds.
Foreign-invested enterprises (FIEs) are permitted to keep foreign
exchange in forex accounts at commercial banks. The Chinese government
has eliminated the foreign-exchange swap centers on which FIEs used
to trade among themselves, and 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 are provided a stamped Foreign Exchange Registration Certificate,
which will enable them to obtain foreign exchange. China's 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 the renminbi 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 the pervasive practice of exploiting loopholes and lax enforcement
procedures to get around the controls on capital transactions. Since
then, traders have complained of delays as their underlying documentation
is screened more closely by SAFE and other regulatory authorities,
including the tax administration. SAFE has been responsive to appeals
that it streamline its system.
Foreign banks, their branches and Sino-foreign joint ventures are
allowed to act as authorized banks, buying or selling foreign exchange
from, or to, foreign-funded ventures. But foreign-funded banks are
not allowed to accept renminbi deposits or make renminbi loans except
in the experimental zones of Shanghai's Pudong district and Shenzhen.
Elsewhere, foreign branches are prohibited from accepting RMB deposits
(liabilities) but can maintain RMB accounts to provide foreign-exchange
conversion for their customers. China has pledged to expand the
scope of renminbi business gradually and to eliminate geographical
restrictions.
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 International Finance Corporation (IFC): 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. IFC's core business is "project finance"
and it currently has over US$ 1.2 billion invested in "project
finance" undertakings in China. These are projects with anticipated
cash flows that can cover debt-service repayment to lenders and
payment of dividends to shareholders. They are without government
guarantees. 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.
The Overseas Economic Cooperation Fund (OECF) of Japan: The OECF
is a Japanese government organization which extends long-term, below-market
interest rate loans to China. In the 1997-1999 period some US$1.4
billion will be available for 130 projects under the Fourth Yen
Loan. These projects are described in the "OECF Quarterly Report
Supplement" available from the Public Relations Division of
the OECF in Tokyo at (81) 3 3215-1307.
Many U.S. companies have been successful in obtaining contracts
under these loans either on their own or by working 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 also offers untied credits which
are medium- or long-term loans at market interest rates. Approximately
30% of JEXIM's credits are untied and these are also 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. 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 State Development Bank, and will work with
other banks, including China Construction Bank, Industrial and Commercial
Bank of China and Bank of Communication, assuming 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, several banks, other major Chinese banks
have the authority to issue letters of credit for Chinese imports.
These include the 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, local Chinese courts have issued injunctions,
from time to time, barring Chinese banks from clearing letters of
credit whose underlying documentation has been challenged. The central
government has issued guidance against this practice, which should
gradually disappear. 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. Thus, 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 modest 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 which 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 enter
into a cooperative joint venture to ensure the sale and financing
of their equipment.
E. Insurance
Insurance: The China operations of the Overseas Private Investment
Corporation (OPIC) have been under suspension since the Tiananmen
incident of 1989 (see section VII M. above). The U.S. Ex-Im Bank
has programs which 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 been experimenting with various
limited-recourse project financing schemes. Long awaited Build-Operate-Transfer
(BOT) laws have been delayed, however, and the overall private finance
climate has cooled off during the past year. 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 which 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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