Friday, January 14, 2011

Has China's Export Financing Met Its Match?

photo: a train in Pakistan: but is it GE or Chinese? 

A fascinating new development in the dry area of export financing: we learn that for the first time, the US Eximbank has matched China Eximbank's terms for export financing. John Pomfret reports for the Washington Post on the case of GE's effort to win a tender for train exports to Pakistan. GE was about to give up:

After all, China was a powerful competitor that routinely offered low-cost financing - below-market interest rates, easy repayment terms - that cut tens of millions of dollars off the bottom line of its international deals.
But in a case that underscores a significant shift in how the United States and the rest of the developed world are dealing with the challenge of China's economic might, the U.S. Ex-Im Bank decided to fight back. In February of last year, U.S. Ex-Im informed Pakistan's Ministry of Railways that it would take the unprecedented step of matching China's below-market-rate financing terms.
GE won the contract. 
"There's a new willingness to take on China, to compete toe-to-toe with China on financial terms," said Fred Hochberg, the chairman of the Ex-Im Bank. "This is a policy change that we will compete with anyone who's not compliant."
In an interview with the Wall Street Journal, Hochberg confirmed this view: "They're winning deals in part because they're not playing by the rules." Although the US administration positioned this action as a move against China, which was not "playing by the rules" it's important to point out that the rules China was not playing by are a voluntary "Arrangement on Officially Supported Export Credits" set by the elite membership of the OECD, an organization of wealthy states that does not include China.

The rules apply only to other OECD members. Why should China abide by these rules?

This is a positive development. The US has long pressed other wealthy exporting powers to adhere to common rules in order to try and create a level playing field. Yet the rise of the BRICs now makes the choice of the OECD as the arena for rule-making seem quaintly obsolete. If we want to get China and the other BRICs to play by the wealthy countries' rules, we do need to create incentives. Now, in a tiny way, Chinese companies can feel the pain of being outside. But more importantly (and urgently), we need to have an arena in which these negotiations can take place.

Pomfret gets one thing wrong, I think. He suggests that the Chinese are using "foreign aid" in these deals, and that the US must use its foreign aid "to serve diplomatic or strategic goals" but that China's Ministry of Commerce dispenses foreign aid, with the purpose of "making money for China." First, it isn't foreign aid funds, but export credits that we're talking about, and they are not being disbursed by the Ministry of Commerce but by the China Export-Import Bank. We have the same kind of agency, the US Eximbank, and that's the relevant comparison: both were set up to "make money" for their owners' companies. I doubt if the US Eximbank got a tranche of finance from USAID for the train deal. 

What were the actual terms for the contract? We learn from Pomfret that "Instead of fees of up to 21 percent of the contract, the United States said it would charge Pakistan 8 percent. Repayment was stretched from 10 years to 12." Charging fees of 21 percent, no wonder we're losing out to China! From the Wall Street Journal, we learn that the interest rate charged by the US Eximbank will be based on Treasury bond yields (now about 3 %), but we don't learn what the margin over T-bonds will be. I will try to find this out, but I doubt if the US Eximbank will be any more transparent on this than China's Eximbank.


Anonymous said...

I was surprised to read that Pakistan was chosing GE locomotives althought "... the Chinese were 30 to 50 % cheaper..."
Anyway, aid or trade, the benefits wil, this time, be for the GE shareowners and it will be the US taxpayers who will finance the deal...

Deborah Brautigam said...

I wonder if the US Ex-Im Bank is providing the full financing, or if they are guaranteeing or subsidizing a private bank loan? A lot of details still to emerge on this deal...

Dan Haglund said...

Loving your blog, Deborah.


Deborah Brautigam said...

Thanks Dan! I'm loving Dan Haglund's careful research and fieldwork, including articles in China Quarterly, and Journal of Modern African Studies. For one of Dan's latest pieces, see:

Tom said...

Not quite the whole story.

Recently, Pakistan Railways has been loudly bashing the quality of the 2001 Dongfang locomotives they bought from China.

Last year, the local representatives of EMD (the other major American locomotive manufacturer) charged publicly that the tender was structured so that only GE could win. Allegedly, the technical specifications were written so that only GE could fulfill them, and the locomotives were required to come from one country only. This excluded EMD, which performs final assembly in Ontario and was planning to use Canadian EDC financing.

In other words, Pakistan Railways had no intention of buying engines from Dongfang, or EMC, or anyone except GE. They just wanted better terms -- and they got them.

The Washington Post article might better be titled, "Jon Pomfret talks to the director of the US Exim bank and writes an article about it." The article shows no signs that he talked to anyone at GE.

Deborah Brautigam said...

Well, that's interesting Tom! Any links to stories on this?

Tom said...

Here are the allegations made by EMD:

Here's the long and tortured story of the Dongfang locomotives purchased in 2001 -- half of which are now out of service:\10\10\story_10-10-2010_pg5_5

Note that 3/4 of the Dongfang locomotives were delivered in kit form, for final assembly in Pakistan. In the decade to 2001, Pakistan Railways managed to run down 2/3 of its locomotives to non-operational status:

China Railways seems to be able to keep Dongfangs in working order ...

I guess we'll see in another ten years if Pakistan's GE locomotives are still working -- and if US Exim Bank manages to get most of its money back.

Deborah Brautigam said...

Thanks for this good research Tom. I remember Dongfang tractors being used in Liberia in 1983. They weren't very popular with the Liberians... but they've had several decades to upgrade the quality.

TD said...

the OECD rules apply to all countries through their adoption at the WTO in general terms in Annex I of the SCM
1. Item J- ECAs must charge premiums sufficient to cover the “long-term operating costs and losses of the programmes” , and;
2. Item K- OSECs must not contain an interest rate subsidy i.e. credit must be equal to or above the cost of government funds

It is the OECD that prescribes minimum premia and sets country risk ratings (basically ruling out many African states).
It is interesting to note that the minimum rates allowed are 100bp above a basket of govt bonds, thus giving low interest rate economies (read US) an implicit advantage.
Some of the OECD Arrangement has tied the hands of signatories but it should be kept in mind that the motivation for the Arrangement was interstate competition between the OECD. They do not want their financing cartel broken by those 'cheating chinese'.

Finally, when it comes to the reality of 'cheating' the evidence often conflicts. I have surveyed China Dev Bank loans vs. ECA equivilents to an unameable Russian Telco (its for my employer!). China terms were MORE expensive than European rivals from Germany, Finaland and Sweden.

Finally, if anyone is interested in more ECA material pls read:

Deborah Brautigam said...

This is exceptionally helpful. I highly recommend the report by Tom Durkin at the website referenced above. It's one of the most sensible things I've read on this topic. I touch on it also in The Dragon's Gift, pp. 297-299.

Anonymous said...

US Ex-Im bank is surprisingly transparent on their interest rates for specific projects, unlike the World Bank. They're right in the annual report.

Anonymous said...

Also, CDB rates are higher than Western rates, but Ex-Im rates seem to be lower. Tough to know for sure.