1. Executive Summary
- Being the most important tool we have to move goods from A to B, ships play an indispensable role in global trade. However, investing into new ships is risky business. The shipping market is highly volatile, and follows the global economy. In an environment like this, creating a favorable financing environment for both owners and lenders of ships is an important tool to ensure that the capacity, tonnage and ability of ships needed for the future is present in the market.
- The shipping market has been experience an economic downturn since the last global financial crisis in 2008, making it challenging for shipowners to order new ships for the needs of the future. Meanwhile, China’s maritime part of the BRI may create demands for new-builds that are up to date in terms of environmental standards, fuel-efficiency, and with the latest technological equipment and ability to handle tomorrow’s cargo (such as for example LNG and factory ships).
- China supports Chinese shipbuilding through three policy-institutions; China EXIM Bank, China Development Bank, and SINOSURE. Financing from these three institutions requires that the ship is build in China by a Chinese shipyard with a certain percentage of Chinese equipment and materials.
- Chinese ship financing is focused on ship leasing finances, which means that the ownership of the ship will stay at Chinese hands (by Chinese financing institutions), while operating profits from the ships may come from abroad through their global operations.
- Chinese ship financing may pose a threat to western and European ship financing institutions through a higher level of competition - possibly leading these institutions to expose themselves to larger financial risks in their pursuit to maintain their profitability.
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2. Who are the main actors influencing strategy decisions in respect to Shipping Finance in and from China?
Up until 2007, China had none of the 15 largest ship finance institutions in the world. Today, they boast of having the largest (China EXIM Bank), the 5th largest (Bank of China) and the 12th largest (ICBC Financial Leasing) institutions in the world. The 15 largest ship finance institutions holds an investment portfolio of over USD258bn, with Chinese institutions currently holding around 25% of these investments. The combined investment value of China’s shipping finance amounted to USD17bn provided for the year of 2018.
The Chinese Government is the key influencer on China’s strategy on ship finance. The government utilizes mainly three policy banks to provide financing and insurance to ships built in China by both Chinese and foreign owners: China EXIM Bank, China Development Bank, and Sinosure (China Export & Credit Insurance Corporation). These three institutions perform different functions with regards to financing of ships, which will be discussed under headline four in this text. Apart from its policy banks, China also utilizes its commercial State Owned Banks to provide ship finance, out of which the ones with the largest shipping portfolio are Bank of China, Industrial and Commercial Bank of China, Bank of Communications, and China Merchant Bank respectively. The table below shows the ten largest Chinese institutions on ship finance in 2018, measured by billions of USD invested into ships, with the Government’s three policy banks being highlighted in bold:
|Name of institution||Value of ship finance for the year of 2018 (in USD Billions)||Rank in China in terms of investment 2018||Total estimated value of Shipping portofolio (in USD Billions)|
|China EXIM bank||4||1||17|
|Bank of China||N/A||2||15|
|ICBC Financial Leasing Co., Ltd||2,8||3||11,8|
|Bank of Communications Financial Leasing Co., Ltd||N/A||4||8,9|
|Sinosure (China Export & Credit Insurance Corp)||2||5||N/A|
|China Merchant Bank Financial Leasing Co., Ltd||1,7||6||4,3|
|China Development Bank||1,4||7||2,35|
|Minsheng Financial Leasing Co., Ltd||1,2||8||6,11|
|China State Shipbuilding Corp (Hongkong) Shipping Co.,||1||9||4,7|
|China Development Bank Financial Leasing Co., Ltd||0,7||10||2,35|
3. What are the goals and sub-goals of the main actors in respect to shipping finance?
The Chinese Government’s first and foremost seeks to secure domestic employment and safeguard domestic shipbuilding industries through its ship financing strategy. This is particularly evident through the government's utilization of its three policy banks to provide financing for ships, where all three require the ships to be built in China as a precontext to make finances available. Investment into tonnage built at Chinese shipyards stood at approximately USD 18bn making up almost 30% of the total value of financing for new builds in 2018. Apart from its domestic shipbuilding industries, Chinese ship financing also provides a tool for the government to move money out of China into new markets through investments, which is in line with its Go Out Policy. As will be discussed under the next headline of this text, the Chinese favours ship leasing financing, which means that the ships will stay under Chinese ownership through their financing institutions, and at the same time obtain profits from financing from the ships’ operations abroad. Lastly, by providing stable finance to build new ships, China also ensures that the global shipping fleet stays up to date in terms of environmental standards, latest technology, fuel efficiency advancements, and capacity. Moreover, a renewed shipping fleet also means that the fleet stays up to date with trends in shipping, such as for example commodity needs and size requirements demanded along China’s Maritime BRI.
Chinese Financing Institutions
Since China induces new demand for both ships and shipping services along the Maritime part of the BRI, investing into ships will most likely turn out to be a lucrative deal for chinese financing institutions. The institutions that are not policy institutions are most likely, therefore, motivated by future profits through their investments into shipping.
4. How do the main actors plan to reach their goals - what are their strategies?
To set standards and provide guidance on the country’s financing sector, the Chinese State Council provides its official Guiding Opinions, out of which two specific ones have been released on the topic of ship finance through finance leasing:
- No.68 of 2015 (Guiding opinions of the General Office of the State Council on Speeding Up the Development of Leasing Industry)
- No.69 of 2015 (Guiding opinions of the General Office of the State Council on Speeding Up the Healthy Development of Financial Leasing Industry)
The Chinese Government plans to reach their ship financing goals mainly through providing a favorable environment for ship lease financing, rather than traditional equity financing. The difference between these two tools are that in equity financing, the bank provides finances to a shipowner, who both owns and operates the ship, while paying back the loan to the bank with interest through operating profits gained from utilizing the ship. In ship finance leasing, the bank as an institution legally owns the ship, and leases it out to shipping companies (lesees) at a fixed yearly cost for a fixed period of time (usually 10-15 years, depending on the agreement). The advantage of ship leasing finance is that the financial risk lays upon the financing institutions, who retain the ship as a security through being the legal owner. This puts less risk on the operator (lesee), should the shipping market drop.
Apart from policy and political will to push for growth of ship financing from and in China, the Chinese government also employs direct financial measures through two of its major policy banks on ship finance; China Development Bank and China EXIM Bank. These two banks give out loans only to ships being built in China by Chinese shipyards for both Chinese and foreign ship owners. For ships being built in China by Chinese shipyards, the Chinese State Owned Enterprise Sinosure (China Export and Credit Insurance Corporation) steps in to provide buyer’s credit, owner’s credit and export credit insurance on loans from the two policy banks. Moreover, insurance offered through Sinosure covers Chinese shipyards’ accounts receivable losses, should payment be forfeited. In a volatile market such as shipping, this allows for both shipyards and shipowners to take a higher level of risk with their investment. In other words, they may chose to build new ships even though the market forecast points at upcoming political or commercial risk.
5. What are the opportunities and threats for EU actors in the Chinese strategy on shipping finance?
EU ship finance institutions
EU ship financing institutions will, and already are, experience a high level of competition from Chinese finance institutions in both retaining their current portfolio and to possibly expand it with new customers. A higher level of competition could eventually translate into lower margins in ship financing, possibly leading to banks and finance institutions resorting to higher risk customers to maintain their profitability. Should EU ship finance institutions resort to higher risk profiles in their portfolios, they also create a situation for themselves where they are vulnerable to external risks, such as a downturn in the global economy, or a lower demand of commodities in the global markets.
EU ship owners and operators
China’s push for providing Chinese ship financing could be capitalized upon by EU ship owners and operators to receive preferrable funding for new-builds as well as refinancing of existing ships. By seeking finance from Chinese ship finance institutions, EU ship owners and operators could also reduce their financial risk of their operations, and could possibly also open new markets along the BRI. One threat with finance from China, however, is that, if not operating out of Hong Kong, Chinese financing institutions are operating under Chinese financial laws. This could make arbitration and settlement of disputes connected to the loans more challenging than with financing coming out of for example Hong Kong, Singapore and London (where they have common Law), the U.S. or other European countries.
6. Forecast of possible future developments and outcomes
- The Chinese government will intensify its encouragement to its three policy banks on ship finance to seek customers (read: shipowners and operators) abroad to build ships at Chinese shipyards. This has already happened before. In 2010, China EXIM Bank, through former Chinese Premier Wen Jiabao established a USD5 billion shipping fund in Greece to attract Greek shipowners to buy Chinese built ships.
- In the long run, Chinese ship financing institutions may push traditional, western institutions and banks out of the ship financing market - especially in the tanker and container ships segment. These traditional institutions will most likely then reduce their shipping portofolio in this segments, and invest the money either into niche markets, such as off-shore or specialized ships, or through putting the money in completely new industries.
7. Possible strategy options for local/EU companies and decision-makers.
EU ship owners and operators
- Explore the possibility of building ships in China with Chinese financing from China EXIM bank, and leasing insurance from SINOSURE. This may bring competitive advantages through favorable financing terms and and lower financial risks.
- Ensure that Chinese leasing terms and lending terms have clear guidelines on dispute settlements, failure to uphold the contract requirement, etc.
- If not already present, explore the idea of establishing Export Credit Agencies (ECAs) that focus on ship finance. These ECAs should be used to support domestic shipbuilding industries, such as shipbuilding, ship ownership and ship Management. The importance and ripple effects of these industries may mean that a death of these industries would likely lead to ripple effects into the national economy and would affect the unemployment rate of the country.
James Chen, Experienced advisor for ship finance and maritime investmentFootnotes  Marantidou, Virginia. “Shipping Finance: China’s New Tool in Becoming a Global Maritime Power.” China Brief, February 13, 2018. Accessed May 1, 2019. https://jamestown.org/program/shipping-finance-chinas-new-tool-becoming-global-maritime-power/.  Liu, Cecily. “Chinese Banks Becoming Global Leaders in Ship Financing.” Chinese Banks Becoming Global Leaders in Ship Financing- Chinadaily.com.cn. 2016. Accessed April 30, 2019. http://www.chinadaily.com.cn/business/2016-06/13/content_25687493.htm.  Lloyds List. Top 10 in Ship Finance 2018, December 2018. Retreived from https://lloydslist.maritimeintelligence.informa.com/LL1125081/Top-10-in-ship-finance-2018  Li, Y. WMU J Marit Affairs (2006) 5: 61. https://doi.org/10.1007/BF03195081  Koukoutsi, Iliana. “The Lease As An Alternative Structure For Financing Ships.” Officer of the Watch. June 06, 2016. Accessed April 02, 2019.  Alexandridis, George, Manolis G. Kavussanos, Chi Y. Kim, Dimitris A. Tsouknidis, and Ilias D. Visvikis. “A survey of shipping finance research: Setting the future research agenda.” Transportation Research Part E: Logistics and Transportation Review 115 (2018): 164-212. Rate this Situational Analysis [yasr_visitor_multiset setid=0] Strategy Development Section To participate in the debate, please:
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