U.S. and China to Kickstart Export Financing Talks

February 16, 2012 Posted by China Briefing Reading Time: 3 minutes

Feb. 16 – The United States and China agreed on Tuesday to jointly work on setting guidelines for export financing, an area in which countries often compete fiercely to win an advantage for their own domestic export markets.

Washington and Beijing plan to establish an international working group that will also include other major government-backed export credit agencies (ECAs). They aim to reach an agreement by 2014, according to the White House.

The two countries agreed to make “concrete progress towards a set of international guidelines on the provision of official export financing that, taking into account varying national interests and situations, are consistent with international best practices.”

With the Obama administration’s bold promise to double the country’s exports within five years ever in mind, the U.S. government has raised concern over China’s aggressive export financing practices in recent years. Although China’s official ECA the Export-Import Bank of China (China Exim Bank) did not specify the size of its total export financing in its 2010 annual report, the bank disclosed that its total loan issuance had achieved RMB707.6 billion (US$112 billion) by the end of 2010. This figure is around 4.6 times more than the U.S. Export-Import Bank’s total export financing in 2011, which combines various financial instruments such as loans, guarantees and export-credit insurance.

In a recent letter to members of U.S. Congress, several U.S. business entities – including the National Association of Manufacturers and the U.S. Chamber of Commerce – estimated that China provides 11 times as much export financing as the United States.

One of the reasons that China is winning more export deals is that it is not so much restricted by international regulations in the area. The world’s second largest economy is still not a participant in the “Arrangement on Guidelines for Officially Supported Export Credits,” a pact of rules regarding the use of government export credits under the Organization of Economic Cooperation and Development.

The lack of regulatory restrictions allows Beijing to gain more flexibility in its export financing policy. It can provide more preferential terms than other lenders for deals that are critical for its national interests, while offering terms that are closer to international standards for deals that are less politically sensitive. It also tends to impose less onerous transparency conditions.

China’s powerful export machine and its flexible policies have barred global exporters from competing on a level playing field; international buyers make decisions not only based on the pricing and quality of the exported goods, but also on the extent of financial support they obtain.

“They are winning deals in part because they are not playing by the rules,” said U.S. Exim Bank Chairman Fred Hochberg in an interview last year. “We’re not going to sit idly by and let you buy business. We will compete and make sure you stand toe to toe with American companies and American workers.”

The exclusion of China from the international export financing guidelines has forced the U.S. Exim Bank to take action in an effort to counterbalance the Chinese policies. Early last year, the bank agreed for the first time to match Beijing’s cheaper financing terms to get the Pakistan government to buy 150 locomotives produced by General Electric.

U.S. business groups believe such matching to Chinese terms is the best way to prevent China from undercutting others and force it to finally follow internationally accepted rules. They are in support of the U.S. Exim Bank’s reauthorization in Congress this year, hoping the agency can play a larger role in protecting “billions of dollars in U.S. exports and thousands of American jobs.”

Looking beyond the competition in pure business interest, one more fact that may be worrying to the Americans is that China is using its undisciplined trade financing tools to expand its political influence around the world. For example, half of the US$20 billion loan China offered to Venezuela was denominated in RMB, revealing Beijing’s intent to further internationalize its local currency and reduce reliance on the U.S. dollar. Such loans can also help China win more support in developing countries, especially at a time when loans are hard to come by due to the current economic downturn facing many Western countries.