Selling more to China has been one of the hottest topics since the beginning of the Obama Presidency. Though exports to China have trebled since an agreement to support U.S. manufacturers was reached in 2005, the trade deficit continues to grow. A renewed push from within China is providing hope for accelerating U.S. export growth.

Our Codependency

Undoubtedly, China has impressed the world with the fastest-growing economy over the past 30 years. Since the country’s implementation of free market reforms in 1979, its annual gross domestic product (GDP) has averaged growth rates of nearly 10 percent. China has also become the 2nd largest trading partner of the United States with $562 billion in total goods in 2013.(1) With a rapidly rising economy and increasing global trading activities, China is a large and potentially colossal export market for the United States.

From China’s perspective, economic cooperation with the U.S. continues to be an economic imperative especially in trade and foreign investment. Whether or not China can maintain a fast growing economy largely depends on the Chinese government’s ability to set forth effective economic policies as well as receive support from international partner countries. Unlike other economic powers, China is still in the development stage where it is continuously striving to adapt to international standards with regards to reducing the gulf between the rich and the poor, and improving environmental protection. The U.S. continues to play a vital role in this transformation as both China’s largest investor and trading partner.

Framework Agreement

From 1985 to 2005, the U.S. portion of bilateral trade dropped from 50 percent to 14 percent. Recognizing the growing trade imbalance and the economic relationship between the two countries, The Export-Import Bank of the United States (ExIm Bank) signed a Framework Agreement with the China Ministry of Finance (China MoF). A company in China could get up to 100 percent financing from a U.S. commercial bank with guarantees from the U.S. ExIm Bank. This 2005 agreement was meant to promote the importation of goods and services made in the U.S. by giving China’s importers favorable financing terms.

Under this framework agreement, a company in China could get up to 100 percent financing from a U.S. commercial bank with guarantees from the U.S. ExIm Bank, which in turn relies upon the sovereign guarantee of China. This financing applies to loans of two years or longer. In addition to creating attractive lending terms, the Chinese government has agreed to waive all import duties on U.S. products using this program. The expectation is that the goods and services where the U.S. has a competitive advantage are ideal for this type of government support.

The Transaction Process

Typically, the Export-Import Bank of China acts as the borrower for these transactions with China’s MoF acting as a guarantor. Currently, there are twelve approved ExIm Bank guaranteed lenders among which HSBC, Wells Fargo Bank, Bank of America, and East West Bank are currently the most active banks participating in this program. However, new financial institutions are being considered.

A project that can avail itself of this type of financing in China will first go through a multi-level approval process within the Chinese government from local to provincial, then to a national level. An independent U.S. exporter is usually involved as a consolidating agent due to the level of a project’s complexity, which may contain hundreds of types of equipment and machinery parts sourced from the U.S. and other countries.

These non-OEM exporters have to go through a qualification process with the U.S. ExIm Bank to become as an acceptable exporter of record. The responsibilities of an exporter include arranging logistics, filing proper documentations, working with various parties involved in the transaction and distributing funds of the loan to the respective parties.

For the Chinese importers, typically State-Owned Enterprises, the advantages of doing these types of transactions are low interest rates on loans with repayment terms ranging from 7-12 years or longer and significant tax benefits. The U.S. lender receives reduced default risk, while the U.S. exporter now has essentially no foreign repayment risk.

Several hundred millions of dollars of transactions have already been financed using the Framework Agreement. The U.S. and Chinese government have set a goal to reach several billions of dollars in next couple of years as part of the push to increase U.S. exports and reduce the trade imbalance with China.

Examples of the types of transactions financed under this arrangement include:

  • Medical Equipment
  • Agricultural Equipment
  • Waste Treatment
  • Firefighting Equipment
  • Mine Safety, and
  • Television Broadcast Equipment.

Based on President Obama’s recent meeting with China’s President Xi Jinping, leaders of both countries have re-affirmed their commitment to strengthen economic cooperation. Under this agreement, the U.S. and China can support each other’s goals: the U.S. can export more goods and services to China, thereby creating more American jobs, and China can benefit from using leading equipment and technology to carry out projects that will improve people’s standard of living.

Case Studies

There has been increasing interest in doing these types of transactions over the past few years. Among all the participants in this program, there are a couple companies worth special notice. The companies have either been successful carrying out projects in China using this program or have been actively pursuing such opportunities in recent years.

In 2013, the U.S. subsidiary of a century-old Chinese trading company successfully used the China Framework Agreement to obtain two loans totaling $55.6 million to support the export of American aircraft and agricultural machinery to China. The U.S. subsidiary acted as the consolidating exporter for the two transactions.

The final example is ExWorks Capital, a new company dedicated to financing U.S. exports. The company was recently approved as an exporter under the program and is on its way to becoming an approved lender. This unique combination would give the company the possibility of playing the role of either lender or exporter of record depending on the needs of the U.S. exporter or Chinese importer. ExWorks has been actively pursuing and currently engaged with a number of transactions to China. It is worth noting the company’s CEO, John McAdams, was one of the original architects of the China Framework Agreement, while he was COO and Vice Chairman of the U.S. ExIm Bank.

About the U.S. Export-Import Bank

ExIm Bank is the official export credit agency of the United States whose mission is to assist in financing the export of U.S. goods and services. It enables U.S. companies — large and small — to turn export opportunities into real sales that help maintain and create U.S. jobs and contribute to a stronger national economy.

This federal government agency does not compete with private sector lenders but provides export financing products to financiers to fill gaps in trade financing by assuming credit and country risks that the private sector is unable or unwilling to accept. It also provides the necessary support to level the playing field for U.S. exporters by matching the financing that other governments provide to their exporters. With more than 78 years of experience, ExIm Bank has supported approximately $567 billion of U.S. exports, primarily to developing markets worldwide.

Footnote: 1. http://www.ustr.gov/countries-regions/china-mongolia-taiwan/peoples-republic-china
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Sophie Yun
About The Author Sophie Yun
Sophie Yun is a China Analyst with Interlink Capital Strategies, a financial advisory firm specializing in structured finance for emerging markets.




www.interlinkdc.com


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