The Shipping Financial Market of China Maintains Growth Despite Depression

2012-01-10

In 2011, the international shipping market was depressed, and the international shipping financial market was subject to downturn again. Chinese banking industry and financial institutions have stepped up effort in ship financing product innovation and shipping financial service innovation. The role of financial lease in ship financing is gradually expanding. Export credit has become an important pillar for export ship financing, and shipping financing grows against the trend; shipping insurance continues to maintain rapid development; breakthrough has been made in the development of derivatives of shipping and shipping price indexes. The market system gradually becomes sound.

A series of bright spots in the shipping financial market of China

In 2011, against the situation of tightening monetary policy and high inflation pressure in China, the increase speed of shipping financial business such as ship financing in China slowed down slightly, but a series of striking bright spots have emerged in China’s shipping financial market.

The increase of bank ship financing has slowed down, and product innovation ability has significantly strengthened

China’s shipping market keeps declining and the increase of ship financing slows down

Since the start of 2011, affected by world economic depression and slowdown of domestic economic growth, China’s shipping market was in a downturn in the whole year. The coastal bulk cargo transportation price index of China kept oscillating and hitting bottom, dropping from over 1400 in the beginning of the year to over 1100 points in early December. China’s export container transportation price index dropped from 1056. 71 points on January 7 to 923.67 points on November 25.

From the perspective of ship financing demand, since 2011, domestic price has been rapidly rising, especially the price of fuel oil; the container rates of many ports along the sea and rivers have risen, and port preferential agreement has been cancelled or the extend of preference has been reduced. Given limited rise of transportation price, the above factors have led to rapid increase in the cost of shipping enterprises and deterioration of profit. Besides, continuous appreciation of RMB exchange rate has increased the risk of external credit business of Chinese-funded commercial banks, and domestic US dollar loan financing interest rate is far higher than the financing cost in the international market. International shipowners’ motivation for applying for loans with Chinese-funded banks is greatly reduced.

From the perspective of ship financing supply, in 2011, the monetary policy in China was solid on the whole, but the actual operation was obviously tight; the rate of the legal deposit reserves was adjusted upward for six times; differential rates of deposit reserves dynamic adjustment measure was adopted to conduct window guidance for credit supply; the reserve fund rate cardinal number was expanded. Against this backdrop, liquidity of commercial banks was tightened, and credit line was limited. In addition, the downturn of the shipping industry caused rise of relevant loan risk. As a result, in 2011, the increase of loans from China’s commercial banks to shipping enterprises and shipbuilding enterprises slowed down as compared with the previous year.

Shipping financial product innovation ability has been strengthened

A period after the establishment of a special department for shipping finance and the setup of a professional service team, the shipping financing product innovation ability of Chinese-funded banks was significantly improved in 2011. Besides traditional project loan, ship mortgage loan, L/G, export credit, trade financing and syndicated loan, some commercial banks have developed multiple-channel financial measures, including ship mortgage, ship financing lease, and M & A loan, as well as providing investment bank service and financial consulting service for enterprise listing, issuing corporate bond and equity replacement, better satisfying multiple financial demands of shipbuilding plants and shipowners.

To help China’s shipping and shipbuilding enterprises effectively avoid exchange rate risk of RMB appreciation, Chinese-funded commercial banks have innovatively launched exchange rate management products specially for the shipping industry and shipbuilding industry. Currently, commercial banks such as Bank of Communication [4.70 2.17% Guba Yanbao] have launched financing and risk-avoiding exchange rate management products addressing ship enterprises such as: ship export risk involvement, ship advance receipt financing, foreign exchange fund risk involvement, ship building financing and buy out of accounts receivable of ship enterprises; the hedging instrument exchange rate management products launched include forward foreign exchange against RMB, NDF, RMB against foreign exchange option, and structural forward exchange transaction, and interest rate changeover.

From the perspective of objects of financial support, the absolute majority of ship financing loan supply of Chinese-funded commercial banks is for domestic shipowners or international shipowners ordering ships with Chinese shipbuilding plants. Provided that the current shipping finance business experience is not rich enough and the understanding of the international ship financing market is limited, it is the natural choice of China’s banking and financial institutions.

Export credit has become an important pillar for export ship financing

The first export credit institution in the world is ECGC of England in 1919. By far, most countries in the world have established export credit institutions to promote export development of their countries. These export credit institutions have directly supported about 10% of the export trade and cross-border investment worldwide.

Since the outbreak of the financial crisis, Export-Import Bank of China and China Export Credit Insurance Company have been bringing into play their advantage as policy financial institutions, stepping up support for ship enterprises in China, and providing a large amount of financing and insurance services for ship export of China. According to statistics, in 2009, one third of the new orders of Chinese shipbuilding plants were supported by Export-Import Bank of China. From its establishment in 1994 to the end of 2010, this bank issued ship credit totaling RMB 130.7 billion and USD 9.9 billion (altogether RMB 203.3 billion), opened export ship L/G totaling USD 28.1 billion, and supported export of 4,452 ships of 151 million deadweight tonnage. In terms of export seller’s credit business lone, this bank issued ship export loan totaling RMB 13.934 billion in 2010. Currently, the total business size of Export-Import Bank of China has ranked top among export credit institutions in the world, and has become one of the world’s renowned ship financing banks. China’s conditions for supporting ship export with buyer’s credit have matured, and buyer’s credit is likely to become the major financing method for foreign shipowners to purchase Chinese ships.

China Development Bank has determined to take the support of the ship industry as a strategic direction for future development and has announced to establish the “China Development Bank Ship Financing Center” in Dalian. By the end of August 2011, the ship financing loan balance of Dalian Branch of China Development Bank had exceeded USD 3.5 billion in total.

Financial lease has become the second major ship financing method

Currently, China has about 260 financial lease companies, among which 17 were regulated by the CBRC and about 240 domestic and foreign-funded financial lease institutions approved by the MOC and the SAT. Tianjin and Shanghai have become important centers of China’s financial lease [0.05 -93.33%] institutions. In the first half of 2011, Tianjin Dongjiang Bonded Port Area had realized financial lease performance of 25 aircrafts, 30 ships and USD 3.7 billion.

Recent years have seen rapid development of domestic financial lease companies, and their assets size and business fields have been gradually expanding, and operation, management and risk control abilities have been substantially improved. According to relevant information, by the end of March 2011, the total assets of 17 financial lease companies regulated by the CBRC had amounted to USD 364 billion; in the first quarter, a business revenue of RMB 3.345 billion and a net profit of RMB 1.324 billion were realized, increasing by 25 times, 27 times and 39 times as compared with the same period of 2007. The non-performing assets rate of the financial lease industry was 0.49%, and the provision coverage was 322%.

The shipping industry is a typical strong cyclical industry. Ship price, transportation rate and rent are subject to strong volatility. Since the outbreak of the financial crisis, financial lease companies have been actively assisting shipping enterprises in relieving their fund difficulties by bringing into play lease advantages and features, so that some enterprises have regained power for development.

Firstly, financial lease companies have relieved enterprises’ difficulties by efficiently using enterprise assets through measures such as leaseback. Shipping enterprises especially large shipping companies may conduct leaseback on operating ships, or sell some surplus transportation capacity to financial lease companies, which lease it to other shipping enterprises to help them efficiently use their assets and realize effective allocation of ship resources.

Secondly, in the current low ebb period of the market, the lease companies appropriately reduce the rent of operating ships of shipping enterprises, reduce rental expenditure of shipping enterprises and thus improve the cash flow of shipping enterprises at source.

Through the development of recent few years, the operation characteristics of some financial lease companies have manifested themselves preliminarily. BOC Lease, depending on the advantages of comprehensive operation of the Bank of Communications, keeps developing and innovating in shipping lease modes and provides clients with multiple lease business modes such as direct lease, leaseback, operating lease, financing lease, mixed lease and bonded area SPV project within the territory. It has become an important market service force in the filed of international shipping financial lease, and takes a leading position in the domestic market. Minsheng Financial Lease has launched the “collective ship building” mode, and ICBC Lease has launched the mode of “united ship building”.

Financing lease has become an important channel for ship building and shipping enterprises in China. Statistics show that in the whole year of 2010, among all ship financing provided by China’s financial market to home and abroad, the acceptance amount of main ship financing banks was about USD 25 billion, the bonds issued by shipping enterprises were about USD 2.8 billion, and the acceptance amount of ship lease reached about USD 4 billion. The rapid rise of financial lease business has provided an important approach for solving the difficulty in financing by medium and small ship enterprises. Currently, ship financing lease has become the second major ship financing channel only next to bank loans.

Source from : www.cnss.com.cn

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