China Export Finance Blogs

Planning for the upturn

info@chinaexportfinance.com (Tracy Grazioli) — Mon, 15 Feb 2010 00:00:00 GMT

Since the beginning of the crisis, all banks have cut their lending and credit lines, removing their customers’ scope for growth for the foreseeable future. If previous recessions are anything to go by, they have shown us that many companies go into liquidation when the market starts to turn around. This is mainly because they do not have the working capital to cover the increase in demand, and over trade beyond their means to compensate. A lack of access to finance will be especially true this time round as the available credit in the markets may have deleveraged by as much as 60% by the time the worst is over. Many companies are making the decision to increase working capital through supply chain open account rather than to place so much reliance on their primary bank lending.

At this time, the banks have been held primarily responsible for the crisis chain reaction, having been encouraged (or rather told!) not to pull the plug on many underperforming companies long enough to maintain the impression of their own recovery long enough to get their Year End accounts out of the way. The lack of support from the banks will inevitably start soon and as many firms reach the end of their accounting cycle, it remains to be seen what heavily reduced sales figures may have on their 2010 banking covenants and even on their credit line status.

Many FD’s at the helms of companies who feel that they are not at risk from their lenders should consider new ways to optimise their cash flow.

Re-negotiating payment terms with a supplier is generally linked to the supplier’s working capital situation and may well be a challenge. As a buyer it is easy to take the view that it is the supplier’s responsibility to find its own funding. However, buyers that take a more active approach and embrace new forms of ‘Open Account’ Trade Finance to guarantee payment to their suppliers should be in a stronger position to negotiate better terms, sustain the supply chain and give a well funded and liquid working capital for both. An obstacle to moving to open account terms in China is often due to suppliers’ reliance on Documentary Letters of Credit (L/C) to give them a secured guarantee of payment or for pre and post shipment finance from banks using the L/C as collateral.

Since Beijing has ordered commercial Chinese banks to significantly reduce their lending, Chinese suppliers may find it even more difficult to access funding even with the traditional L/C method. As Chinese suppliers struggle to obtain access to funding the total cost of the goods will increase and payment will be requested earlier as suppliers find greater need to finance their orders. Buyers and sellers working together to find improved access to cash flow through supply chain finance will result in a win-win situation and can unlock substantial value for the future of both parties.

Facing the chop in China

info@chinaexportfinance.com (Harry Bunnell) — Fri, 12 Feb 2010 00:00:00 GMT

Within my role at CEF I deal with our marketing team in China on a daily basis. Part of this is supporting my colleagues in organising stands at the China trade events. A few months back we were finalising the details for the Hong Kong Electronics Fair. As per usual one of my colleagues had sent the stand application form back to the London office for me to approve with a company stamp or ‘chop’. On this particular day the stamp had been locked away by our Head of Operations who was on leave. What with this, and the added delay of the time difference between London and Shanghai, I duly suggested to my colleague in China that she have another China Export Finance Ltd chop made (we operate as CEF Consulting in China and Hong Kong). It must be cheap as chips to make it out there, I thought, and would cut out the time taken for documents going back and forth between offices. I had unwittingly made a cultural faux pas by not realising the deeper cultural significance that the chop holds in China.

Company chops in China cannot be created as easily as a simple email suggestion. My colleague had been politely requesting that we continue as normal (so as not to cause me loss of face) but after more hectoring emails from me she eventually had to spell it out…

We understand the inefficiency of sending docs to London for stamp when needed. However, we do not have the right to get a company stamp here unless we are authorised by London top management team. As I mentioned last time, the company stamp is extremely controlled, which is related to Chinese history. They originated from pottery making; at the beginning, pottery seals were used to imprint words or marks on surface of pottery to indicate the ownership of the goods. As time passed, seals developed as a tally and eventually held the function of credit. Thus, in Chinese culture, “seals” became more important than signatures in certifying credibility. In certain situations whilst doing business in China, only company stamps are acceptable to “sign off” legal documents. Because of these reasons, we have to turn to London for docs stamped when needed but not make it in China.

…only then did it dawn on me that my easy fix solution I had been pushing, was going against thousands of years of Chinese tradition. I realised I needed to take a lesson in cultural awareness.

Through some further research I came to realise that an important difference in business practices between China and the West is the legal standing given to the company stamp - referred to as a ‘chop’ or ‘seal’ in China. In China, a company chop is used instead of signatures on personal and business documents. Chops are usually made of stone, or sometimes in metals, wood, plastic, or ivory, and printed with a red ink made from cinnabar. In the West, the legal holder’s signature is all encompassing; it’s totally different in China. Legal signatures are very rarely registered with the government departments or chambers of commerce and so the value of the company chop is significantly more important. When setting up a company in China the directors must make a company chop that is registered with the local authority office. This chop then represents the company and any documents bearing it’s mark will be legal and binding, regardless of whether the document carries a signature or not.

As I well know, stamps are needed for the day-to-day running of a business and signing off documents. The organisers of the Hong Kong Electronics Show do not accept an application with the mere signature of our Marketing Director! However, it is important to keep the right balance of ease of access to stamps and the correct security around it. Although I was cursing the day I needed it and our ‘chop’ was safely locked away in the Operations ‘vault’; many companies have not been so diligent and learnt the hard way. My colleagues in Shanghai have told me how in some cases you hear of stamps of western owned firms in China being entrusted into the wrong hands, and then unauthorised contracts being signed without the knowledge of the owners. If a stamp needs to be available whilst the stamp holder is away, then they can be left with a trusted accountant or law firm, only to be used for specific matters and its use recorded.

The lesson to be learned is; always safeguard your company stamp (and if a Chinese colleague drops a hint, then do some further research before making your own assumptions!). China and the West hold such different cultural practices; if you want to succeed in business in the Far East then a bit of research into the customs and norms will help you go along way.

China takes centre stage in global economic order

info@chinaexportfinance.com (Wong Meng Choong) — Mon, 08 Feb 2010 00:00:00 GMT

Whilst other economies floundered in 2009, China continued to maintain steady growth. GDP grew at a rate of 8.7%, surpassing Japan to become the second largest economy behind the United States. Economic stability was aided by a package of economic stimulus policies that had a noticeable impact in steadying the ship. It contributed almost 50% of world economic growth in 2009, a huge rise compared with the 22% of 2008. It is undeniable that world growth, especially in Europe, will be directly related to China’s own growth. As one of the new global economic players China can be found at the centre of most economic debate and has found itself with new economic responsibilities within the global community.

Some western countries feel under threat from China’s economic rise due to its huge foreign exchange reserves and runaway economic growth in the face of the global financial crisis. However, the Chinese government stated its good intentions at the recent World Economic Forum in Davos, Switzerland on January 28th. Li Keqing, Chinese vice Premier, declared that they would take a leading positive role in a new global order. He appealed for countries to cooperate in surviving the crisis and maintain sustainable economic development in the post-crisis era. He laid out a five point proposal in his keynote speech that asked for further cooperation in combating the crisis, promotion of the open market, balanced development of the world, joint tackling of major challenges, and improvement of the global governance structure.

Last week Karl Alomar spoke about the growing credit bubble. The Chinese economy has been overheating for some time leading to adverse affects for the public and businesses. There has been an explosion of credit in the housing market which lead to the property prices rising by a massive 30% to 70% in 2009. Both the Producer Price Index (PPI) and consumer price index (CPI) showed growth in December 2009, this is the first time that PPI (1.6%) and CPI (1.9%) grew since July 2008. Banks have been massively over-lending. In just the first two weeks of 2010 Chinese banks loaned 1.1 trillion Yuan (146 billion USD). To counter this the Chinese government have taken immediate actions to curb inflation and economic overheating.

January action timeline

January 7th: The People's Bank of China sold 60 billion Yuan ($8.8 billion) worth of three-month bills at 1.3684%, four basis points higher than the week before
January 12th: China Central bank sold 20 billion Yuan worth of one year's bills, 8 basis points higher than the week before
January 18th: deposit reserve ratio was increased by 0.5% to 16.5%
January 19th: China central bank sold 24 billion Yuan worth one year of bills
January 20th: China curb banks loans

The Chinese government has pushed banks to slow lending, whilst having the central bank reduce the RMB supply by increasing deposit reserve ratios and selling billions Yuan worth of short-term bills - signs of a “tightening policy”. It is probably still too early to say China has already given up moderately easy monetary policy in the long term. But it does show that the government is tackling the financial crisis with confidence, and is facing up to its global economic responsibilities.

China will continue to perform all necessary defensive tactics to balance the long term growth of its economy and that of the world. It will take the joint and coordinated actions of all the countries to contribute to the stability and continuous growth of the world economy.

Farewell to Google China?

info@chinaexportfinance.com (Chantal Younis) — Thu, 04 Feb 2010 00:00:00 GMT

“We’re in this for the long haul,” wrote Andrew McLaughlin, Google policy executive, four years ago when the company launched google.cn, a version of the Google search engine that returned self censored search results. However, as we move into 2010, Google announced on its official blog that it is prepared to pull out of the country because of alleged attacks by hackers in China on its email service and a tightening of China’s restrictions on free speech on the internet. Google acknowledges that this could have “far-reaching consequences” and not a single marketer working within the Chinese market would disagree.

At CEF we deal with both sides of the spectrum; building relationships with colleagues and customers in both East and West. We have a healthy respect for intercultural differences which are blithely spoken about but far less frequently understood. This situation not only throws up marketing issues in terms of online search engine optimisation and advertising planning this year but also illustrates the challenges of cross cultural communications.

According to a Google statement, Google and at least 20 other large companies from the finance, technology, media and chemical sectors have been on the receiving end of a "highly sophisticated and targeted attack" originating from China. Google said that the attack resulted in the theft of some of its intellectual property, and claims that a primary purpose of the attack was to access the Gmail accounts of Chinese human rights activists with some limited success. As a result of this and claims that there have been increased attempts to decrease free speech over the past year, Google has said that it is "no longer willing to continue censoring [its] results on Google.cn" and that "over the next few weeks we will be discussing with the Chinese government the basis on which we could operate an unfiltered search engine within the law, if at all. We recognize that this may well mean having to shut down Google.cn, and potentially our offices in China."

In the West we assume that free speech can only be a positive thing. In Chinese culture, where harmony, respect, hierarchy and the good of the group over the individual are king; the perspective is different. Liu Deliang, head of the Beijing-based Asia-Pacific Institute for Cyber-law Studies, illustrates this point when he said that said both China and the United States had laws and regulations on Internet but only in different ways. “The U.S. government only wants to keep children away from porn, while the Chinese government wants nobody to have access to porn," Liu said.

When Google entered the China market they acknowledged that they would have to work within the legal parameters of that country, stating that “Chinese regulations will require us to remove some sensitive information from our search results.” They also acknowledged that the market was too important to ignore. “Failing to offer Google search at all to a fifth of the world's population, however, …[compromises our mission]…far more severely.”

This situation is a very good example of how huge market opportunity can be tempered by cultural barriers to entry. Google’s public announcement gives the ruling Chinese Communist Party leaders little room to compromise in any talks to keep Google.cn running in China.

“The Chinese government may want to give Google’s high- profile move the cold shoulder,” Jing, a visiting professor at the National University of Singapore’s Lee Kuan Yew School of Public Policy. “Given the reason Google cited in its announcement, that Google.cn can no longer put up with Beijing’s censorship, the CCP leaders are afraid that it could set a dangerous political precedent should they compromise on this one.”

Will it be possible for either side to save face following such thinly veiled accusations? We at CEF, along with anyone marketing into China will be holding our breath for the next development. And in the meantime this serves as a very real illustration of how culture differences run so much deeper and are so much harder to grasp than using the right coloured paper to wrap a gift.

China bubble ready to burst?

info@chinaexportfinance.com (Karl Alomar) — Tue, 02 Feb 2010 00:00:00 GMT

Through 2009 we have seen strong action on the part of the Chinese Government to help stimulate their economy and maintain export growth through one of the worst economic climates in our lifetimes. Having accumulated significant surpluses over the past ten years, the government has certainly had the wherewithal to facilitate and sustain stimulus programs that have allowed China to buck the trend of the international markets and post growth numbers through the end of the year. But in doing so, many have asked whether China has taken on too much risk and built a bubble that is destined to burst.

China seems to have heeded the warnings and with international economies poised for a steady recovery, the government is now making moves to mitigate the potential overgrowth in its lending markets; however, the retraction of stimulus and excessive credit may cause problems for exporters, especially the SME’s. 2010 will present some treacherous waters for China’s manufacturers, however we have confidence that those who approach the problem intelligently will avoid the potential risks of sudden banking withdrawal or capital constraints.

China curbs credit - exporters feel the squeeze

info@chinaexportfinance.com (Lionel Taylor) — Mon, 25 Jan 2010 00:00:00 GMT

We are in the run up to Chinese New Year and already the Tiger is beginning to bite! In an effort to ward off an overheating economy, the Chinese Government has started to tighten monetary policy by restricting the availability of bank credit. This comes after a period of sustained economic growth partly fuelled by the $586bn economic stimulus package put in place to soften the blow of a last year’s economic crisis.

In December and January there were numerous headlines of China overtaking Germany as the world’s largest exporter. It was reported that China’s exports grew for the first time in 14 months with sales to the USA rising by 16% and the EU by 10% in December, partly driven by companies restocking following a year of running down their inventories. In addition, China’s imports were reported to have surged by 56% a clear indication that the Government’s aim to boost domestic demand to cover a flagging export market has worked.

However, such measures can create an overheated economy. An example of this is an explosion of credit in the Chinese housing market where buoyed on by the Government stimulus package, there has been a surge of development and demand for housing that has led to property prices rising by 8% in December 09.

So what could this all mean for the huge number of private enterprises that support China’s export market?

Many of them have consistently complained that the stimulus initiatives did little to increase their level of bank support. They claim that such support was geared towards the larger partly state owned sector leaving them struggling to find working capital solutions to cover the growing expectation of extended payment terms by their customers. A tightening of monetary policy will lead to a scarcer availability of credit and as happened in 2007/8 the cost of borrowing is expected to rise.

At CEF we have seen a rising stream of enquiries from Chinese sellers looking for alternative cash flow solutions to supplement whatever support they are receiving from their banks. In fact, following the granting of a factoring license and receipt of SAFE approval to our locally formed Tianjin company, we are also more involved in dialogue with many Chinese regional banks looking to extend cooperation so as to better serve their SME and mid corporate customers.

2010 will continue to see substantial growth in the Chinese economy (predicted to be about 10%), but such growth will come at a price as we expect the Government to continue tightening monetary policy as it attempts to contain inflation and growing debt levels.

How the mighty fall

info@chinaexportfinance.com (Matthew Cooke) — Tue, 19 Jan 2010 00:00:00 GMT

Hi folks, welcome to my first blog of 2010. Whilst flicking through the market news this week I came across an article from the ever-informative economist Bill Bonner. This extract perfectly encapsulates for me how the mighty fall;

In this weekend’s Washington Post, a columnist wonders what GM executives were thinking when they allowed the best automotive franchise in the world to go broke.

They probably weren’t thinking much at all. They didn’t need to. Business was good for a very long time. American auto sales expanded for an entire century. Remember the glory years... the ‘50s... the ‘60s?

GM came out with new and better models every year. People paid attention – they measured the fins... admired the chrome... and listened to the roar of GM horsepower.

The highway system was getting better and better. Salaries were increasing – at least until 1973. Gasoline was 25 cents a gallon. Everyone wanted to ‘See the USA in a Chevrolet.’
But nothing fails like success. GM was the world’s biggest and most successful company.

A structure’s strength inevitably becomes it’s weakness, whether it be an individual, a company or even a country; think Rome, think the British Empire - ‘where the sun never set’ & think the current de-emasculation of the USA (completely self inflicted… hey, you guys voted in not one, but two Bush’s… and did it several times…shame on you!)

It is all pretty much academic now (yes, even you guys in the States, it is over; look I love Obama…but the horse has bolted) and the only story in town today is China - the start of the new global super-dynasty.

Here is my food for thought:

GM went broke because of their parasitic executives greed & ego, government meddling, and their refusal to make cars that people (and the Earth) need and wanted.
Rome fell because of the following; Christianity, decadence, lead poisoning, monetary trouble, and military problems.
USA…err…ditto Rome (replace Christianity with the start of Global enlightenment…anyone in the room put your hand up if you really wanted Iraq & Afghanistan?).

That being said; what might be the reasons behind the inevitable fall of China when the time comes?

Karl's Quarterly Roundup: Newsletter Issue #7

info@chinaexportfinance.com (Karl Alomar) — Wed, 09 Dec 2009 00:00:00 GMT

This year so far has presented dramatic changes and fluctuations in the world markets, however, China has somewhat protected itself from this volatility. It must be said that China’s stimulus program has probably been the most effective of those introduced by various governments this year. China has stabilised a pending disaster in their export market and has continued to spend on domestic infrastructure and growth in order to enhance its alternative sources of GDP growth so as not to rely so heavily on exports into the future. China has also begun to open its doors to innovation and modernisation of financial services in order to support the continued growth in GDP.

CEF has been incorporated into this evolution, and is the first wholly owned foreign enterprise that has been awarded a factoring license in Tianjin, the province sitting at the heart of China’s financial services innovations. CEF has also been afforded access to new regulation that allows the company to trade in foreign exchange and effectively make payments domestically in foreign currencies; a right that to this point has only ever been held by banks in China. We applaud the foresight of the Chinese government in recognising the growing need for innovative services to support the financial demands of its nation. CEF has always had a vision to create a domestic banking hub for its international business, and this provides a great avenue for the company to do just that. A subsidiary has been established in TEDA (Tianjin Economic Development Area) as the basis for the CEF’s introduction of this alternative banking base.

We, at CEF, look forward to seeing the world markets settle and economies to begin growing once again. Although this will probably be at a modest pace for now, CEF is sitting in the perfect position to play a key role in helping the Chinese trading markets gain confidence and re-establish secure and growing trading structures into the future.

Economic power shift from West to East is poised to gather pace

info@chinaexportfinance.com (Karl Alomar) — Tue, 08 Dec 2009 00:00:00 GMT

The next few years will see a dramatic acceleration in the shift of global economic power eastwards, according to the latest predictions from The Conference Board, an international network of leading business figures.

It believes that the sluggish growth in the established economies of North America, Europe and Japan will result in their share of global GDP shrinking from around half today to a third by 2016. In line with other international bodies, such as the IMF and the OECD, the Conference board sees global growth returning next year, after the worst downturn in three-quarters of a century.

The Board says that the world economy will expand by 3.5 per cent in 2010, and growth will accelerate to more than 4 per cent in 2011. The current IMF forecast is for worldwide growth of 3.1 per cent next year, and during 2010-14, an average just above 4 per cent.

--The Independant

Karl Alomar says:

The modern western economies of the world from Europe and North America had dominated the world economic markets for the whole of the 20th century; yet as we begin to settle into the 21st century the tides of economic power are clearly shifting eastwards. The western economies have been driven by innovation and bank liquidity, establishing credit systems and processes that have spurred growth through numerous industrial and technical revolutions. However now that the life blood of the western economies has run dry, and banks have stopped lending; for the first time in over a hundred years it is wiser to look towards the east for a company’s growth or funding needs.

While the western banks have their hands tied and cannot lend to their domestic SME markets, businesses are unnecessarily failing, unemployment rising and consumer confidence taking a nose dive. The East on the other hand, led by China, is full of liquidity, and some would say is lending against too much risk; but this flow of cash into the market has spurred growth that has clearly bucked the global trend. Over these few years, Chinese and other eastern banks will continue to take leading positions globally giving Chinese enterprise the opportunity to dominate on the world stage and overtake the current leading economies at an accelerated pace.

If this takeover and eventual domination is to be avoided, western governments, banks and markets must rethink their protective strategies and put money back to work where it is needed to help rebuild western economies.

Read the full article

CIT Group's biggest hurdle: Keeping customers

info@chinaexportfinance.com (Lionel Taylor) — Wed, 25 Nov 2009 00:00:00 GMT

A Chapter 11 filing usually means the end of the road for financial companies since they rely so heavily on customer trust. CIT Group Inc. is hoping that its case will be different.

The commercial lender's trip through bankruptcy reorganization may well be speedy given that it's already reached agreements with creditors on restructuring its debt. But the real test will come from CIT customers, who could decide to take their business elsewhere.

"Their image is tarnished right now," said Len Blum, a managing partner at investment bank Westwood Capital. "They have an uphill climb because they are only worth the value of the portfolio," Blum said of CIT's pool of loans it has extended to customers.

Just as a bank would fail if all of its depositors tried to get money out at the same time, CIT wouldn't be able to survive if too many of its customers close their accounts. Some have already been pulling their business in recent months as CIT struggled for survival, but it's still too early to know how many will remain.

CIT is one of the nation's biggest lenders to small and mid-sized businesses, providing financing to a large array of businesses including retailers, energy companies, a small movie studio, and operators of Dunkin' Donuts stores.

--Associated Press

Lionel Taylor says:

CIT is an example of a long established company meeting a very real need in the SME market. CIT was the sixth largest lender in the USA and the largest lender for small to mid sized businesses. Many clients have grown their business on the back of CIT and as a result CIT has a fiercely loyal client base. However a damaging combination of lending to under-qualified customers, and deviating from core business into riskier loans, resulted in a higher than average delinquency rates as compared with the rest of the market. Like other businesses CIT also suffered from the general collapse in the wholesale banking market which led to a general shortage of liquidity causing much of the problems that CIT is now facing.

So what does this mean for CIT customers? CIT is certainly undertaking a damage limitation exercise. According to Jeffrey Peek (CIT's CEO and Chairman) “The decision to proceed with our plan of reorganization will allow CIT to continue to provide funding to our small business and middle market customers, two sectors that remain vitally important to the U.S. economy.”

As CIT begins its latest attempt to restructure, many business customers have been left feeling very nervous about whether their old trusted financial partner will still be around in the coming months. Many are facing potential changes in facility terms and conditions as CIT fights for survival. Also, some customers have based their trust on their relationships with individual account managers within CIT, many of whom are actively searching for new jobs.

One might surmise that customer concern is justified. In recent statements released by CIT, they state “Under the plan, CIT expects to reduce total debt by approximately $10 billion dollars, significantly reduce its liquidity needs over the next three years, enhance its capital ratios and accelerate its return to profitability.”

Talk of increased capital ratios and a return to profitability sound positive, but action needs to be taken to turn the situation around, and each of these changes will certainly have trade offs. Cutting costs may well impact customer service, maximizing revenue could lead to increased charges for customers, tightening up credit will certainly impact on CIT’s willingness and ability to write new business and possibly maintaining credit lines for existing customers.

Read the full article