Shipping Finance: China’s New Tool in Becoming a Global Maritime Power

China began 2018 by making important strategic moves in the shipping industry. On January 10, COSCO Shipping Development, COSCO Shipping’s leasing finance arm announced a plan to establish a shipping fund with state-controlled China Cinda Asset Management Co., Ltd. to finance ship assets (Splash24/7, January 10). COSCO Shipping, the product of a gigantic merger of Chinese shipping behemoths, China Ocean Shipping Company and China Shipping Company, last summer acquired Hong Kong’s Orient Overseas International, becoming the world’s third-largest container ship fleet.

These strategic moves to become dominant in the shipping industry are reflective of the industries’ broader importance to China’s economy. Around 90 percent of global trade travels by sea (International Chamber of Shipping, 2017). The world’s largest exporter of goods, China relies on seaborne imports for close to 70 percent of its energy needs. The Maritime Silk Road—one leg of the trans-Eurasian “Belt and Road Initiative” is a network of Chinese-funded infrastructure projects along global shipping routes. A less studied, but perhaps more important contributor to Chinese maritime dominance is shipping finance. While the first one has monopolized the interest of policy makers, investors, and maritime experts, China’s growing shipping portfolios and its role in shipping finance is largely overlooked outside the shipping industry circles. When viewed together, they present a clearer view of China’s impact on global maritime supply chains.

China’s New Role in Shipping Finance

In 2009, the global financial crisis and fall off in global trade gutted the shipping market. The failure of prominent global financial institutions and the subsequent lack of trade finance and liquidity distressed the overexposed shipping portfolios of the Western banks, making shipping loans either unavailable or more expensive. The crisis offered an opportune moment for Chinese banks to step in and build new shipping portfolios or expand existing ones, allowing China to expand its fleet and build the foundations for international partnerships or even dependencies that would that would empower it on the global maritime arena.

Before the global financial crisis, Chinese shipping lending was domestically focused, providing financial support mainly to Chinese shipbuilders and shipping companies. At the time, not a single Chinese bank had a place among the top 15 global shipping lenders (OECD, November 2015). Ten years later, the Bank of China, Export- Import Bank of China (China Eximbank) and China Development Bank (CDB) have not only made it to the top 15, but Eximbank and CDB occupy the global second and third place respectively (Petrofin, July 2017).

Chinese shipping lending has undergone massive transformation, rapidly becoming outward looking and more sophisticated. Experts argue that during their initial steps in international lending Chinese banks lacked experience and had to deal with strict regulations imposed by the People’s Bank of China, time-consuming internal processes, and heavy external bureaucracy. However, their appetite for doing business, prompted also by a market gap, quickly led to significant improvements and streamlining in their shipping loans structures. These improvements have made their sought-after lenders to some of the world’s largest shipping companies, such as Maersk Line, BP shipping, and Mediterranean Shipping Company. [1] At the same time, while traditional forms of lending like bank loans still dominate the market, alternative lending such as leasing is becoming a leading part of China’s shipping finance sector. From commercial banks such as the Industrial and Commercial Bank of China (ICBC) and Bank of Communications to shipbuilders and shipowners such as China State Shipbuilding Corporation (CSSC) and COSCO Shipping, 23 financial institutions and relevant company divisions are involved in ship lease finance, with a portfolio of 989 vessels valued at $16.5 billion (Week in China, June, 2017).

Entry into the shipping finance industry has very much been facilitated by market factors, including the retreat of Western banks, the abundance of Chinese capital and the fact that it had not been tied to existing shipping portfolios. However, a strategic sector like shipping inevitably falls under close government supervision. With a declining domestic shipbuilding industry, Chinese banks have been given clear directions to assist and subsidize.

In January 2017, in a statement published by the Ministry of Industry and Information technology, six ministries expressed support to the shipping industry while they encouraged financial institutions to support the sector with loans and financing (miit.gov.cn, January 2017). Additionally, the China Banking Regulatory Commission (CBRC) has encouraged financial institutions to support the domestic shipbuilding industry and the export of domestically-built ships (Splash247, September 2017; Seatrade Maritime News, May 2017).

For an emerging economy like China it comes as no surprise that the most prominent lenders are either in themselves export credit agencies (ECAs) such as the China Export & Credit Insurance Corporation (Sinosure) and China Eximbank or ECAs-supported banks (Marine Money [paywall], June 2014). ECAs are public institutions that facilitate financing for domestic exporters and investors who do business overseas. As Valentino Gallo, Global Head of export and agency finance at CITI has written, “ECAs operate as a tool of economic policy and have a mandate to support exports” (Citibank, March 2014). Chinese ECA-backed lenders prioritize lending to international firms who intend to build their ships in Chinese yards.

Similarly, as the Chinese government aspires to gain better control over how the country’s trade is transported, the goal of expanding its merchant fleet is a natural outgrowth. Beijing’s “national oil, nationally carried” campaign is indicative of this goal. In the early 2000’s due to economic and security considerations, Beijing focused its efforts on expanding the national oil tanker fleet by encouraging Chinese shipping firms to invest more in larger tankers. In 2006, Chinese analysts expected that their country will need more than 40 large crude carriers (VLCCs) in order to be able to transport up to 50 percent of its oil imports and with the aim to further increase numbers and carry up to 70 percent by 2020. [2] China is on track to surpass this goal. A newly established subsidiary of China Merchant Energy Shipping, China VLCC, possesses 42 operational VLCCs, making it the world’s largest oil tanker operator. Eleven more are on order (IHS, Fairplay [paywall], September 2017).

Shipping finance appears to be an excellent tool to carry out these two policy goals: providing support for domestic shipyards and enlarging the Chinese merchant fleet to better control trade.

What Does this Mean for the World?

China’s shipping finance has largely benefitted the global shipping industry, especially at a time when the sector experiences a dearth of funds. However, as Chinese-led shipping portfolios are further expanding, and as international shipping firms are looking more closely into China to fund their operations, ownership of the global shipping fleet seems to be shifting to Chinese hands.

This is particularly true with Chinese leasing finance, which is gaining ground over traditional bank lending because of its higher Loan to Value and longer amortization period. Leasing deals with Chinese lenders take place under two models: “the financial lease” model where the lessee is the typical manager of the assets and can take ownership at the end of the lease and the “operating lease” model where the lessor keeps ownership of the vessels at the end of the lease (Marine Money, January 2017 [paywall]). Chinese lenders frequently offer sale-and-leaseback deals which entail lessees first selling their vessels to leasing companies and then lease them back on normal loan rates. Leasing finance is fast turning Chinese banks and non-shipping firms into shipowners, enlarging China’s merchant fleet and enhancing its shipping power.

The case of Vale vs. China from a decade ago reveals how leverage can be exerted to serve specific policy goals and economic interests. When Brazilian iron ore giant Vale, a key exporter to China began establishing its own dry bulk fleet of 14 ships, it contracted the majority of the work to Chinese shipyards with Chinese banks financing the construction. However, during their first return voyage to China loaded with ore, Valemax carriers were forbidden from docking in Chinese ports on safety grounds due to their large size. Sources claim that Vale was targeted by private Chinese shipping firms under an extension of the “national oil, nationally carried” campaign and with the blessings of the Chinese government (Week in China, July 2017). In the end Vale sold the unprofitable ships to Chinese shipping firms and banks. Twelve of them were then leased back to Vale on long-term contracts, and Chinese ports opened for the now-Chinese-owned Valemax carriers (Financial Times, July 2015).

Most importantly, the Vale case demonstrates how controlling key parts of the supply chain allows a country to manipulate the entire supply chain. From the financing and building of the vessels, to controlling of the ports and the sale and lease back deal, China not only shielded its own maritime industry from strong competition but also strengthened control over one of its biggest sources of iron ore imports.

This will be no less true as China is moving forward with its Belt and Road initiative. BRI aims to create an overarching framework, which will serve these policy objectives including the direction of shipping finance to support Chinese economic interests. Therefore, looking into China’s growing shipping portfolios along with the BRI infrastructure projects, it seems evident that in the near future more of the global seaborne trade will traverse via Chinese-funded ports, on Chinese-funded, Chinese-owned or Chinese-built vessels, providing China with a strong oversight over the global supply chains and a strong leverage to direct those according to its interests.

China’s growing involvement in shipping is setting the foundations for future powerful partnerships in the sector. While European banks remain Greek shipping’s main financiers, holding 80 percent of overall Greek loans (Petrofin, May, 2017), Greek shipowners are increasingly seeking cooperation with China, especially through leasing. The Greek merchant fleet remains the largest in numbers, size and value, and with a large appetite for more funds. China’s fleet is currently the third largest and growing, and China is likely to gain a larger market share in shipping finance and has an objective to have more control of the global trade routes (Hellenic Shipping News, March 2016). Greek ship owners have been traditionally engaged with China and their ties go back decades. Greek ship owners were also the ones who brought Chinese investors into the Piraeus port. [3] It only makes sense that deepening further Sino-Greek maritime cooperation remains a shared interest. As Katerina Fitsiou from XRTC has contended “Greek ship-owners are the taxi drivers of shipping and China is a superpower increasing their fleet, controlling seaborne trade, having huge banks to finance any project.” Therefore, it is important to monitor closely these synergies as they are poised to shape the future of shipping and global trade routes.

Conclusion

Despite expectations of a rebound in the price of shipping, shipping finance is expected to remain a limited business for Western financial institutions. This will allow Chinese banks to expand operations and establish themselves as global players in the shipping sector. China already possesses the third largest merchant fleet. Given its three-fold expansion in the last decade, a growth rate of seven percent for the past two consecutive years and the central government’s policy, this expansion is expected to continue (Hellenic Shipping News, March 2017). This entails greater shipping power for China, which coupled with funding, and building of maritime infrastructure across the world will give it greater leverage and influence over the global shipping routes, and greater control over global supply chains.

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