By staff reporter Zhang Yuzhe
Related article: China's Policy Banks
(Caijing Magazine) Established in 1994 and wholly owned by the central government, China Eximbank is one of the three policy banks under direct leadership of the State Council. After China Development Bank launched controversial reforms toward commercialization in 2008, China Eximbank said that it would not follow that path. Instead, reform stagnated. "We felt ignored," said a source within China Eximbank.
Almost overnight, the Export-Import Bank of China (China Eximbank), the country's international trade policy bank, was put under the spotlight as it was seen to move forward with a long speculated restructuring plan, after the central bank proposed a 200 billion yuan capital injection plan.
In February, China's foreign trade volume fell significantly for the fourth consecutive month, down 25 percent year-on-year. The People's Bank of China sought remedies with China Eximbank and China Export & Credit Insurance Corporation (also known as Sinosure). As important arms of the State Council supporting foreign trade, the two policy institutions hold major responsibilities in implementing China's international economic strategy.
On August 5, a report by the central bank on second quarter monetary policy revealed that in March, a working group had been established to study the reform of China Eximbank and Sinosure. A re-imagining of China Eximbank was in the works.
Caijing learned from ministerial sources that the central bank planned to inject 200 billion yuan into China Eximbank. The bank earlier expected that the capital injection would only be around 40 billion yuan. However, various ministries are currently debating how much to inject, where, and how best to control related risk.
According to Wang Jun, chief financial sector specialist with the East Asia & Pacific Financial Development Bureau of the World Bank, the distinction between policy institutions and commercial institutions is less well defined in transitional countries than in developed countries. Therefore, clear legislative charters and regulatory frameworks for such institutions are needed to help determine their effectiveness, he added.
Export Plummet Spurs Bank Reform
China Eximbank has been under scrutiny mainly because China's foreign trade has become the weakest pillar in national economic growth.
According to the General Administration of Customs, China's foreign trade rebounded after lagging for five months starting last October. However, the total value of international trade fell a dramatic 22.7 percent year on year during the January to July period.
Following the release of first quarter export data, the State Council organized a working conference in April to develop policies regarding export of mechanical and electronic products. As a preliminary move, the conference decided to provide policy support to the sector.
Since 1995, exports of mechanical and electronic products have grown 30 percent annually. The sector enjoys the top position among China's exports, representing half of total export value.
In late May, the State Council proposed six policies to stabilize exports. Most important was to "provide financing and insurance for exporting large-scale equipment."
The new policies suggest China Eximbank should support export financing.
Soaring Credit Lending
In the second quarter, China Eximbank lending grew 130 percent year-on-year, surpassing its entire credit origination in 2008. Consequently, inadequate capital and a lack of recapitalization have emerged as growing concerns in the bank.
The bank had capital of 3.38 billion yuan when established in 1994. In the year 2000, the capital base increased to 5 billion yuan with an injection of state funds. No further capital has been provided since then.
Neither China Eximbank nor the Agricultural Bank of China has set aside sufficient provisions for non-performing loans, according to the five-category loan standard. At June 30, 2009, China Eximbank had 1.28 percent non-performing assets. If it meets regulatory loan loss provision standards, the bank will have negative net capital. In addition, the bank has inadequate foreign exchange capital of only US $310 million.
China Eximbank gets its capital mainly by issuing bonds on the interbank market, loans from the central bank, and fiscal injection. As of December 31, 2008, China Eximbank had issued bonds worth 703.3 billion yuan for the year, with the majority sold on the interbank market.
Who Will Inject Money?
An agreement has now been reached among various ministries on the need to recapitalize China Eximbank. Controversy remains over how much to inject and the source of funds. Li Ruogu, president of China Eximbank, earlier told Caijing that compliance with the statutory 8 percent minimum capital requirement will demand 40 billion yuan capital injection after loan loss provisions.
The central bank has its own strategy in proposing to provide 200 billion yuan. As policy banks are not responsible for their Return on Equity ratio (ROE), an injection of 200 billion yuan will ease the pressure from soaring foreign exchange reserves by as much as US$ 2.1 trillion. Also, it will build a solid foundation for the future as it parallels the nation's export policy.
Which entity will provide the funds? The Ministry of Finance, the central bank, or the state investment arm, Central Huijin?
Acknowledging policy aims, it would be natural for the Ministry of Finance to inject capital into a policy bank. But, a state policy bank model alone cannot sustain the bank's capital adequacy and establish an effective risk control framework.
According to traditions, Central Huijin was also expected to be a potential source of funds. However, Central Huijin mainly invests in commercial financial institutions, rather than policy banks, which focus on risk management, not profits.
If the central bank provides capital, however, the link between bank capital and basic monetary supply will remain intact; however, basic monetary supply would be put under pressure. On the other hand, concerns may arise to specifically identify the central bank's role in China Eximbank.
Moreover, analysts warned that without clear strategies and goals for the reform, the outlook for China Eximbank's restructuring will not be optimistic.