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China in Africa: The Real Story

Has China's Export Financing Met Its Match?

Deborah Brautigam

photo: a train in Pakistan: but is it GE or Chinese? 

A fascinating new development in the dry area of export financing: we learn that for the first time, the US Eximbank has matched China Eximbank's terms for export financing. John Pomfret reports for the Washington Post on the case of GE's effort to win a tender for train exports to Pakistan. GE was about to give up:


After all, China was a powerful competitor that routinely offered low-cost financing - below-market interest rates, easy repayment terms - that cut tens of millions of dollars off the bottom line of its international deals.
But in a case that underscores a significant shift in how the United States and the rest of the developed world are dealing with the challenge of China's economic might, the U.S. Ex-Im Bank decided to fight back. In February of last year, U.S. Ex-Im informed Pakistan's Ministry of Railways that it would take the unprecedented step of matching China's below-market-rate financing terms.
GE won the contract. 
"There's a new willingness to take on China, to compete toe-to-toe with China on financial terms," said Fred Hochberg, the chairman of the Ex-Im Bank. "This is a policy change that we will compete with anyone who's not compliant."
In an interview with the Wall Street Journal, Hochberg confirmed this view: "They're winning deals in part because they're not playing by the rules." Although the US administration positioned this action as a move against China, which was not "playing by the rules" it's important to point out that the rules China was not playing by are a voluntary "Arrangement on Officially Supported Export Credits" set by the elite membership of the OECD, an organization of wealthy states that does not include China.

The rules apply only to other OECD members. Why should China abide by these rules?

This is a positive development. The US has long pressed other wealthy exporting powers to adhere to common rules in order to try and create a level playing field. Yet the rise of the BRICs now makes the choice of the OECD as the arena for rule-making seem quaintly obsolete. If we want to get China and the other BRICs to play by the wealthy countries' rules, we do need to create incentives. Now, in a tiny way, Chinese companies can feel the pain of being outside. But more importantly (and urgently), we need to have an arena in which these negotiations can take place.

Pomfret gets one thing wrong, I think. He suggests that the Chinese are using "foreign aid" in these deals, and that the US must use its foreign aid "to serve diplomatic or strategic goals" but that China's Ministry of Commerce dispenses foreign aid, with the purpose of "making money for China." First, it isn't foreign aid funds, but export credits that we're talking about, and they are not being disbursed by the Ministry of Commerce but by the China Export-Import Bank. We have the same kind of agency, the US Eximbank, and that's the relevant comparison: both were set up to "make money" for their owners' companies. I doubt if the US Eximbank got a tranche of finance from USAID for the train deal. 

What were the actual terms for the contract? We learn from Pomfret that "Instead of fees of up to 21 percent of the contract, the United States said it would charge Pakistan 8 percent. Repayment was stretched from 10 years to 12." Charging fees of 21 percent, no wonder we're losing out to China! From the Wall Street Journal, we learn that the interest rate charged by the US Eximbank will be based on Treasury bond yields (now about 3 %), but we don't learn what the margin over T-bonds will be. I will try to find this out, but I doubt if the US Eximbank will be any more transparent on this than China's Eximbank.