Having spent years in the wilderness, the Export-Import Bank of the United States is back and armed with a new mandate to take on its biggest rivals, the Chinese export credit agencies, in key sectors, such as telecommunications and energy. But some are questioning the potency of US Exim’s new programme on China. Felix Thompson reports.
After President Donald Trump put pen to paper on the Export-Import Bank of the United States’ (US Exim’s) seven-year reauthorisation in December 2019, the bank’s return from almost half a decade of near dormancy – which saw it unable to authorise transactions worth US$10mn or more until May last year – formally came to an end, and with it came a direct order to take on one rival country in particular – China.
The reauthorisation directed US Exim to set up a ‘Program on China and Transformational Exports’ and instructed the bank to ringfence 20% of its financing authority – equivalent to US$27bn – to help the country’s exporters take on Chinese counterparts.
In the months since, the bank has made operational changes as it works to meet this new remit, bringing in David Trulio from the Department of Defense (DoD) to establish and run the new programme, which US Exim says is aiming to “neutralise export subsidies for competing goods and services financed by official export credit, tied aid, or blended financing provided by the People’s Republic of China”.
With a focus on key high-technology sectors such as 5G, artificial intelligence and quantum computing, the programme will support the extension of loans, guarantees and insurance at rates and terms fully competitive with those of China and other competing countries.
The two major state-owned institutions that provide export credit in China are the China Export and Credit Insurance Corporation (Sinosure) and the Export-Import Bank of China (China Exim Bank).
US Exim has long railed that China’s system uses export credit to aggressively pursue its geopolitical goals, offering huge levels of support, and on terms and rates that other export credit agencies (ECAs) – in particular those that abide by the OECD guidelines – can’t match.
Created in 1978, the OECD Arrangement is a “gentleman’s agreement” struck between several nations, which places limits on the terms and conditions participating countries can provide when offering export credit support. Currently Australia, Canada, Japan, South Korea, New Zealand, Norway, Switzerland, Turkey, the US and countries in the European Union are signed up to the agreement.
According to the OECD, the agreement is meant to help ensure buyers make purchasing decisions based solely on the quality or price of goods or services, rather than the export credit support on offer.
However, criticism of the Arrangement has been building in recent years, with US Exim noting in its 2019 competitiveness report that non-OECD ECAs, namely those in China, are playing by wholly different rules.
According to US Exim, China’s medium and long-term export credit activity from 2015 to 2019 was at least equal to 90% of that provided by all G7 countries combined.
US Exim’s chief banking officer Stephen Renna tells GTR that he has “seen a number of letters from China, that have shown they’re providing financing packages with 20-year terms, 1% interest rates and a five to seven-year grace period”.
Renna says this highlights China’s willingness to use concessionary loans, a form of tied aid, as part of its export credit strategy.
Unlike export credits, tied aid is support extended to a country – generally an emerging market – which comes with more generous interest rates and repayment terms. As the name suggests, it requires that the funding be used for the procurement of goods or services from the donor country.
US Exim alleges that Chinese ECAs are able to use tied aid more loosely, much like with official export credits, and are known to make financing packages more attractive by pairing export credits with concessional financing.
In turn, this has led to a trend of OECD ECAs resorting to similar ‘blended finance’ packages, US Exim says.
As part of its new mandate, US Exim has been given more freedom to try and match the rates and terms on offer from the Chinese ECAs, although Stephen Renna and US Exim’s senior vice-president of policy analysis and international relations, James Cruse, both believe there will be further hurdles to overcome as the bank strives to level the playing field.
Renna says that while the bank can offer tied aid to try and compete with concessionary financing, the amount available is limited.
There are also practical difficulties for US Exim, and Cruse tells GTR that one of the issues the bank faces in trying to match its rival is sourcing information about what kind of financing the Chinese offer.
Cruse adds that US Exim is looking at ways to identify and compile information on any transactions involving Chinese financing entities, a process he says is currently difficult due to the opaque nature of its competitor’s operations.
The bank is also trying to “establish a unit within the institution that would focus on these types of transactions”, he says.
US exporters are asked to submit applications to US Exim when they identify a competing Chinese deal. US Exim must then conduct its own due diligence and decide whether to meet the export credit terms and conditions on offer from the Chinese financing entity – in other words, matching their offer to its own exporters – and in doing so go beyond what the OECD would allow.
US Exim has shown a willingness to operate outside the OECD guidelines before, with a spokesperson for the bank telling GTR it has offered loan terms outside the arrangement for a “select few” transactions previously, as it “is permissible under certain criteria”. The use of matching hasn’t strictly been prohibited in the past, given the OECD guidelines are just that – a guideline. Renna cautions, however, that the bank would prefer to stay within OECD guidelines to the “greatest extent possible”.
Although those ECAs that choose not to abide by the OECD Arrangement have effectively been undermining the guidelines for years, US Exim’s new mandate has sparked fresh fear in some quarters for the future of the agreement, with a senior export finance banker operating in Europe telling GTR that if OECD ECAs like US Exim start reacting by ignoring the agreement, it could spell the end for it.
They state that US Exim’s new willingness to act outside of OECD guidelines is a “strong political statement”, and that if more OECD participating countries start trying to compete with non-OECD-abiding ECAs by lowering rates and terms, there will be a “race to lower standards” in each transaction.
Alongside these changes to its bureaucratic structure, US Exim has become increasingly involved in national security discussions since the start of the year. According to Cruse, its role within the federal government has fundamentally changed.
As part of this, the bank has become an increasingly active player in policy co-ordination discussions at the National Security Council, while also working with other agencies to support the Trump administration’s international priorities in key sectors, namely wireless technology and liquefied natural gas (LNG).
Within the wireless technology sector, 5G is a crucial area of interest for the US government, which has taken steps in the past year to squeeze Chinese telecoms giant Huawei out of the international market, over what it says are serious national security concerns.
Huawei refutes such allegations, yet at the behest of the US, the UK and French authorities have both imposed de facto bans on the firm in the past few months.
For its part, the US has imposed sanctions on the Chinese firm, with the Trump administration initially putting Huawei on an export control list in May 2019, in a move designed to restrict Huawei’s access to US-made and designed semiconductors necessary for vital products, namely telecoms network equipment and smartphones.
Concerned that Huawei was circumnavigating these rules, the Department of Commerce announced fresh measures in May, effectively banning chip manufacturers in any country around the world from selling semiconductors to Huawei if US technology is involved in any part of the production process.
Huawei has vehemently opposed the sanctions, responding in May that the “decision was arbitrary and pernicious” and that the company has been committed to complying with all US government rules and regulations.
While such sanctions are a key part of the Trump administration’s global 5G strategy, Renna says US Exim will also play a role in helping the US take on China in the sector, and will work to provide financing and support to Huawei competitors – both US and foreign.
Currently, however, US companies are voicing concerns that they’re struggling to compete with the financing on offer to Huawei, particularly in emerging markets.
Michael Liebsch, managing director at Juniper Financial Services, the financing arm of US technology company Juniper Networks, said on a recent US Exim conference call that the financing on offer to Huawei from the Bank of China, and other banks, is far more aggressive than what a typical US publicly traded company can arrange.
In a bid to help level this perceived imbalance, Liebsch called for US Exim to work alongside US companies like Juniper and non-American firms that are vital in its 5G supply chain, specifically radio access network (RAN) providers such as Samsung, Nokia or Ericsson.
“I think there’s a huge opportunity for all of us in a partnering mode to put together… very competitive solutions in conjunction with Exim to start taking market share in other parts of the world,” he said.
In May, US Exim showed its willingness to challenge China in the LNG market as well, taking part in a US$14.9bn senior debt financing agreement backing Total’s Mozambique LNG project.
Having reportedly muscled in on the deal last year, which China and Russia had originally been slated to finance, US Exim agreed to provide a direct loan of US$4.7bn.
But, while US Exim championed this win over its rival, China still holds a strong presence in the LNG sector in Africa, and there are signs this could pose problems for US Exim going forward.
The China National Petroleum Corporation (CNPC) is a major (28.6%) stakeholder in the nearby Rovuma LNG project being developed by American corporate ExxonMobil and Italian energy firm Eni, for instance.
US Exim had been lined up as a potential backer for that deal as well, however ExxonMobil reportedly withdrew an application for US$2bn of funding from US Exim earlier this year.
Ed Hobey-Hamsher, senior Africa analyst at global risk consultancy Verisk Maplecroft, notes in a blogpost for the African Business magazine that the energy major pulled its request for financing from the bank after US Exim expressed concerns about the participation of the CNPC.
Africa takes centre stage
As US Exim looks to take on China in these key sectors, the bank’s chairman and president, Kimberly Reed, makes clear that the battle between the ECAs will be felt greater in certain regions, such as Africa, which has six of the 10 fastest-growing economies in the world.
Speaking about the importance of the continent in US Exim’s 2019 competitiveness report, Reed says: “At a time when countries like China, through its Belt and Road Initiative (BRI) and Made in China 2025 efforts, are increasing their presence in Sub-Saharan Africa and beyond, Exim has heard loud and clear, especially from Congress and the SAAC [Sub-Saharan African Advisory Committee], that our agency has a critical role in helping America’s businesses and workers fairly compete for these opportunities.”
Such efforts by the Chinese have been signposted by the US DoD as potential causes for concern, with Chinese BRI and Made in China 2025 development projects potentially setting the stage for heightened military tensions globally.
According to the DoD, Chinese military personnel could well be deployed in greater numbers overseas in the coming years, in order to defend BRI projects.
But Kanyi Lui, a Beijing-based partner at global law firm Pinsent Masons, points to Africa’s vast infrastructure financing gap, which – according to the African Development Bank – presents an annual deficit of between US$67bn and US$107bn, and suggests that there may be enough room to welcome all players willing to back African deals. “It doesn’t have to be a competition,” he says.