Steps on Applying Project Finance of Soft Loans and Commercial loans from China
By Leda Greenpower Beijing Trading and Engineering Ltd.
2009, Second Version
Steps on Applying Project Finance from China
Leda Greenpower (Beijing) Trading & Engineering Co. Ltd.
In china, there are policy banks, developing banks, commercial banks and state owned banks, and foreign banks. Thanks to strict regulation from government supervision bodies as China Central Bank and China Bank Regulatory Commission, Chinese banks have successfully gone through the current financial crunches which terribly hit the foreign banks. And through decades of planned economy and development, China have accumulated large sum of foreign reserve, mostly denominated in US Dollars. This huge reserve about 1.8 trillion USD has been supporting China to provide financing to foreign projects in different financing facilities. And the reserve will be increasing day by day, and then China has the ability to finance projects in the world for the goal of economical benefits from these financing to the world projects.
Among these banks, generally speaking all of these banks have the business covering loans as soft loan or commercial loans to foreign projects, but their key business scopes differ from bank to bank, and experience for providing financing to foreign projects also play very important role when they make decision whether or not to provide loan to foreign projects.
As a policy bank to support Chinese high tech electric and machinery industries to export to the world market, esp, to these emerging and developing nations to support these host nations infrastructure and improving local people’s life standards, The Export-Import Bank of China (hereinafter called Eximbank) will be the major policy bank to supply financing as soft loan, commercial loan and buyer?credit to foreign projects. And also China Development Bank is still a supplementary source for getting financing from China. But to our experience Eximbank is still first choice when applying financing for foreign projects from China.
Established in 1994 and solely owned by the central government, The Export-Import Bank of China (China Eximbank) is a government policy bank under the direct leadership of the State Council. Its international credit ratings are compatible to the national sovereign ratings. At present, the Bank has over ten business branches and domestic representative offices, as well as three overseas representative offices in Johannesburg, Paris and St. Petersburg. It has established and maintained correspondent relationship with more than 300 overseas banks worldwide.
As an important force in the backup system of foreign trade and economy and a significant component of the financial system, China Eximbank has developed into a key channel of policy financing for exports and imports of mechanic and electronic products, complete set of equipment, and high- and new-tech products, and for offshore construction contracts as well as overseas investment projects. Meanwhile, the Bank is also the major on lending bank of foreign government loans and the sole lending bank for Chinese Government Concessional Loan entrusted by the Chinese Government. The Bank is playing a more and more important role in promoting the development of the open and export-oriented economy of the country.
1.1.1. Mission of Eximbank
The main mandate of the Bank is to implement the state policies in industry, foreign trade, diplomacy, economy and finance to provide policy financial support so as to promote the export of Chinese mechanical and electronic products and high- and new-tech products, to support Chinese companies with comparative advantages to conduct such cooperation with foreign partners as offshore construction contracts and overseas investment projects, to develop and strengthen relations with foreign countries, and to enhance Sino-foreign economic and technological cooperation and exchanges.
Export credit and Import credit;
* Loans to overseas construction contract and Loans to overseas investment project;
* Chinese Government Concessional Loan;
* International guarantee;
* Onlending loans of foreign governments and financial institutions;
* International and domestic settlement and corporate deposits under the loan facilities provided by the Bank;
* Raising funds in domestic and international capital markets and money markets;
* International inter-bank loans, organizing or participating in international and domestic syndicated loans;
* Renminbi inter-bank borrowing and lending and bond repurchases;
* Foreign exchange dealing and approved risk protection Foreign Exchange (FX) business for client;
* Creditworthiness investigation, consultation, appraisal and witness services which are relevant to the Bank’s business;
* Other business approved or entrusted.
In year 2008 witnessed a fast growth of the Eximbank’s whole business. the on-and-off sheet loan outstanding combined exceeded RMB 600 billion with total assets valued at RMB 700 billion, Credits signed on the balance sheet amounted to RMB 373.4, billion with loan disbursed adding up to RMB 296.135 billion, up by 72.51% and 51.05% respectively over the previous year. These credit was designed to finance the exports of mechanical and electronic products, high and new-tech products, overseas construction contracts and overseas investment projects valued at 102.793 billion in the total as well as the imports of technical equipment and resource based products worth USD 96.082 billion. [http://www.eximbank.gov.cn/annual/2008/2008nb18-29.pdf]
And in 2009 year the soft loan only reached to 10 billion, and now many projects are under evaluation by the Eximbank.
China Development Bank (the "Bank" or "CDB") is under the direct leadership of the State Council. It is dedicated to the mission of strengthening the competitiveness of our country (author remarked: meaning CDB main business is to providing financing for Chinese domestic projects) and improving the living standards of our people.
CDB has always been a strong supporter of the State’s macroeconomic policies and has assumed an active role in raising and channeling funds to alleviate the bottleneck restraints to the development of the economy and society. The Bank is dedicated to promoting the development of the market through well-planned and balanced financing efforts that support development of the State’s key projects and construction in the infrastructure sector, basic, industries, pillar industries and high-techn, ology industry. In support of the State’s polic, ies to implement disciplined development and build a harmonious society, the Bank’s funding efforts also go to constrained sectors, including urbanization, SMEs, agriculture, rural communities and farmers, education, medical and health care and environmental protection. In answer to the call of the State to encourage domestic enterprises to "Go Global", the Bank engages in a wide range of international cooperative activities.
In support of the State’s development strategies and objectives, the Bank has endeavored to adhere to a market oriented approach, a strategy validated by the Bank’s maintaining and continuously improving robust development capabilities, market innovation capabilities, outstanding internationally-benchmarked market performance and core competitiveness indicators.
Supporting the state’s Infrastructure development initiatives, basic industries and pillar industries
Promoting coordination in regional development and restructuring key industries
Facilitating the development of new rural communities
Focusing on initiatives that enhance people’s livelihood through supporting sectors that have traditionally been faced with funding constraints
Steadily promoting international cooperation and supporting the implementation of the state’s "go global" strategy
Prioritizing planning, enhancing financial services and deepening financing cooperation
As the largest developing country in the world, China has the will and responsibility to share the story of its success with other developing countries. The Bank has continued to maintain its support for a large number of major Chinese enterprises in their strategies of expanding their business overseas, inviting foreign investment, and enhancing international cooperation. By the end of 2007, there were 180 international projects supported by the Bank with a total loan balance of USD 18.189 billion.
In 2007, CDB actively participated in a number of significant international financing projects that received great attention from the government and enterprises. In Europe and Asia, the Bank participated in international syndicated loan projects of Russia Aluminum Industry United Company, Dubai World, Qtel (Qatar Telecom) and Hazak Commercial Bank. In the Asia-Pacific Region, the Bank facilitated the Australian iron mine project; the Indian telecommunication project and the power plant project in Indonesia are progressing soundly. In America, the Bank helped China Aluminum Corporation to acquire the Peru Copper Inc., and established a cooperative relationship with Corporaci¨®n Andina de Fomento (CAF). In Africa, the Bank made great progress in cooperation with South Africa, Kenya, Uganda and Guinea, and established ongoing relationships with regional multilateral development-oriented financial institutions such as the African Development Bank, West African Development Bank and the Sino-Africa Development Bank.
CDB loans are divided into short-term loans (with maturity shorter than a year), medium-term loans (1-5 years) and long-term loans (longer than 5 years). For large infrastructure projects, the maturity period can be extended according to the needs of the relevant industries and projects.
The CDB sets interest rates in line with the unified stipulations made by the People’s Bank of China. For long-time customers who have maintained sound credit standing, interest rates can be lowered appropriately within the range stipulated by the People’s Bank of China.
From the business scope and character of the Eximbank and CDB, we can clearly check out that Eximbank put its financing on foreign projects, while CDB focuses on domestic projects. For these foreign companies or employers, it is suggested to apply financing from Eximbank as your priority bank for getting financing from, and taking CDB as a second choice.
Now let spend more time on describe on the principles and general terms of Eximbank. And the terms for financing with other Chinese banks are almost the same as these of Eximbank.
Although there are many kinds of facilities of financing from Eximbank, the widely used is the buyer’s credit against guarantee from the borrower’s banks or government department, usually it is the host country’s Ministry of Finance.
The Export Buyer’s Credit refers to the medium and long-term credit offered by the Bank to creditworthy foreign borrowers to support the export of Chinese capital goods, services and overseas construction projects. With a competitive interest rate and a longer period of time, the Export Buyer’s Credit can facilitate foreign importers to make prompt payment to Chinese exporters for the exported products and services. The operations generally follow the Arrangement on Guidelines for Officially Supported Export Credits as developed by OECD.
1. Products and Services Covered by the Credit
Export Buyer’s Credit is mainly extended to finance the export of Chinese capital goods such as mechanic and electronic products and complete sets of equipment. It is also available for financing the export of Chinese-built ships, high- and new-tech products & services, and overseas construction projects contrac, ted b, y Chinese companies.
2. Requirements for Application
The borrower should be a foreign importer, or the importer’s bank, or Ministry of Finance of or other authorized government institutions of the importing country, and should be acknowledged by China Eximbank. The borrower should have reliable credit standing, and should be capable of repaying all the principals and paying the accrued interests and related fees and charges of the loan as prescribed in the agreed repayment schedule.
The exporter should be an independent legal entity with the acceptable qualification of dealing export operations or overseas projects as verified by authorized Chinese government authorities, and should be capable of implementing the commercial contract. The goods and services exported should fall within the support list of Export Buyer’s Credit operated by China Eximbank.
The commercial contract that seeks for export buyer’s credit should be examined and approved by the Bank, and should satisfy the following requirements:
The value of the commercial contract should be more than USD 2 million.
The portion of the Chinese content of exported goods should be no less than 50% of the total value.
The cash payment (down payment) made by the importer to the Chinese exporter should not be less than 15% of the total contract value or 20% in the case of ship export contract.
The requirement of the Chinese content portion and the down payment percentage on overseas construction projects should be consistent with relevant policies and guidelines set by the Chinese government.
Subject to the credit policy of the Bank, the borrower is required to provide a repayment guarantee, and when necessary, a sovereign guarantee of the importing country should be provided.
Whether it is necessary to apply for export credit insurance should be decided by the Bank in accordance with the country risk of the borrower.
3.Credit Terms and Condition
The currency of the loan could be either US Dollar or other currencies acceptable to China Eximbank.
Generally, the Export Buyer’s Credit provided by the Bank for an export project of goods or services shall not exceed 85% of the total contract value, and 80% in the case of a ship export contract. As for an overseas contracting project, the loan amount should follow the regulations of state relevant policies.
The maximum maturity period is 15 years from the date of the first disbursement of the loan to the last repayment date as stipulated in the loan agreement.
The interest rate could be a fixed interest rate on the basis of the Commercial Interest Reference Rate (CIRR) as monthly announced by OECD, or a floating interest rate on the basis of London Interbank offered Rate (LIBOR) plus a certain interest rate spread. For special cases, the interest rate could be negotiated and decided between the lender and the borrower.
The availability of drawdown under the loan agreement shall be consistent with the terms and conditions of the commercial contract related.
The borrower shall pay management fees, commitment fees and exposure fees to China Eximbank.
· Loan Application and Approval
An eligible borrower should submit a formal application to China Eximbank for Export Buyer’s Credit together with the following documents and materials:
Draft commercial contract or letter of intention, Tendering and bidding documents, feasibility study report on the project and relevant approval documents;
Documentation that proves the credit standing of the borrower, the guarantor, the importer and the exporter; the financial statements of the borrower and the guarantor;
Other documents and materials required by the Bank.
China Eximbank will examine the application documents submitted by the borrower, confirm the qualification of the borrower and the guarantor, decide credit terms and conditions, and start project appraisal and approval process. Upon approval of the loan, China Eximbank will sign with the borrower a loan agreement on Export Buyer’s Credit, and the guarantor will present to the Bank a Repayment Letter of Guarantee.
· Loan Disbursement and Repayment
China Eximbank shall disburse the loan to the borrower as prescribed in the loan agreement.
The borrower shall repay to the Bank the principal and pay the interests together with relevant fees of the loan as stipulated in the loan agreement. Unless otherwise specified, once the drawdown period is over, the principal of the loan should be repaid semi-annually in equal installments. The interests incurred should be either paid semi-annually as calculated on the basis of the loan outstanding or follow the terms stipulated in the loan agreement.
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