Jason Jiang identifies key trends in the emerging powerhouse of maritime capital.
In the past few years, the international shipping finance sector has experienced a massive crisis with bad debts accumulating amid the continued recession in several shipping sectors. European banks have substantially reduced the scale of their shipping exposure in order to repair their balance sheets while American private equity firms have realised shipping is not the easy profit center they had once anticipated.
In the meantime, Chinese financial leasing companies have stepped into the gap left by the European banks and US private equity firms, and are now strengthening their grip on the international shipping market.
In order to seize opportunities from the central government’s One Belt, One Road initiative, Chinese financial leasing companies have accelerated their international strategies in the past couple of years.
ICBC Leasing, Minsheng Financial Leasing, and CMB Financial Leasing have all started collaborations with big international companies including Vale, CMA CGM, MSC and Trafigura.
According to Mao Wanyuan, director of the Non-Bank Financial Institutions Supervision Department of the China Banking Regulatory Commission (CBRC), currently banks in China remain conservative when it comes to shipping finance, but they are becoming more flexible in their deals with the sector.
Data from CBRC shows that currently there are 60 financial leasing companies in China, 23 of which have opened ship financial leasing businesses, managing a fleet of 989 vessels with total value of RMB113.9bn ($17bn).
While various funds have entered the domestic shipping market in the past few years, there has not been a major development in alternative direct financing for domestic owners. Mao believes in the near future, bank loans and financial leasing will remain as the main financing methods in China, equity financing and debt financing as secondary and industrial funds and trusts as supplementary.
“For the next step, CBRC will continue to encourage financial leasing companies to start ship businesses to support the transformation of thedomestic shipping and shipbuilding industry. Currently, financial leasing has become the second largest ship financing tool in China following bank loans, and the volume is still growing,” Mao says.
Shen Lei, director of the management committee of Tianjin Dongjiang Bonded Port Area, reckons that the maritime financing sector in China is undergoing a major evolution.
Tianjin Dongjiang Bonded Port Area is a national-level demonstration area for the innovation of leasing business and it has become the largest platform for ship financial leasing business in China, as well as for aviation. According to statistics from the committee, there are over 160 single-vessel companies registered in the area, while international ship leasing assets registered in the area now totals $5.2bn, accounting for 80% of the total volume in the country.
“The maritime financing business in China is now at the transformation stage and the integration of industrial capital and financial capital has become a new trend,” Shen says.
Shen reckons that traditional shipping and shipbuilding companies in China have now adopted newly available financial tools to expand to the upstream sectors. Financial institutes have also transformed from capital providers to become actual participants in maritime business, even becoming designers of integrated logistics plans. In addition, maritime companies are collaborating these days with financial institutes to set up industrial funds as new investment platforms.
In May, Chinese shipping conglomerate China Cosco Shipping Corporation announced a plan to set up an international fund to invest in shipping assets. The fund will be split in two – RMB and US dollars – and will not just focus on ships but also non-performing assets, restructuring targets and asset-backed securitisation.
“The continued downturn in the shipping market has brought many challenges in securing bank financings for medium-small companies, which has increased the demand for the diversification of non-bank ship financings,” Shen says.
Gu Song, a senior transport analyst at Guotai Junan Securities, also holds the view that financial leasing as an asset intensive industry needs to explore more diversified financing channels to control costs, and he believes securitisation is one of the innovative ways to handle this.
“Long term ship leasing contracts will generate stable cash flows and spread risks, which is suitable for securitisation in the capital markets, especially under the circumstances where interest rates in the bond market are going up,” Gu says.
Fang Zhixiu, head of shipping at BoCom Financial Leasing, reckons the financing channels in the shipping market have been gradually shifting from traditional bilateral bank loans to fund raising in the capital markets, especially in US dollars, and the financial leasing companies are trying various methods including liquidity loans, project financing and bond issues in order to expand the US dollar financing channels.
The ongoing digitalisation transforming the global maritime industry is also bringing opportunities for the ship finance sector in China.
AS-Pay, an online shipping finance platform backed by HNA Group, was launched in Shenzhen last year. The company claims to be the first online financial settlement and financing platform in China.
According to Wang Yongli, head of AS-Pay, the operating data of medium and small shipping companies in China is highly discrete, so that the financial institutions are unable to effectively evaluate risk using the current credit evaluation systems, which makes it difficult for these companies to secure financing.
“The AS-Pay platform will provide financial settlement services to medium and small companies and help them create a credit profile using big data, and by analysing this data, we will be able to provide various customised financing services to the companies,” Wang says.