SHIP FINANCING IN CHINA

1. Introduction
In 2008-2009, the global financial crisis and fall off in global trade gutted the
shipping market. The failure of prominent global financial institutions and the
subsequent lack of trade finance and liquidity distressed the overexposed
shipping portfolios of the Western banks, making shipping loans either
unavailable or more expensive. The crisis offered an opportune moment for
Chinese banks to step in and build new shipping portfolios or expand existing
ones, allowing China to expand its fleet and build the foundations for
international partnerships or even dependencies that would that would empower
it on the global maritime arena.

Before the global financial crisis, Chinese shipping lending was domestically
focused, providing financial support mainly to Chinese shipbuilders and
shipping companies. At the time, not a single Chinese bank had a place among
the top 15 global shipping lenders (OECD, November, 2015). Ten years later,
the Bank of China, Export- Import Bank of China (China Exim bank) and China
Development Bank (CDB) have not only made it to the top 15, but Exim bank
and CDB occupy the global second and third place respectively (Petrofin, July
2017).

Chinese shipping lending has undergone massive transformation, rapidly

becoming outward looking and more worldly. Experts argue that during their
initial steps in international lending Chinese banks lacked experience and had to
deal with strict regulations imposed by the People’s Bank of China, time-
consuming internal processes, and heavy external bureaucracy.

Chinese of lending like bank loans still dominate the market, alternative lending
such as leasing is becoming a leading part of China’s shipping finance sector.
From commercial banks such as the Industrial and Commercial Bank of China
(ICBC) and Bank of Communications to shipbuilders and ship owners such as
China State Ship-building Corporation (CSSC) and COSCO Shipping, 23
financial institutions and relevant company divisions are involved in ship lease
finance. Entry into the shipping finance industry has very much been facilitated
by market factors, including the retreat of Western banks, the abundance of
Chinese capital and the fact that it had not been tied to existing shipping
portfolios.

Chinese leasing finance, which is gaining ground over traditional bank lending
because of its higher Loan to Value and longer amortization period. Leasing
deals with Chinese lenders take place under two models: “the financial lease”
model where the lessee is the typical manager of the assets and can take
ownership at the end of the lease and the “operating lease” model where the
lessor keeps ownership of the vessels at the end of the lease.

Controlling key parts of the supply chain allows a country to manipulate the
entire supply chain. From the financing and building of the vessels, the sale and
lease back deal, China shielded its own maritime industry from strong
competition and also strengthened it.

Chinese companies are increasingly dominant across the entire global maritime
supply chain, controlling the world’s second-largest shipping fleet by gross tons
and constructing over a third of the world’s vessels.

The size and focus of Beijing’s efforts accelerated after the 2008 financial crisis
when the global maritime industry suffered a collapse in demand. Support
provided to Chinese firms with a strategic buffer by Beijing from volatile
market forces, helping Chinese companies to expand their global market share
in shipbuilding and shipping finance.

1.1 China’s growing role in maritime industry and ship finance

China has been and remains a big driver of seaborne activity in the last twenty
years. Moreover, the Chinese fleet has been developing quickly and is already
the third largest merchant fleet. Its shipbuilding capacity has grown
significantly. In parallel, the role of China in ship finance has been increasing;
Chinese banks have been gradually replacing Western banks in shipping
portfolios since 2008 Global Financial Crisis. Particularly, the Chinese shipping
finance contribution to new shipping business since 2016 accounts for almost
40% or more of global new business.
 8000 20000
7000 18000
16000
6000
14000
5000
No. Of Ships

12000
4000 10000

$B
3000 8000
6000
2000
4000
1000 2000
0 0
20212020201920182017201620152014201320122011201020092008200720062005

Year

Imports Exports GDP (in $ B) No. of ships

Graph-1: showing import, export and GDP in relation with ship ownership. Positive correlation
between GDP and ship ownership (r=0.95512032 (lies b/w -1 to +1: positive correlation))

Share of world fleet in % owned by top 15 countries

in 2021.

20% 18%

1%
2% 12%
3%
3%
3%
3%
3% 11%
3%
4% 7%
4% 5%

Greece China Japan Singapore China, Hongkong SAR Germany

Korea Norway Bermuda France United Kingdom USA

China, Tawin province Denmark Belgium Rest of the world

Figure 1: Share of world fleet in % owned by top 15 countries in 2021

 Figure 2: 2017 Shipping Portfolio League Table, USD in billion
(Source - SHIP FINANCE PRACTICES IN MAJOR SHIPBUILDING ECONOMIES)

Bank of China, China EXIM (CEXIM) and the China Development Bank
(CDB) now place among the top 15 global shipping lenders as CEXIM is in the
first and CDB are in the fifth place (Figure 2). Before 2009, however, Chinese
banks had been more focusing on domestic support for ship-owners and
shipbuilding companies, and there were no Chinese Banks in the top 15 global
bank list (Laurent Daniel, 2019)

With a wide variety of financing types like traditional debt financing, leasing
financing and private equity financing, China holds a majority of stake in ship
financing market.

One big driver in sharp increase in 2012-2013 can be attributed to BRI (Belt
Road Initiative). BRI was designed to modernise the overseas infrastructure
encouraging investments.

In accordance with Chinese national energy security goals in the beginning of

2000s, it was aimed by the Government that 60% to 70% of China’s oil would
be carried via ocean going tankers by 2020. In order to achieve this ''national
oil, nationally carried'' approach, in August 2003 a special working group
named as ‘‘Tanker Working Group’’ was established (Laurent Daniel, 2019).
What does this means to the world?

China’s ship finance industry has largely benefitted global shipping industry
especially when the finances were dearth. As Chinese shipping loan portfolio
increased global shipping companies are looking more closely towards Chinese
shipping lenders to finance their operations and hence, increase their fleet size
as to gain more market and revenue.

Ownership of global shipping fleet is transferring to china which earlier was

owned by western nations. This is particularly true with Chinese leasing
finance, which is gaining ground over traditional bank lending because of its
higher Loan to Value and longer amortization period. Leasing deals with
Chinese lenders take place under two models: “the financial lease” model where
the lessee is the typical manager of the assets and can take ownership at the end
of the lease and the “operating lease” model where the lessor keeps ownership
of the vessels at the end of the lease (Marantidou, 2018).

Chinese lenders regularly provide sale-and-leaseback agreements, in which

lessees sell their vessels to leasing companies first and then lease them back at
standard loan rates. Chinese banks and non-shipping companies are quickly
becoming ship-owners thanks to leasing finance, which is growing China's
merchant fleet and strengthening its maritime dominance.
 2. Ship Finance
The financing of the ship is as old as the history of ship itself or the history of
international itself. The way the financing is carried out has only change over
the time and evolved at a very fast pace over the time. The financing products
available has increasingly become diverse and financers or lenders offering
them are banks, leasing houses, private equity fund, bonds and equity markets.

Ship financing is an arrangement that uses vessel charter fees as the principal
source of repayment, while various forms of collateral structured around
shipbuilding and charter agreements are assigned to mitigate credit risk
(MIZUHO, n.d.).

Ship finance is somewhat different from other asset-based lending’s such as real
estate finance. After all, shipping business earnings can be quite volatile and,
therefore, less predictable. Additionally, the collateralized asset (the ship) is
exceptionally mobile. The traditional method for ship finance was private
resources. Shipping industry being global in its nature, the finance to build and
operate the ship has changed and shifted to nations which are primarily more in
trade (more exports and imports) and hence can control the supply chain
favoring them.

China has now become an important center for the world for ship finance as its
international trade has increased over the years and accessed the important
supply chain points. China inched towards market openness by lowering entry
requirements for financial entities and china improved its growth in the market.
 2.1 Bank (Debt) Finance

Bank financing is the main source of capital to the shipping industry, providing
a flexible and low cost of capital to the shipping companies. Banks are the most
reliable and long-term oriented capital providers to the industry, accounting for
the greatest majority of the shipping capital every year (Manolis G. Kavussanos,
2016). Banks are still the most favourable options for shipping companies for
debts to carry out transactions. Bank loans do not affect the ownership structure
of a shipping company. This is a markedly desirable feature for shipping
business, since they are typically reluctant to endure significant changes in their
traditional family oriented and highly concentrated ownership structures.
Perhaps even more importantly, raising funds through bank loans does not
require the public disclosure of strategic, financial and operational information
(Kim, 2017). Even after the 2008 financial crisis and the decision of a number
of banks to reduce their shipping exposure, the cost of bank financing remains
highly competitive for ship-owners as compared with any other source of
capital (Manolis G. Kavussanos, 2016). When most banks were reducing their
exposure Chinese banks with Beijing filled this gap and placed themselves in
this competitive market and carrying out majority of the transactions. Their
quantum of market capture is as those loans which are not fulfilled by western
banks Chinese bank takes over it. It is quite amazing that every time we have a
client that cannot refinance himself the Chinese take it (KARNER, 2018). China
has pumped USD 20 billion into ship financing – 33 percent more than Chinese
banks loaned out in 2017, reports the Wall Street Journal based on figures from
the leasing arm of the Industrial & Commercial Bank of China (ICBC)
(ANDERSEN, 2017).

Four Chinese banks are estimated to sit on a fourth of China's total loans of
approximately USD 200 billion, reports the Wall Street Journal citing Marine
Money (ANDERSEN, 2017).

Chinese banks and leasing houses are playing an increasingly prominent role in
international ship financing, and Chinese lenders, which are ultimately state-
backed, are able to offer loans and leasing deals that Western banks are not able
or willing to match (THOMSEN, 2021).
 Loans for Vessels
CMB grants mid- and long-term mortgage loans to eligible enterprises that have
purchased a vessel. Under the loan, the vessel is mortgaged and the revenues from
its operation are used as the source of repayment.
Scope of Application
General-purpose vessels with a carrying capacity of over 1,000 tons and a unit price
of not more than RMB30 million. Such vessels include container ships, bulk
carriers, oil tankers and passenger ships that are either new or have been in use for
under 10 years, and exclude vessels under construction.
Basic Requirements for the Borrower
A business entity or organization that is registered with an industry and commerce
administration (or a higher-level regulatory authority), and holds a vessel operation
license from the shipping management authority; Strong business operations,
financial status, and credit standing; has established a basic or general clearing
account with CMB.
Guarantee Requirements for the Applicant
The purchased vessel on mortgage, repayment guarantee insurance from an insurer
with CMB as the primary beneficiary, and joint liability with the manufacturer or
seller of the vessel; or Adequate currency, or the applicant or third party must
pledge national or other bonds that are recognized by CMB.
Down Payment, Term and Repayment of the Loan
The borrower shall make a minimum down payment of 30 percent of the purchase
price for a new vessel or 50 percent for a second-hand vessel; the maximum loan
term is 10 years; the loan is repaid in equal monthly instalments.
Benefits
Eases the repayment burden of the borrower as the mortgage loan is repaid in
monthly instalments; Helps vessel manufacturers and vendors expand business and
enhance competitiveness; facilitates the distribution of general-purpose equipment
and the growth of river and marine transportation.

Box-1: China Merchants Bank Loan for Vessels

2.2 Export Credits

An export credit agency offers trade finance and other services to facilitate
domestic companies' international exports. Most countries have ECAs that
provide loans, loan guarantees and insurance to help eliminate the uncertainty of
exporting to other countries. The purpose of ECAs is to support the domestic
economy and employment by helping companies find overseas markets for their
products. ECAs can be government agencies, quasi-governmental agencies or
even private organizations—including the arms of commercial financial
institutions (BARONE, 2020).

CEXIM and China export and credit insurance corporation (Sinosure) are the
two most active ECA’s in China. In line with the “national oil nationally
carried” the Chinese ECA backed are given priority to domestic firms who build
their ships in Chinese shipyards.

As of 2016, CEXIM has provided an accumulated total of over CNY 730 billion
of credit facilities supporting the ship industry since its establishment in 1994
(Laurent Daniel, 2019).

CEXIM acts as a policy bank and supports the plan of the Chinese government
to move up the value chain in shipbuilding. It provides export credit insurance,
shipbuilding credits, loans and shipbuilding guarantees. According to its
website, CEXIM has provided for more than CNY 300 billion in export credit to
the shipbuilding industry since 2013.

In 2020, the Bank made the first disbursement for the USD750 million project,
lending a strong hand to the Chinese shipyard in combating the COVID-19
pandemic and resuming work and production.1

2.3 Subsidies

1
THE EXPORT-IMPORT BANK OF CHINA Annual report 2020
The most direct way Beijing supports its shipping and shipbuilding industry is
through traditional subsidies, which listed firms disclose on their annual reports.
For the 35 listed Chinese shipping and port management firms between 2007
and 2019 (the earliest time period for which complete data was available),
Beijing provided $3.4 billion in total subsidies while the 12 listed Chinese
shipbuilding companies received a total of $2.1 billion (Jude Blanchette, 2020).

Subsidies are given from the Chinese government, provincial authorities, and
municipals, to help grow the shipbuilding sector. The subsidies come in the
form 1) cash payments that can offset the business cost and boost the revenue.
2) Tax rebates and 3) Entry subsidies like land subsidy or licensing procedure.
Firms utilise these subsidies for technology purchasing, R&D, covering
production cost during downturn and promoting the use of products made in the
country, hence helping the other industries to grow. According to M.
Kalouptsidi, China’s subsidies to the shipbuilding sector lowered the production
costs of Chinese shipyards by 13 to 20% between 2006 and 2012.

Year 2019 2018 2017

Subsidy amount
(Unit – Yuan; 112,821,078.94 83,710,709.80 144,268,243.87
Currency - RMB)
Net Profit 928,546,285.12 -247,415,0150.26 -45,856,889.17
Table-1: CSSC offshore & Marine Engineering (Group) company Limited (Data as per
Annual report 2019)

Subsidies come from different levels of the government. At the central level, the
Ministry of Transportation plays the largest role in directing subsidies, given its
responsibility for setting the broad policy direction of the industry and
developing and regulating China’s maritime transportation sector. At the local
level, subsidy policies are used as tools to compete against other cities for
investment, trade, and employment. As an example in 2019, CSSC received
government grants (all forms) is 12.15% of its net profit as in Table-1.
Following the 2008 crises many Chinese shipyards had difficulty in getting the
payments against the orders either completed or at a stage, increasing overall
inventories at shipyards as Chinese shipyards continue to build vessels. To
stimulate the demand Beijing introduced “scarp and build” subsidy, which
helped firms to scrap their old ships and upgrade to new ships at a reasonable
price. Under the original terms of the subsidy, shipping companies received all
of the subsidy only after they demolished their aging ships and built
replacement vessels. For example, in 2014, COSCO Holding (a subsidiary of
COSCO Group) received $194 million from the scrap and build subsidy when
its year-end profit totalled only $51 million. Although the Chinese government
eventually phased out the subsidy program, while it was in operation, it helped
boost not only China’s fleet modernization but also domestic shipbuilding and
shipbreaking yards, which were the downstream recipients of government
support (Jude Blanchette, 2020). On the one hand, industrial subsidies
significantly increased China’s market share in the shipbuilding sector,
especially if they were targeted towards the most productive firms and if they
were implemented in times where the global shipbuilding markets were facing a
drop in orders. However, this is not a plea for more industrial subsidies, as the
mere fact that China’s shipbuilding market share has increased does not imply
that its industrial subsidies were allocated effectively from an economic point of
view. On the other hand, these subsidies resulted into lower overall prices for
ships, also benefitting foreign ship-owners (OECD SCIENCE, APRIL 2021).

2.4 Debt Equity Swap

A debt/equity swap is a transaction in which the obligations or debts of a

company or individual are exchanged for something of value, namely, equity. In
the case of a publicly-traded company, this generally entails an exchange of
bonds for stock. A debt/equity swap is a refinancing deal in which a debt holder
gets an equity position in exchange for the cancellation of the debt. The swap is
generally done to help a struggling company continue to operate. The logic
behind this is an insolvent company cannot pay its debts or improve its equity
standing. However, sometimes a company may simply wish to take advantage
of favorable market conditions. (CHEN, 2021). China's debt-to-equity swap
program started in 2016. The last time China experimented with debt-to-equity
swaps to clean up the massive bad loans on the balance sheets of its state-owned
banks was in the late 1990s. In 1999, four asset management companies
(AMCs), in tandem with the four largest state-owned banks (often referred to as
the "Big Four" banks), were created to experiment with such swaps. (Huang,
2019).

In 2019, China implemented debt-to-equity swaps in various sectors for an

amount of USD 203 billion in total. In 2020, the China Banking and Insurance
Regulatory Commission announced to encourage further expansion of
investments in debt-to-equity swaps (OECD SCIENCE, APRIL 2021).
However, this debt to equity swap program was much opposed as the amount of
money involved would be insufficient to tackle debt problem as there is no fair
value of equity to swap and uncertainty in the market.

China Shipbuilding Industry Corp, one of the Chinese Navy's biggest

contractors, announced debt-to-equity swaps which will see eight investors
picking up stakes in two of its unlisted subsidiaries for an estimated 22 billion
yuan ($3.27 billion). China Cinda Asset Management Co Ltd and China Orient
Asset Management Co Ltd, two of the eight investors, will contribute around 5
billion yuan and 2 billion yuan, respectively, toward servicing debt of CSIC's
Dalian Shipbuilding Industry Co Ltd and Wuchang Shipbuilding Industry
Group Co Ltd. The other six investing companies will go in for straightforward
cash-for-equity deals. They include State-owned enterprises Venture Capital
Fund Co Ltd, Enterprises Structural Reform Fund Co Ltd, and China Life
Insurance Group Co. (Shuiyu, 2017).
 3. Leasing

Ship Leasing In China: Avenue

The lease is bequest of property (vessel) but not the ownership. A more precise
legal definition of leasing is- A lease is an agreement whereby the lessor
(owner) conveys to the lessee in return for a payment or series of payments the
right to use an asset for an agreed period of time (international accountibg
standard 17, n.d.). Ship finance lease is the combination of financial industry
and shipping industry, it is a kind of finance lease model with ship as the subject
matter. This financing mode separates the right to use and the ownership of the
ship. The ship owner enjoys the ownership of the ship through the purchase of
the ship, and the charterer enjoys the right to use the ship through the lease
contract. On the one hand, the ship finance leasing model relieves the capital
turnover pressure of shipping enterprises and construction capital pressure of
shipbuilding enterprises. On the other hand, it creates good investment
opportunities for investors, which is a win-win financing model (Wen, 2018).

One of the primary reasons to participate in ship lease financing arrangements

rather than purchasing a ship through a bank equity financing arrangement is for
ease of balance sheet management. The lease appears as debt rather than equity
for the party in possession of the ship. The lessor ship management company
may document the lease as a credit asset or an account receivable.

The demand for ship leasing and leasing finance will increase as trade via sea
route has increased, as reported by Global Times - China adds over 100 new
container shipping routes (Jingjing, 2022).

Just over a decade, China has become an eminent in shipping finance industry.
After 2008 global financial crises when European banks were inefficient to
serve the growing demand (dominance of European banks until 2008) of
finance in shipping industry, some folded altogether, and those that remained
scaled backed their loan portfolios, raised rates, and made qualifying criteria
more stringent (Jude Blanchette, Hidden Harbors china's state backed shipping
industry, 2020). Tapping on this opportunity Beijing’s efforts accelerated post
2008 crises and helped Chinese shipping companies to increase their share in
world maritime sector.

China’s maritime rise has been driven by focused state support beginning in the
early 2000s after China’s accession to the World Trade Organization (WTO).
The size and focus of Beijing’s efforts accelerated after the 2008 financial crisis
when the global maritime industry suffered a collapse in demand. Such support
has provided Chinese firms with a strategic buffer from volatile market forces,
helping Chinese companies to expand their global market share in shipbuilding
and shipping finance by 10 percent and 15 percent, respectively, from 2008 to
2018 (Jude Blanchette, Hidden Harbors China’s State-backed Shipping
Industry, 2020). Chinese financial institute didn’t just provided support to its
maritime industry via loans but also they provided significant support in the
form of leasing. In 2007, the China Banking Regulatory Commission (since
restructured to become the China Banking and Insurance Regulatory
Commission) allowed the first batch of companies to begin leasing. Among the
early adopters were the Industrial and Commercial Bank of China (ICBC),
China Merchants Bank, Bank of Communications, and China Minsheng Bank.
Now China’s top four financial leasing companies, their combined shipping
portfolios have grown from around $6 billion in 2011 to $32 billion in 2018
(Jude Blanchette, Hidden Harbors China’s State-backed Shipping Industry,
2020). Initially, the leasing financial help was provided for only those ships
which are built in Chinese shipyards, but now they are in a position to finance
ships built in foreign shipyards.

Lease Financing in China —A Popular Option.

A vessel leasing arrangement provides for a more streamlined legal approach to
debt financed acquisition of vessels, and it puts less strain upon vessel managers
to negotiate legally complex financing arrangements with banks and instead can
devote greater resources to pairing charters with appropriate vessels (Beaumont,
2016).
China is an important center of ship finance. In 2009, the shipping portfolio of
Industrial and Commercial Bank of China (ICBC) grew to $7.8 billion. In that
year alone, ICBC closed 45 new shipping transactions totaling $2.3 billion.
Minsheng Financial Leasing, rapidly becoming one of the most important lease
financing companies in China’s domestic market, entered an agreement with
Shanghai Guodian Shipping, a subsidiary of Fujian Guohang Ocean Shipping,
to deliver 18 Panamax bulk carriers under a financial leasing arrangement.
Rongsheng Heavy Industries Group Holdings, a Chinese heavy industries group
and shipbuilder, announced that the first of the Minsheng-commissioned
Panamax bulkers was delivered after three years on Oct. 28, 2011. Before
taking delivery, the Tianjin free trade zone (FTZ)-based Minsheng placed a
bullish order for 10 additional Panamax vessels in 2010 and subsequently
sought Chinese candidates for lease financing. ICBC is one of the largest
Chinese vessel leasing companies (as it currently owns 340 ships of various
types including bulk, container, oil tankers, LNG carriers, luxury cruise ships,
FPSOs and wind power operations and maintenance ships), offering an array of
solutions applicable to the shipping sector which includes: (1) financial lease for
new equipment (Financing services), (2) operating lease for new equipment
(Asset servicing), (3) capacity service, (4) indexed linked modal leasing, (5)
joint tenancy, and (6) financial consultant and economic consultant.
 LNG carrier time charter project and product tanker project with a Dutch
Group.

In 2020, ICBC Financial Leasing signed a time charter project for two LNG
carriers with a Dutch group, realizing the direct cooperation between Chinese
leasing companies and international first-line oil and gas companies. In April
2021, ICBC Financial Leasing delivered the first IMO2 product oil tanker to
a certain group. ICBC Financial Leasing took the lead in arranging the
project. The project ship was built by Jiangsu New Times Shipyard in China
and operated by Shandong Shipping Company. After delivery, it will serve in
the long-term lease operation of a group is the first time that a group chooses
a Chinese shipyard and a Chinese ship-owner for cooperation.

Container ship operating leasing with a Danish company

In 2019, ICBC Financial Leasing signed a leasing contract for 10 container

ships with the world's largest liner company, providing transportation
capacity to top customers through operating leases, meeting customer needs,
and breaking the ice in cooperative relations.

Leasing consulting and financial consulting services for shipping companies.

In 2020, ICBC Financial Leasing successfully arranged a VLCC oil tanker

leasing consulting business for an oil company and an energy transportation
company. In 2019, ICBC Financial Leasing acted as a financial consultant
for an international ship owner, providing an overall financing plan for the
LNG carrier project it was bidding for.
By establishing leasing divisions that provide funding for new construction
projects while maintaining asset ownership, Chinese banks are converting to
ship owners. In order to put the bank-owned asset to work and obtain the benefit
through contracts for hire rather than through laborious mortgage procedures,
the leasing arm can allow ship management to charter the vessel out. By
maintaining ownership of the asset, the banks reduce the amount of legal action
needed to reclaim the ship. Leasing companies may be an arm of a bank, like
ICBC leasing a wholly owned subsidiary of Industrial and Commercial Bank of
China Limited provides shipping leasing services, and thus, they are positioned
to obtain favorable credit ratings or credit enhancement.
Alternatively, leasing companies may be an arm of a shipyard or shipbuilding
company, taking advantage of favorable pricing over the asset and collapsing its
profit margin with the shipbuilder's margin (Beaumont, 2016). In order to lease
out assets the company must be licensed to carry out leasing activity. To do that
China Banking Regulatory Commission ("CBRC") in 2007 started granting the
license for leasing activity. Whereas, shipyards are seeking licensing for ship
finance leasing from ministry of commerce (MOFCOM) to avoid strict
requirements of CBRC, as NBFC are in more comfortable position when
compared to shipyards when there is a financial transaction between related
parties.

The vessel will be owned by the Chinese leasing organization that negotiated
the transaction and leased to a Chinese operator. Nonetheless, the parties have
access to the most cutting edge technology of Korean shipyard i.e. the ship
build in Korean shipyard can be used by Chinese ship leasing company and also
benefits of flying Marshall Island flag a favorable shipping jurisdiction.

Lease Financing Arrangements Have Advantages for Both the Lessor and
the Leasing Company.
Entering ship-leasing agreements may be wise commercial decisions for ship-
owners, in addition to streamlining legal procedures to secure a position. Small
and medium-sized Chinese ship-owners are deemed un-bankable by domestic
banks, so these businesses benefit from alternative forms of vessel acquisition
arrangements, such as lease financing, despite China's importance to both
import and export markets as well as its expanding shipping sector.

The leasing business can profit from market fluctuations by selling its
ownership rights and keeping any underlying charters intact because it has the
legal authority to both own the asset and collect lease payments. The leasing
business may be in a position to resell the right to collect payments on the lease
agreements as well as the vessels it owns.

For the leasing company to achieve such benefits, it must be a bankruptcy-

remote vehicle, it must acquire ownership of the ship through a real true and
irrevocable sale, and receivables owed through its rights to collect lease
payments may be assigned but may not be reached by a parent company.

Two Competing Schemes for PRC Financial Leasing Companies.

There are majorly two competing schemes to which companies may register
themselves to conduct leasing transaction. “MEASURES FOR THE
ADMINISTRATION OF FOREIGN-CAPITAL LEASE INDUSTRY” issued
by CBRC (CBRC scheme) where article – 6 defines vessels as leased property
and article – 2 : “These Measures shall apply to the foreign-capital companies,
enterprises and other economic organizations (hereinafter referred to as the
foreign investors) that establish foreign-capital enterprises within the territory of
China in the forms of Chinese-foreign equity joint venture, Chinese-foreign
contractual joint venture and solely foreign-capital enterprise to conduct leasing
business or financial leasing business” (asianlii, n.d.) The China Banking
Regulatory Commission (CBRC) has encouraged financial institutions to
support the domestic shipbuilding industry and the exports of domestically-built
ships.

The other scheme is foreign-invested finance leasing companies established

with Ministry of Commerce (“MOFCOM”) approval. Scheme is more investor-
friendly and is better suited for manufacturers and privately funded financial
leasing companies, Under the MOFCOM Scheme, small- to mid-sized non-bank
leasing companies may engage in vessel leasing operations without the need of
license from CBRC (fulbright, 2007).
Following CBRC’s promulgation of rules governing financial leasing
companies in 2007 and subsequent reforms of the Mainland Chinese leasing
industry, several Mainland Chinese leasing companies have become active
internationally, offering ship leasing as an alternative to conventional bank
finance. Similar to many other tonnage and capital providers, these leasing
companies set up ship-owing entities in tax neutral jurisdictions to house non-
Mainland Chinese flag vessels. Most of these leasing companies operate out of
Beijing, Shanghai or Shenzhen (council, 2018).

The CBRC scheme targets large financial institutions, requiring its principal
investors to hold at least 50 percent of the company’s registered capital on hand,
while the MOFCOM scheme is more investor-friendly and is better suited for
manufacturers and privately funded financial leasing companies, requiring still
at least US $5 million in assets and three years’ experience in lease financing.
Neither the CBRB scheme nor the MOFCOM scheme places any cap on foreign
investor shareholdings in a finance leasing company (Beaumont, Avenues to
Foreign Investment in China’s Shipping Industry, 2015).

The lease arrangement puts both parties at a tax advantage over a vessel sale
position. Sale-leaseback arrangements may be undertaken by entities such as
shipyards to take advantage of this tax credit. The sale-leaseback arrangement
may also attract shipyards in need of immediate capital to fund their next build
project. Sale-leaseback arrangements are specifically permitted under both the
CBRC scheme and the MOFCOM scheme.

Foreign investors can take part in either scheme, however the MOFCOM
scheme applies only to foreign-capital enterprises that establish a limited
liability company or a joint-stock limited company within China and must take
the form of a Chinese-foreign equity joint venture, a Chinese-foreign
contractual joint venture, or a solely foreign-capital enterprise. The CBRC
scheme may be utilized by certain foreign entities as well. While banks are
specifically prohibited from being lease financing companies under the CBRC
scheme, commercial banks may be the major investor in a lease financing
company and may be registered in China or abroad. The CBRC scheme also
permits the major investor to be a leasing company registered in the PRC or
abroad or a large domestic manufacturer of products suitable for leasing. Thus,
the CBRC scheme is attractive to domestic or foreign banks, to domestic or
foreign companies already in the business of lease financing, and to domestic
manufacturers of products suitable for lease financing arrangements, such as
state-owned shipyards, looking to invest in a lease financing arm.

While commercial banks are subjected to strong capital adequacy regulations,

bank affiliated Chinese lessors are regulated by the Chinese Regulatory
Commission whose restrictions are not as strict as the regulations for
commercial banks. In the international ship owners’ point of view, leasing
appears to be comfortable financing alternative which is appealing regardless of
owners’ credit worthiness and on the other hand, making business with Chinese
leasing companies’ means networking in Asia which can increase the possibility
of having advantaged financial package.

China provided $15bn to the shipping industry in 2020 when other, traditional
lenders were retracting (bakhsh, 2121). The cost of Chinese finance who have
been entering the market in a bigger way is low as compared to European
lenders.

Leasing companies owned by the banks such as ICBCL, BoComm and

Minsheng Leasing (3 main players of Chinese ship leasing) have adequate
financial liquidity for funding of ship leasing operations. On the other hand
companies which have no connection with banks have difficulty in reaching
liquidity levels of that kind.

- Lease Financing under the CBRC's Revised Scheme-The 2021

Measures
It is an international practice and common practice in the leasing industry to
carry out aircraft and ship leasing business in the form of a specific purpose
vehicle of the project company. In 2010, the former China Banking Regulatory
Commission (CBRC) issued the Notice on Issues Related to the Establishment
of Project Companies by Financial Leasing Companies in Domestic Bonded
Areas to Carry out Financial Leasing Business, which actively explores
aviation, aviation and financial leasing companies in domestic bonded areas.
The foundation for the professional development of shipping-related leasing
business has been laid. With the continuous changes in the economic and
financial situation at home and abroad and the deepening of business
exploration, the market basis for financial leasing companies to carry out
financial leasing business in the form of project companies has been
continuously improved, and the business scale has grown and the management
difficulty has also increased. In order to further encourage and support the
financial leasing industry to improve its ability and level of serving the real
economy, focus on the high-quality development of major national strategies,
enhance the effect of risk management, and improve the quality and efficiency
of risk supervision work, the CBIRC formulated and issued the Measures
(CBIRC, 2022).

The measures consist of 5 chapters and 34 articles, the main contents of which
include: First, it clarifies the legal basis of the Measures, the definition of the
project company and the scope of leased objects to be carried out through the
project company for financial leasing transactions. The Measures shall apply to
financial leasing companies and professional subsidiaries of financial leasing
companies (hereinafter referred to as professional subsidiaries) establishing
project companies to carry out financial leasing business in accordance with
relevant laws and regulations. The project company refers here as the financial
leasing company, a professional financial leasing company shall engage in
specific purpose of leasing in accordance with relevant laws and regulations and
specially established project subsidiaries (SPV). The financial leasing company
establishes a leased property (ship) to carry out lease transaction and those
leased property should comply with relevant rules and regulations on the
management of subsidiary.

The second is to clarify the establishment location, qualification conditions,

establishment principles and business scope of the project company. The project
company and its subsidiary/subsidiaries can establish or setup company in
domestic bonded areas, FTZ, free trade ports and other domestic areas. With
restriction of setup of Project Company overseas earlier, CBIRC makes the
scope for project companies as they may set up Project Company overseas also,
considering Belt and Road initiative and understanding the fact the financial
strengths of leasing companies. To set up a financial leasing company within
China or more specifically the areas mentioned earlier by the NBFC of CBIRC
it has to obtain the license or qualification to carry out financial leasing business
upon approval.

The third is to require financial leasing companies and professional subsidiaries

to follow the principle of consolidated management and penetrating
management to manage project companies, establish and improve management
systems and mechanisms, and implement comprehensive risk management. A
professional subsidiary may establish a managed project company overseas for
the purpose of investing in and managing other project companies or financing
other project companies by issuing bonds.

The fourth is to strengthen risk management, and clarify the specific

requirements such as the correspondence relationship of project companies,
equity transfer, liquidation and closure, and the functions and levels of overseas
management project companies. Fifth, it clarifies the regulatory responsibilities
of banking and insurance regulatory authorities, regulatory requirements such as
matter reports, regulatory indicators, and report submissions, and may take
regulatory measures or impose penalties in accordance with existing relevant
laws and regulations for existing problems and risks.
These measures comprehensively regulate the financial leasing business carried
out by financial leasing companies and professional subsidiaries in the form of
project companies, and clarify the relevant regulatory requirements for overseas
project companies of professional subsidiaries. The second is to strengthen
business penetration management and comprehensive risk management
requirements, emphasizing that financial leasing business carried out by
financial leasing companies and professional subsidiaries through project
companies should apply risk management requirements that are not lower than
those directly conducting business and be included in the comprehensive risk
management system. The third is to promote the enhancement of endogenous
management power from the aspects of optimizing the correspondence
relationship and level setting of project companies, and actively prevent risks.

- Chinese leasing companies

With the rapid development and growth of China over the last 20 years, the
Chinese financial sector grew initially to serve Chinese shipping clients and
local shipbuilding and subsequently international clients on an international
basis. Most Chinese banks developed their own leasing subsidiaries which have
come to dominate the global shipping leasing business. Please see in graph 1 by
Smarine the lessors’ shipping portfolios and growth since 2017 to a total of
US$66.5bn which is approximately 15% of global ship finance It is important to
note that the lessors’ portfolios cover the total value of the shipping assets and
not only the intrinsic debt of the lessees (Petropoulos, 2021).

Chinese leasing houses continue to conclude new deals. There were news
reports of CSSC Shipping, the financial leasing unit of China State Shipbuilding
Corporation (CSSC) announcing plans to issue two bonds worth a total of
US$800 million due in 2025 and 2030 and to use the net proceeds primarily to
develop its leasing business and refinance its existing indebtedness. Bocomm
Leasing also made the headlines with a US$650 million contract signed with
Shell for a dozen dual fuel long range tankers. In recent years, the annual
increase Bocomm portfolio in shipping industry reaches nearly RMB 20 billion
yuan, ranking among the top three of ship finance institutions worldwide. The
internationalized layout of shipping leasing business has been also rapidly
advanced, with overseas business accounting for more than 50% of entire

Chinese lessor shipping portfolio in 2020 ($bn)

graph-1
70

60

50

40

30

20

10

0
2017 2018 2019 2020

Series 1

shipping portfolio. At present, Bocom Leasing owns 432 ships and portfolio
size more than RMB 100 billion yuan, making it the one who owns the largest
merchant fleet among the domestic financial leasing companies. Bocomm also
maintain the top-tier level in terms of shipping portfolio, financial performance
and asset quality and have become a leader in the domestic shipping finance
market and an important participant in the international shipping market
(LEASING, n.d.).
CHINA DEVELOPMENT BANK FINANCIAL LEASING CO., LTD.
With respect to ship leasing, in 2022, finance lease income from ship leasing
of the Group amounted to RMB 656.8 million, representing an increase of
RMB 31.5 million, or 5.0% as compared with that of last year, mainly due to
the floating interest rate of some ship finance lease business was based on
US dollars, and the project yield was affected by the increase in the US
dollars. The leasing income from ship operating lease amounted to RMB
5,320.5 million, accounting for 42.6% of the total operating lease income,
representing an increase of 18.3% as compared with that of last year

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