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Tristan Kenderdine

Research Director at Future Risk

Column: Asian Kaleidoscope

Much speculation has focused on the Asian Infrastructure Investment Bank (AIIB) as a threat to the multilateral development bank order, but it is actually the multilateral bank order itself that threatens its own existence. The AIIB is a shadow puppet, it is what you are supposed to look at, but it is not the principal agent. Rather China is aiming to build institutional strength in the real-engine room of international development finance—export credit agencies. The spearhead of China’s globalization 2.0 export credit agencies is China Export & Credit Insurance Corporation, Sinosure. Sinosure is moving into Belt and Road economies such as Azerbaijian, Kazakhstan and Uzbekistan with a clear mandate to underwrite state lending activities in the region. However lacking competition and without transparency, Sinosure can effectively write its own rules of the game, and ensure that China’s renminbi (RMB) is the currency of choice. While greater overseas direct investment (ODI) from China in the Central Asian and Caucasus economies may be welcome, it is important to understand that with the lack of any competition, and without transparency, Sinosure can effectively write its own rules of the game.

Much speculation has focused on the Asian Infrastructure Investment Bank (AIIB) as a threat to the multilateral development bank order, but it is actually the multilateral bank order itself that threatens its own existence. The AIIB is a shadow puppet, it is what you are supposed to look at, but it is not the principal agent. Rather China is aiming to build institutional strength in the real-engine room of international development finance—export credit agencies. The spearhead of China’s globalization 2.0 export credit agencies is China Export & Credit Insurance Corporation, Sinosure. Sinosure is moving into Belt and Road economies such as Azerbaijian, Kazakhstan and Uzbekistan with a clear mandate to underwrite state lending activities in the region. However lacking competition and without transparency, Sinosure can effectively write its own rules of the game, and ensure that China’s renminbi (RMB) is the currency of choice. While greater overseas direct investment (ODI) from China in the Central Asian and Caucasus economies may be welcome, it is important to understand that with the lack of any competition, and without transparency, Sinosure can effectively write its own rules of the game.

Sinosure was formed in 2001 as a merger of a branch of the People’s Insurance Company of China, the first insurance company in China spun out of the danwei system, and a branch of the Export-import Bank of China, now the key policy bank charged with guiding state ODI. Colloquially known as Xinbao, Sinosure is quietly building a bilateral banking and insurance network across the Belt and Road economies that renders the Bank of International Settlements irrelevant in this corner of globalisation 2.0. In China, Sinosure supports the deployment of the Belt and Road through three core operations: ‘infrastructure interoperability; international capacity cooperation; and trade and economic cooperation zone development.’ This is the Belt and Road in microcosm: state capital ODI, industrial transfer to external geographies, and new trade blocs to run parallel to the global open market system.

As the only policy-oriented export credit insurance institution in China, Sinosure advertises itself as lending a ‘Sovereign Seal’ to legitimise China’s ODI investment. Basically every state investment in the Belt and Road is underwrittern by Sinosure, from electricity projects in Egypt, Pakistan, Jordan and Lao, to equipment manufacturing in Saudi Arabia and Iran, to commodities processing in Kazakhstan and Uzbekistan. Sinosure insurance covers around 25 percent of China’s exports, in January-June 2018, coverage was to US$ 257.39 billion, underwriting 1,379 international capacity cooperation projects, with an insured amount of US$ 129.1 billion.

Insurance is a key component of international trade and investment and export credit agencies, as an essential institutional part of international trade, are extant in all open, transition and communist economies. Under Belt and Road, Sinosure is guiding the export credit cover necessary for China’s firms to go abroad. This is particularly important in SCO countries where the normal trade and investment financial architecture of globalisation 1.0, dominated by the Bretton Woods institutions and their legacies, is weak. Since 2001, Sinosure has supported Chinese enterprises to export and invest more than US$179.64 billion in SCO economies, paying compensation of nearly US$358 million, and underwriting 420 major projects, such as the Central Asian Gas Pipeline project, steel rolling mills in Kazakhstan and gold mining in Tajikistan.

Sinosure’s operations are building public finance institutional legitimacy in China’s external geographies such that China’s firms may invest abroad with confidence, and without having to exit China’s closed capital acount. ‘Insurance + Financing’ is the wider policy guidance of linking China’s state-owned banks with the state-owned insurance operator while ‘Internet + Credit Insurance’ is the proposed online safety net extended to encourage SMEs to go global with direct investment into new markets. China’s ODI in Eurasian economies can then remain in a closed loop of Chinese institutions, without ever touching a foreign currency. Ministry of Commerce and Sinosure are backing the ‘World Tradelink’ to dovetail with an ‘SME Credit Insurance E-Plan’. This aims to extend the Alibaba model of domestic logistics and trade network integration to external geographies. But this globalisation 2.0 e-WTO model is a closed Chinese system: Jeff Bezos is not invited to this party.

Through such operations, Sinosure is underwriting China’s RMB internationalisation agenda in Eurasia, often itself being the key corresponding institution for bilateral state agreements. Since 2013, Sinosure has, in the SCO alone, penned agreements with Russian Export Credit and Investment Insurance on reinsurance cooperation; Russian Federation Savings Bank on export credit insurance cooperation; framework cooperation agreements with Russia’s traditional trade bank Vneshtorgbank (VTB); with Kazakhstan State Holding Group; and with both the Assaka Bank and Uzbekistan National Bank for Foreign Economic Affairs (Uznitsbank) .

Sinosure President Wang Yi does more diplomatic business than his namesake Foreign Minister Wang Yi. Agreements with Azerbaijian’s International Bank of Azerbaijian in May, along with meeting state oil company SOCAR President Rovnag Abdullayev to discuss joint projects are solidifying Sinosure’s position as China’s key state public finance institution in the Caucasus, paving the institutional way for investment from the three policy banks Export-Import Bank of China, China Development Bank and the Agricultural Development Bank of China.

Sinosure is also working closely with the policy and commercial banks to ensure a cohesive state-directed ODI financing model. In the China-funded upgrade of Egypt’s electricity grid a new public finance governance model has emerged: ‘Three Banks, One Insurer’. Exim Bank, China Development Bank and ICBC provided funding, under the guidance of NDRC and MofCOM, and underwritten by Sinosure. And this institutional pattern of Three Banks One Insurer is set to be replicated in future industrial transfer projects. From a China perspective, this is simple financial risk mitigation, ensuring three separate lines of credit by one guarantor. For open economies however, it looks like the death of competition on the Belt and Road.

It is this kind of institutional risk underwriting that allows the policy banks to move so easily into external geographies in Eurasia. At the SCO meeting in Qingdao in June 2018, Uzbekistan set up a US$ 750 million line of credit with China Development Bank and Exim Bank. While the Exim US$ 500 million is a blank cheque for Uzbekistan to spend however it wishes, the 250 million with CDB for support Chinese SMEs to bring technology transfers to Uzbekistan. This development is mirrored in the recent creation of a new US$ 500 million Kazakhstan-China Eurasian Nurly Fund and the Russia-China Investment Fund, a US$ 225 million fund denominated in RMB established principally by the sovereign wealth fund Russian Direct Investment Fund and China Investment Corporation. These funds are designed to support the industrial transfer strategy under International Capacity Cooperation and they supplement Sinosure’s direct investment underwriting. So Chinese state-owned enterprises can choose to draw down on RMB either from national funds, provincial ICC funds, bilateral funds or to borrow directly in China and invest abroad under the umbrella of Sinosure. For China it means that all investment in the Belt and Road is effectively backstopped by the state and denominated in RMB. For host economies, there is nothing wrong with letting the China side take the financial risk if the project is of direct benefit to the host economy. But if the RMB denominated risk is on the Eurasian side, and the project is to the benefit of Beijing, such as with Uzbekneftgaz’s pipeline construction, then who is really win-winning?

As the major underwriter for China’s key industrial transfer policy, International Capacity Cooperation, puts Sinosure at the end of a financing paper trail across major industrial clusters — electricity, aluminium, steel, cement, communications, photovoltaics, shipping, minerals, and textiles. Such ODI institutional linkages go hand in hand with direct state development projects, such as US$ 10 billion in investment recently agreed between China Development Bank and Russian’s state development bank Vnesheconombank.

The development of Sinosure into external geographies changes the fundamental dynamics of international trade and investment. Its underwriting activities in Central Asia and the Caucasus reveal the shadow of China's future external industrial policy in Eurasia. Policy insurance underwriting policy banking is the guiding institutional factor in international development finance in China’s Belt and Road geoeconomic strategy. But the ability of China’s banking system to price and effectively respond to risk in external geographies is at least as questionable as the open economy financial institutions. This means that creditor risk in China is actually a much darker and deeper risk than debtor risk in external economies. Much analysis has focused on the debtor risk of smaller economies being caught in a China debt-trap. But the endogenous risks in the larger China creditor economy being exported to external economies is a little understood risk. For Russia, disregarding the actions and agendas of Sinosure would be to cede legitimacy and economic gravity to China’s economic development agenda in the Eurasian heartland.


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