Friday, January 14, 2011

Has China's Export Financing Met Its Match?



GE won the contract. 






  1. I was surprised to read that Pakistan was chosing GE locomotives althought "... the Chinese were 30 to 50 % cheaper..."
    Anyway, aid or trade, the benefits wil, this time, be for the GE shareowners and it will be the US taxpayers who will finance the deal...

  2. I wonder if the US Ex-Im Bank is providing the full financing, or if they are guaranteeing or subsidizing a private bank loan? A lot of details still to emerge on this deal...

  3. Thanks Dan! I'm loving Dan Haglund's careful research and fieldwork, including articles in China Quarterly, and Journal of Modern African Studies. For one of Dan's latest pieces, see:

  4. Not quite the whole story.

    Recently, Pakistan Railways has been loudly bashing the quality of the 2001 Dongfang locomotives they bought from China.

    Last year, the local representatives of EMD (the other major American locomotive manufacturer) charged publicly that the tender was structured so that only GE could win. Allegedly, the technical specifications were written so that only GE could fulfill them, and the locomotives were required to come from one country only. This excluded EMD, which performs final assembly in Ontario and was planning to use Canadian EDC financing.

    In other words, Pakistan Railways had no intention of buying engines from Dongfang, or EMC, or anyone except GE. They just wanted better terms -- and they got them.

    The Washington Post article might better be titled, "Jon Pomfret talks to the director of the US Exim bank and writes an article about it." The article shows no signs that he talked to anyone at GE.

  5. Well, that's interesting Tom! Any links to stories on this?

  6. Here are the allegations made by EMD:

    Here's the long and tortured story of the Dongfang locomotives purchased in 2001 -- half of which are now out of service:\10\10\story_10-10-2010_pg5_5

    Note that 3/4 of the Dongfang locomotives were delivered in kit form, for final assembly in Pakistan. In the decade to 2001, Pakistan Railways managed to run down 2/3 of its locomotives to non-operational status:

    China Railways seems to be able to keep Dongfangs in working order ...

    I guess we'll see in another ten years if Pakistan's GE locomotives are still working -- and if US Exim Bank manages to get most of its money back.

  7. Thanks for this good research Tom. I remember Dongfang tractors being used in Liberia in 1983. They weren't very popular with the Liberians... but they've had several decades to upgrade the quality.

  8. the OECD rules apply to all countries through their adoption at the WTO in general terms in Annex I of the SCM
    1. Item J- ECAs must charge premiums sufficient to cover the “long-term operating costs and losses of the programmes” , and;
    2. Item K- OSECs must not contain an interest rate subsidy i.e. credit must be equal to or above the cost of government funds

    It is the OECD that prescribes minimum premia and sets country risk ratings (basically ruling out many African states).
    It is interesting to note that the minimum rates allowed are 100bp above a basket of govt bonds, thus giving low interest rate economies (read US) an implicit advantage.
    Some of the OECD Arrangement has tied the hands of signatories but it should be kept in mind that the motivation for the Arrangement was interstate competition between the OECD. They do not want their financing cartel broken by those 'cheating chinese'.

    Finally, when it comes to the reality of 'cheating' the evidence often conflicts. I have surveyed China Dev Bank loans vs. ECA equivilents to an unameable Russian Telco (its for my employer!). China terms were MORE expensive than European rivals from Germany, Finaland and Sweden.

    Finally, if anyone is interested in more ECA material pls read:

  9. This is exceptionally helpful. I highly recommend the report by Tom Durkin at the website referenced above. It's one of the most sensible things I've read on this topic. I touch on it also in The Dragon's Gift, pp. 297-299.

  10. US Ex-Im bank is surprisingly transparent on their interest rates for specific projects, unlike the World Bank. They're right in the annual report.

  11. Also, CDB rates are higher than Western rates, but Ex-Im rates seem to be lower. Tough to know for sure.