Credit Insurance to Promote Export Growth by China: Why and how?
Some foreigners often ask why China still uses credit insurance to promote export growth although it is the largest exporter in the world. A similar question is posed by some Chinese but from a different angle: should China continue to expand its export credit insurance in such an "aggressive" way in order not to offend the Western world since trade clashes are becoming increasingly intense? There is no doubt that the why and how enigma truly mirrors the fact that government-backed export credit in China is at the crossroads of reassessment and reform.
Accelerating financial reforms in 2012
In recent years, there has been misunderstanding concerning the role of export growth in China's economy. He Weiwen (2012) (Note 1) tried to use facts and statistics to clarify this. His main findings are as follows:
i) China is not an export-dominated economy. Over the period 2000-2011, 10 of these years saw the GDP growth rate exceed 8%. Only three of these years had export contribution in excess of 2%, one year surpassed 1%, five years below 1%; and three years were negative. This indicates that the role played by exports in China's rapid economic growth has been over-estimated.
ii) China is no longer a large trade surplus country. Since 2008, China's trade surplus has fallen sharply. Trade surplus as a percentage of GDP jumped from 1.94% in 2004 to 7.76% in 2007, narrowed to 3.99% in 2009, and fell to 2.13% in 2011, far below the 4% that the United States has urged for China to maintain.
|Foreign trade surplus|
|Trade surplus |
iii) The widely-used share of exports in GDP is not a scientific indicator and cannot be used to infer that China is a highly export-dependent economy.
iv) Expanding exports is not contrary to, but in line with, expanding domestic consumption because it will help increase employment.
In conclusion, China should maintain its export growth at a modest pace to achieve balanced and stable development. Since the World Trade Organization (WTO) does not prohibit certain types of export insurance, the Chinese government has no reason not to make better use of it to facilitate international transactions.
China has enormous potential to be tapped into for export credit insurance growth, compared with Japan
Export credit is relatively new in China, and the China Export and Credit Insurance Corporation's (SINOSURE) strong export credit insurance performance is a more recent achievement. Compared with mature countries like Japan, China still has a long way to go.
i) China has a significantly shorter history in using export credit insurance as a tool to promote trade growth
China's involvement can be traced back to 1988 when the People's Insurance Company of China (PICC), the only insurance company at that time, was authorized to provide insurance for domestic exporters. On the other side, the Japanese government has sought to promote exports through export insurance since 1950. China's export activities have enjoyed a much shorter period of government support than that of Japan and are suffering from more unresolved problems, which imply great potential for policy improvement.
ii) China's penetration ratio of export credit insurance is much lower than the peak that Japan reached
Since its inception at the end of 1980s, export credit insurance in China has grown very slowly. Change was seen only after 2009 when the State Council decided to use export credit insurance as the top tool to promote export. SINOSURE, the only export insurance provider in China, expanded its amount of export credit insurance underwritten from $43.2 billion in 2008 to $98.3 billion in 2009. In 2011, SINOSURE's total insured amount reached $253.89 billion, of which the insured amount of export credit insurance was $216.24 billion, accounting for 11.4% of the total export amount at the same period and hitting a new high.
Although SINOSURE's penetration rate, the rate of insured amount of export credit insurance against total export, is higher than the global average level hitherto, it is still lower than the peak that Japan reached. According to Jai S. Mah and Chris Milner (2005) (Note 2), of the many countries which have operated export insurance systems, Japan's share of exports insured by export insurance is the highest in the world. During the period 1990-1999, the amount of underwritten business totaled 159.2 trillion yen, which covered 36% of total Japanese exports, although the coverage ratio decreased somewhat to 20% during 2000-2001. This was the highest in the world, compared with the other active users such as France (17%), Korea (17%), the UK (13%), and Australia (9%).
The following figure compares the penetration ratio of SINOSURE and Nippon Export and Investment Insurance (NEXI) over the decade of 2002-2011. Before 2009, NEXI had a much higher penetration ratio than SINOSURE; after 2009, the gap narrowed due to the latter's sharp rise and the former's sharp decline. In 2011, the penetration ratios of these two nations were very close.
China needs to take more action to enhance international cooperation and promote competitiveness
The 2008 global financial crisis has changed many things, including the international and domestic background of China's economic development. There are three challenges particularly worth mentioning. First, China's new role as the second biggest economy is shaking the existing international hierarchy and arousing increasingly more conflicts economically and politically. Second, the international community is expecting increasing cooperation and responsibility from China accompanying with its ever-growing influence. Third, the numerous problems confronting China render domestic reforms not only necessary but also urgent. More and more Chinese people have realized that accomplished achievements are not sustainable without reform.
All of the three challenges above apply to the export credit insurance system in China, which implies that it is no longer suitable to proceed along the traditional road, and new ideas should be adopted to review and reform the old regime. The two most crucial factors are:
i) Participating in international negotiations positively
China is not a member of the Organisation for Economic Co-operation and Development (OECD) and thus is not binding to OECD arrangements, which constitutes one of the roots of the trade clashes between itself and the other developed nations. From the Westerners' perspective, China's attitude toward participating in export credit-related international forums is not regarded as active, and sometimes even deemed passive (Note 4). If this is true, adjustments must be made immediately. International negotiation is the only way to help reshape a more impartial and sustainable trade environment.
ii) Facilitating domestic reforms decidedly
Many international issues are domestic by nature, e.g., SINOSURE is the only provider of export credit insurance, and no private insurers are allowed to operate the business currently in China. SINOSURE's unnecessary monopoly has resulted in many adverse consequences, such as disruptive market mechanics, over-estimated statistics, and international dissatisfaction. Many academics and practitioners are calling for opening up of the export credit insurance market to private insurers, but no actions have been taken yet. Why is there hesitation? It is time for the central government to make a clear separation between government intervention and market mechanics.
- ^ He Weiwen, "Maintaining export growth to realize a balanced development," International Trade, Volume 2, 2012 (in Chinese)
- ^ Jai S. Mah and Chris Milner, "The Japanese Export Insurance Arrangement: Promotion or Subsidisation?" The World Economy, Vol.28, No.2, Feb.2005
- ^ Some adjustments have been made on NEXI's business lines to make data comparable with that of SINOSURE.The underwritten amount only refers to export credit insurance, excluding those lines related to investment activities such as overseas investment insurance and overseas untied loan insurance.
- ^ E.g., according to the U.S. Government Accountability Office's (GAO) report (2012), some OECD members have made efforts to engage China on export credit issues, including encouraging participation in various forums, but have generally reported limited success. Several ECA, government, and OECD officials have reported that China is often either unwilling to attend or sends lower-level representatives to export credit-related meetings.