Export Credits in Asia: The Hong Kong Export Credit Insurance Corporation

 

 

As discussed in much more detail elsewhere in this issue, export credit agencies provide credit insurance (and loans) to enterprises doing business overseas. Although private companies (such as EULER and HERMES, CNA, Eurofactor, and Hiscox) sometimes provide these services, credit insurance and loans are more often provided by public - government-backed - agencies.

 

Government-backed export credit agencies (ECA) are in fact major providers of credit insurance. Also called 'account receivable insurance', these schemes provide business with protection against the failure of customers to pay debts. For instance, when a customer overseas fails to pay as a result of going broke, or does not pay within a set timeframe, an ECA will cover the loss. These circumstances are referred to as 'commercial risks'. ECAs also provide business with protection against 'political risks'. Such risks may arise in a buyer's country during times of war, when the government cancels a contract, or when it implements regulations that either prevent the export or import of goods - or prevents or restricts the transfer of hard currency.

 

In the case of Asia, criticism has been levelled primarily at ECA loans (though not credit insurance); that is, criticism of agencies in countries like Germany, the US, Canada, Sweden, and Finland financing projects in places like Indonesia, the Philippines, Thailand, and China. A growing body of research has exposed ECA investment in projects where the impact on local communities has been disastrous (land appropriation, forced resettlement, harmful effects of air and water pollution, and so on). For example, Indonesia's first major foreign-invested paper pulping mill - PT Tel - was built in Muara Enim in Southern Sumatra for around $1.3 billion,1 of which $650 million came from ECAs in Germany, Canada, Finland, and Sweden. These stories, which now include ECA investment in the arms trade, large dams - such as the infamous Three Gorges project in China, coal fired power plants, and hydropower projects, concern the flow of export credits from the North to the South. However, ECAs are not confined to the North. There are, for instance, a handful of Asian ECAs among the dozens worldwide, including agencies in Hong Kong, India, Malaysia, the People's Republic of China, Singapore, South Korea, Sri Lanka, Taiwan, and Thailand. This article focuses in particular on Hong Kong's Export Credit Insurance Corporation (HKECIC), and examines the level of backing the government provides for local exporters.

 

The HKECIC was created by statute in 1966 - that is, under British colonial rule - to encourage and support export trade though the provision of insurance protection for Hong Kong exporters. It was established under the Hong Kong Export Credit Insurance Corporation Ordinance (Chapter 1115), and even after the return of Hong Kong to mainland China the HKECIC operates in accordance with the requirements laid down in the Ordinance.

 

The Ordinance is a long and legal document that lists the regulations governing the HKECIC's operation. It is in the main concerned with the business of insurance, but two regulations are of interest here. First, as of 2000, the 'Chief Executive may appoint a Commissioner of the Hong Kong Export Credit Insurance Corporation, who may be a public officer seconded for the purpose, on such terms and conditions as he may think fit'. Second, the Ordinance states that the HKECIC 'shall not enter into contracts of insurance against risks that are normally insured with commercial insurers'. In other words, the HKECIC is an arm of government - with the Chief Executive or his proxy controlling it, and it covers risk most other insurers are unlikely to touch.

 

Like other ECAs, the HKECIC offers protection to Hong Kong exporters of goods and services. It provides a wide range of insurance facilities to Hong Kong exporters trading with overseas buyers, usually on credit periods of up to 180 days. As its publicity material states: 'the HKECIC covers non-payment risks for goods exported and services rendered arising from the buyer's inability or refusal to pay, or political and economic events including shortage of foreign exchange, import ban, war, revolution, riot and natural disaster'.

 

Hong Kong is a trading hub, and a substantial portion of business conducted in the territory consists of the re-export of goods imported from mainland China, or the logistical management of goods manufactured outside Hong Kong (the latter is otherwise known as external trade). Policies covering both these types of trade are the HKECIC's most popular.

 

The HKECIC will normally reimburse 90 percent of losses incurred for any of the reasons listed above. In addition, the banking community accepts HKECIC policies as collateral because the payment of export bills is guaranteed.

 

Exporters in Hong Kong insuring their trade through the HKECIC can access a database of over 50,000 buyers all over the world. This database is maintained to monitor credit-worthiness and 'integrity', and allows business to assess risk. All information is derived from an international network that includes status information agencies, banks, and other credit insurers.

 

Should a customer default on payment, the HKECIC does not simply provide its client with 90 percent of the monies owing. It has links to a worldwide network of lawyers and debt collectors who will assist the Corporation in solving - as it terms them - payment problems. It will also advise a course of action for policyholders to recoup losses.

 

The cost of a HKECIC policy depends on a number of factors, including its assessment of country risk, the exporter's credit rating and size of turnover, and so on. However, in general, a company in Hong Kong can expect to pay a premium of around 0.54 percent of the total cost of goods exported.

 

The Government of the Hong Kong Special Administrative Region wholly owns the HKECIC. This is an important point because it means that the SAR government guarantees all policies taken out by exporters. Its current contingent liability stands at $1.6 billion - contingent liability refers to the responsibility of the SAR Government to cover future events (like non-payment) arising out of a past transaction (like shipping goods). In other words, the taxpayers of Hong Kong are responsible for bad debts up to $1.6 billion.

 

Wickerland Ltd., a small Hong Kong trading company specialising in wickerwork products such as cane baskets, provides a good example of how the HKECIC provides protection for business. Established by businesswoman Janis Poon, the company has been supplying products to the US for nearly 15 years. Customers there included, until recently, Kmart, the US retail giant that filed for bankruptcy earlier this year. Wickerland had been doing business with Kmart for eight or nine years, with orders amounting to $400,000 to $800,000 per year. When bankruptcy rumours became true and it seemed Kmart would default on bills totalling $100,000, the HKECIC contacted Ms Poon to help her file a claim. They assured her that she would receive payment within four to five weeks, and that the process would be straightforward. In the end Wickerland did not need to file a claim because Kmart settled all outstanding invoices. However, the HKECIC had made it clear to Ms Poon that its role was to protect Hong Kong business from just this sort of situation. It is debatable whether Hong Kong taxpayers should be bearing the cost to business of Kmart's financial collapse.