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Credit Insurance & Finance for USA-China Trade

The New Old Politics

If the first high-level meeting between senior U.S. and Chinese officials in 2021—held recently in Anchorage—provides any indication, the Biden administration may be picking up more or less where the Trump administration left off.

Even though last year’s Phase 1 trade deal took the heat out of the escalating tariff duel between the world’s two largest economies, the spirit of the Alaska summit appeared to be one of confrontation and competition rather than cooperation.

U.S. diplomats highlighted China’s human rights record, cyber incursions, and issues in Taiwan, Hong Kong, Xinjiang, and the broader Asian geopolitical region. Chinese officials fired back that the USA was in no position to point fingers at them or anyone else.

Relations between our two countries evidently have a long way to go toward improvement.

USA/China Codependency

Notwithstanding the impassioned rhetoric, China needs the USA and the USA needs China. The USA is China’s largest trading partner and China is the United States’ third largest trading partner . . . after Canada and Mexico. Plus we have hundreds of billions of dollars invested in each other’s country.

While the trade deficit is more than 2-to-1, in 2020 U.S. exporters sold Chinese customers nearly $100 billion of capital equipment, agricultural commodities, and many other kinds of products, as well as intellectual property and services (which counted for one-third of the sales). The U.S. Department of Commerce estimates that export trade with China supports almost a million American jobs.

Demand for Trade Credit

While trade between the USA and China was for many years conducted primarily with letters of credit, a growing amount of business is now being done on open-account payment terms. Importers in both countries need working capital, so they’ve turned to their overseas suppliers for credit . . . to help them make it through COVID-time and hang in there long enough to participate in the eventual recovery.

When U.S. exporters extend credit to buyers in China, however, what happens if they don’t get paid? Nonpayment risks have always existed, but the downsides have become more acute in COVID-time because of customer insolvencies, cash flow and working capital issues, excess leverage, financial inflexibility, quarantines/lockdowns, uncertain supply chains, and other problems caused by the pandemic. Or masked by the pandemic (i.e., don’t assume every payment problem is COVID-related).

Extending longer payment terms also impacts exporters’ working capital. Unless they have a lot of cash in reserve, how can exporters fill new orders, cover their labor and material expenses, etc.? Furthermore, receivables from China are not always easy to get financed. Banks and other lenders face challenges to monetizing A/R from Chinese customers . . . especially in COVID-time.

Export Credit Insurance

The solution for both risk management and receivables financing is export credit insurance, coverage which protects accounts receivable against virtually all nonpayment risks. If a customer covered under a policy defaults, and the debt can’t be collected, the policyholder can file a claim and get indemnified.

Credit insurance enables exporters to keep selling in 2021’s uncertain new normal, grow international trade with more competitive payment terms, increase the profitability of overseas business, and enhance borrowing capacity (by designating a bank/lender as their policy’s assignee or loss payee).

Any or all of a company’s insurable export (and/or domestic) sales can be covered. Spreads of risk get underwritten more flexibly than standalone credits. A limit can be specified in the policy for each customer, or for exporters who qualify the policy will insure the credit decisions they make themselves.

Export credit insurance availability varies by country. The dozens of insurance companies that write credit insurance policies, as well as the U.S. government’s export credit agency EXIM Bank, are all open for covering U.S. exporters’ accounts receivable from creditworthy customers in China.

Meridian has specialized in brokering export credit insurance for more than 25 years. With offices in Los Angeles, New York, London, Brussels, and Singapore, we work with every insurer in the market that writes these kinds of policies. Beyond negotiating the most effective terms at the lowest cost, we provide comprehensive technical support for every policy we sell . . . including in the event of claims.

Import Finance

Like exporting to China, importing from China has migrated away from using letters of credit. Many Chinese suppliers, however, remain wary of extending open-account payment terms to their U.S. customers. They require payment upon shipment of goods—sometimes even in advance of shipment—giving rise to demand for supply chain finance among U.S. importers.

Working with a wide range of U.S. and international lenders, Meridian arranges several different kinds of supply chain finance solutions for creditworthy U.S. companies that source products from China.

Chinese suppliers may agree to invoice on open-account terms if they’ll be paid as soon as they ship the goods. Factoring companies purchase accounts receivable from Chinese exporters—at a discount and without recourse—satisfying the suppliers’ imperative to get paid (at least mostly) up-front while enabling U.S. importers to pay later under the original invoice credit terms.

In contrast to factoring and other “supplier credit” structures, some financial institutions offer “buyer credit” under which Chinese suppliers are paid at—or even prior to—shipment and the lenders extend trade loans directly to U.S. buyers, long enough for the goods to arrive or in some cases longer.

U.S. companies that are newer to importing may be able to purchase from China through an intermediary trading company, who will not only handle the transport logistics but also may offer longer payment terms than the Chinese supplier (at a higher cost, if supportable by transaction margins).

 

For more information about credit insurance, trade finance, and Meridian’s other services, call us at 310.260.2130, visit www.meridianfinance.com, or email us at info@meridianfinance.com.

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