Sinosure (officially known as China Export and Credit Insurance Corporation), is a state-owned export credit insurance agency of the PRC, which provides insurance on export credit-related loans and investments. The insurance provided by Sinosure covers both commercial and political risks. If the insured is unable to receive repayment or recover full returns at the occurrence of the cause set out clearly in the insurance policy, Sinosure will provide the insured with their payment up to the specified amount agreed to in its policy, therefore assuming partial liability for repayment.
For a very long period of time, Sinosure has been believed by the market to be “official” given its ownership ties with PRC's Ministry of Finance (MOF) and Central Huijin Investment Co., Ltd. (中央汇金投资有限责任公司) as well as its important role in supporting PRC's export activities. Consequently, the lending covered by Sinosure is considered to have a very low-risk weight.
Sinosure is in fact an independent legal personality separated from the PRC government and there is no publicly available document clearly confirming PRC government’s guarantee to Sinosure’s obligations. This is different from other official export credit insurance agencies, such as the Swedish Exportkreditnämnden (EKN) or the Korea Trade Insurance Corporation (KSURE). In Swiss, EKN is a public legal entity of Swiss Confederation and has direct access to assets of the Swiss Confederation to ensure its capacity to pay at any time. The liability of the Swiss Confederation is unlimited and forms an indirect state guarantee of the Swiss Confederation to the EKN via the granting of loans to the EKN at a market rate, inherited from the Swiss Export Risk Insurance Act and the bilateral treasury agreement between the EKN and the Swiss Confederation. Similarly, in Korea, KSURE is classified as a special public sector entity independent from Korean government, while the Korean government has a legal obligation under the Trade Insurance Act to cover deficits incurred by the Trade Insurance Fund managed by the KSURE, through which the KSURE runs its trade insurance business. As a result of the interpretation of relevant laws, a creditor of KSURE would have a claim for damages against the Korean government if such creditors suffered a loss from a default that has occurred due to the Korean government’s failure to replenish the deficit incurred by KSURE.
Moreover, the statement that “Sinosure issues the Policy under the authorization of the MOF” has been knowingly deleted from the cover page of the Buyer’s Export Credit Insurance Policy issued by Sinosure in 2022 (Sinosure’s Policy), compared with its previous version. This amendment triggers overseas financial institutions’ concerns as to the relationship between Sinosure and PRC government, and ultimately, whether the PRC government would absorb Sinosure’s liabilities.
Although there is no publicly available document clearly confirming PRC government’s guarantee of Sinosure’s obligations, however, due to Sinosure’s ownership linkage with the state as well as its unique role in the nation's export credit insurance segment, and the state’s intent manifested in various policy documents and historical events, we are inclined to the view that the PRC government will render support to the Sinosure, if needed, to prevent the default on any obligation. Below is the detailed analysis that led us to such view.
Government Ownership and Management
As aforementioned, the shareholders of Sinosure are MOF and Central Huijin Investment Co., Ltd., a wholly-owned subsidiary of China Investment Corporation (中国投资有限责任公司), the PRC's sovereign wealth fund, ultimately owned by the State Council of PRC.
Moreover, the relationship between MOF and Sinosure cannot be simply construed as that of a common shareholder and company, since Sinosure shall be financially managed and supervised by MOF. On the cover page of Sinosure’s Policy, it is clearly expressed that “the MOF as the shareholder of the Sinosure is the competent department for the policy-oriented export credit insurance business.”
According to the Financial Management Measures of China Export and Credit Insurance Corporation (the No. 63 Measures) (《中国出口信用保险公司财务管理办法》 (财金〔2003〕63号))1, Sinosure shall accept the management and supervision of MOF and the local financial supervision office of MOF, particularly:
1) the annual financial income and expenditure plan of Sinosure shall be approved by MOF and be strictly implemented;
2) the use of funds by Sinosure shall be in accordance with relevant measures approved by MOF; and
3) the audited annual financial report of Sinosure shall be submitted to MOF for approval within four months after the end of a fiscal year.
Policy-oriented Identity as an Instrument of the PRC Government
As PRC’s sole state-owned policy-oriented credit insurer, Sinosure has a strong position in export credit insurance, and has a substantial operating scale and extensive sales and customer service networks throughout the nation.
Sinosure is frequently mentioned in various state-level governmental meetings and policy papers. The performance of the Sinosure has been included in the annual Government Work Report (政府工作报告) by the Premier of the State Council in recent years, and the performance of its policy-implementing function is evaluated by the Development Research Centre of the State Council (国务院发展研究中心) in each year recently. In 2022, the Ministry of Commerce of the PRC notified of taking export credit insurance as a strong measure to stabilize foreign trade and that all business offices of the Sinosure shall effectively leverage the role of policy-based financial institutions2.
Sinosure plays an important role in performing policy functions, serving national strategies, supporting the development of enterprises and ensuring financial sustainability, and appears to be an instrument of the PRC government in the areas of export and trade.
Likelihood of Financial Support by the Government
The registered capital of the Sinosure is funded by the Export Credit Insurance Risk Fund (出口信用保险风险基金) (the Fund) as arranged by the state fiscal budget and Central Huijin Investment Co., Ltd.
According to the Formation Plan of Sinosure (中国出口信用保险公司组建方案) which was released by MOF on 12 May 2003, the Fund will be supplemented from: (1) the refund of income tax paid by the Sinosure; (2) insurance recovery income of the Sinosure; and (3) the State’s fiscal budget (but to the extent that such supplement by the State’s fiscal budget is necessary to maintain the equity/liability ratio of 1:20 of the Sinosure taking into account the insurance liability of the Sinosure and PRC’s financial situation at that time).
Moreover, according to the No. 63 Measures, by approval of the MOF, the Fund may be used to make up the Sinosure’s annual losses, with further potential supplement by the state budget depending on policy factors and the state's financial position.
Such regulations make it theoretically feasible for the Sinosure to get financial support from the state through the Fund. Although the state has no statutory obligation to do so, historically, it is observed that if the Central Financial Enterprises3 (and some other central-government-owned enterprises) descend into financial distress, it is not uncommon that the state will come to rescue and bail it out by providing funds (either directly or indirectly). These are some examples of Central Financial Enterprises and central-government-owned enterprises being rescued by the state based on relevant information accessible to the public - Bank of China (in 2003), Agriculture Bank of China (in 2008), China Eastern Airlines (in 2008), and China Southern Airlines (in 2008).
Similarly, as one of twenty-seven listed Central Financial Enterprises, it is great likely that Sinosure would receive financial support if descend into financial distress, like the financial support received by the above-mentioned other Central Financial Enterprises and central-government-owned enterprises.
O-Risk Weight Assignment to Sinosure-covered Loan by CBRC
According to the Circular on Risk Weighting and Classification of Sinosure-covered Loans (关于中国出口信用保险公司承保贷款风险权重和风险分类的批复)4 which was released by the China Banking Regulatory Commission (中国银行业监督管理委员会) (CBRC, currently known as the National Administration of Financial Regulation), a Sinosure-covered loan has a risk weight of 0% for calculation of the capital adequacy ratio of relevant Chinese banks.
According to the relevant PRC laws and a public response from the CBRC, the risk weighting system is a core element of prudent capital regulation, reflecting the actual default risk generated by banks holding credit assets.
Other institutions that the PRC regulator has assigned a 0-risk weight to the credit assets held thereby include the PRC central government, the People’s Bank of China (i.e., the central bank) and other PRC policy banks. In comparison, generally the risk weight of the ministerial bodies and provincial-level government is 20%.
Additionally, we also noticed a special scenario that the risk weight for notes held by a commercial bank is 0% when such notes are issued by asset management companies invested by the central government for the purpose of financing its acquisitor of non-performing loans from state-owned banks. In particular, from certain announcements/statements available to the public, we note it is not uncommon that MOF will provide support to such asset management companies with respect to its payment of the interest or principal of the notes. However, from such announcements/statements, it is not clear to us what exact “support” would be provided by MOF.
To put it into context, from CBRC’s perspective, it treats the risk of a Sinosure-covered loan as equal to the risk exposure to PRC central government and the People’s Bank of China. Considering in practice, it is not uncommon that the MOF will provide support to the asset management companies invested by the central government in the special scenario as mentioned above, an educated guess about the reasoning behind the 0-risk weight assignment to the Sinosure-covered loan could be the following – the MOF might give Sinosure similar support as given to the above-mentioned central government-invested asset management company.
In conclusion, based on the state-owned nature of Sinosure and the role it plays, as well as the state’s intent manifested in various policy documents and historical events discussed above, although there is no legal document specifying PRC government’s obligation to guarantee Sinosure’s payment obligations, it is great likely the PRC government would ultimately take actions to prevent Sinosure from default and/or bankruptcy for the purpose of boosting public confidence and maintaining its creditworthiness.