China is hungry for advanced Israeli technology

Oren Cohen

Bank Hapoalim's Oren Cohen explains the financing options for Israelis doing business with China.

China, the country with the worlds largest population, creates a special challenge for the business world.

Until in the 1830s, China was the worlds largest economic power, but the industrial revolution changed that: the title first went to European countries, beginning with Great Britain, and in the 1870s, the US emerged as the worlds number 1 economic power, and kept that status until last year.

In late 2014, the IMF updated data and announced that Chinas economy was again the largest in the world: its GDP exceeded that of the US in both purchasing power parity (PPP) terms and in current prices. 16.5% of total global output is now produced in China, compared with 16.3% by the US.

Chinas population is 1.37 billion, 20% of the worlds population. In the past few years, as a result of massive urbanization, Chinas middle class is growing rapidly. The Chinese government wants to move the economy from an investment and export-based growth model, which has resulted in surplus production and a huge balance of trade surplus, to a domestic demand and private consumption-based model.

These figures are very important for Israel as a country and for Israeli businesspeople. The two countries want to deepen economic relations. The Chinese mainly want advanced Israeli technology, especially in biotech and medical equipment, water, energy, agriculture, and communications.

In addition to the bilateral commercial relations, Chinese companies have acquired Israeli companies and not necessarily in high-tech, but in agrochemicals, Adama Agricultural Solutions Ltd., control of which was sold in 2011 at a company value of $2.4 billion, and in food, Tniva Food Industries Ltd., control of which was sold in 2014 at a company value of NIS 8.6 billion.

Financing for exporters cash deals

Israeli exports to China are mostly carried out through the financial protocols signed between the Israeli government and Chinas Ministry of Finance. The first financial protocol was signed in 1996, followed by additional protocols that expanded the framework amounts and possible financial plans. An example is the special financial protocol for agricultural projects.

The financial protocols are operated by the parties through framework agreements sigend between Israeli banks, which provide loans to Chinese banks for Israeli exports, while Ashra - Israel Foreign Trade Risks Insurance Corporation Ltd. insures the Israeli banks loan for a large part of the risk against the borrower Chinese bank.

The financial protocol allows the Chinese party to benefit from long-term financing at preferred terms for the equipment purchased from Israeli exporters. For the Israeli exporter, this instrument allows it to carry out large transactions essentially as cash deals, with no risk or taking responsibility for the financing, which is provided by the Israeli bank to the Chinese bank. Nonetheless, because the terms of the financial protocol set preferred terms for the Chinese party, part of the financing costs are borne by the Israeli exporter.

The use of financial protocols are characteristic of work with emerging countries with centralized regimes, which decide which transactions will be channeled through the protocols. In this case, the Chinese government guarantees repayment of the debt.

Fast and routine operation

Bank Hapoalim (TASE: POLI), Israels leading bank for implementation of the Chinese financial protocol, was the first bank to operate this financing structure and it is the only Israeli bank signed on framework agreements with all of Chinas six big banks, which were selected and approved by Chinas Ministry of Finance to participate in the financial protocol. These agreements allow fast and routine financing of export deals to China.

Since the start of activity through the financial protocols with China, Bank Hapoalim, through its Foreign Trade Transactions Department, has provided financing for more than 200 loan agreement totaling $800 million, including $300 million since the beginning of 2014.

We have recently seen the entry of integrator companies into the Israeli market, which organize purchases in Israel and the sale of a complete project, including equipment from different suppliers, to a Chinese importer. Examples are medical equipment to hospitals, agricultural equipment, educational equipment, and water infrastructures equipment. These companies usually include a Chinese partner which is familiar with Chinese government procedures and is an expert in Chinese approval financing procedures through the financial protocol, making it possible to quickly close a deal.

Bank Hapoalims Foreign Trade Transactions Department provides its customers with information and training for conducting export deals through the financial protocol between Israel and China. To properly understand the execution of a deal through this structure and to correctly price it so the exporter is unharmed by its share of the financing costs, the department advises the exporter to contact it as soon as possible to obtain this information and training.

Tips for the Israeli exporter to China

Below are some important tips for Israeli businesspeople seeking a foothold in or to expand their exports to China:

  1. Learn the fundamental details about the Chinese economy and ask for detailed information about the development of the specific industry in which you operate. It is advisable to contact the Chinese Desk at the Ministry of the Economy or commercial attaches at Israels representative offices in China. It is important to understand Chinese government policy, especially in the industries it is promoting. Such information will help you find potential opportunities for the coming years.
  2. Carefully check the terms and restrictions on currency transfers, both inward and outward. These terms are liable to change from time to time.
  3. Map the market and conduct feasibility studies. China has dozens of provinces, each with its own government. Each province has its own advantages and disadvantages, and knowing them will help you focus on the region with the most promising potential.
  4. Thoroughly study your target market characteristics, the market segment of the product or service that you are offering, and try to thoroughly know the market needs and consumer trends in order to decide the price range you should market your goods.
  5. Formulate a detailed strategic plan that takes into account issues, such as regulatory barriers (Chinese safety and quality requirements and the different standards for different products), intellectual property rights protection, financing stamina, logistics and product delivery. In other words, know the procedures, import and export licenses, delivery companies, delivery and release from customs costs, and standards rules.
  6. The nature of the entry into the Chinese market is very important. Should you operate through agents and distributors, or enter the market independently and establish a business representative in China.
  7. Before signing a contract with a Chinese partner, verify that all the business details provided and agreed upon during the negotiations actually appear in the contract.
  8. Participate in regional exhibitions.

A 20-year old financial protocol

Bank Hapoalims Foreign Trade Transactions Department functions include the financing of export transactions of capital equipment from Israel to China under the financial protocols signed between the Israeli government and Chinas Ministry of Finance. The first financial protocol was signed in 1996 to set out the main financing terms that will be given for loans approved under it. Since the first financial protocol, Bank Hapoalim has signed an operates framework agreements with all six Chinese banks approved by Chinas Ministry of Finance to serve as lenders under the financial protocol. The framework agreements allow fast and routine functioning financing of export transactions, even in fairly small amounts, instead of signing a specific financing agreement for each transaction.

Each transaction approved by the Chinese government and Ashra, which is responsible on behalf of Israels Ministry of Finance, is financed under one of these framework agreements through a short individual agreement (which describes the details of the specific transaction) signed between an Israeli bank and a Chinese bank on the basis of Society for Worldwide Interbank Financial Transactions (SWIFT) exchanges.

A bilateral protocol of this kind is characteristic of and possible in countries with a centralized government, as the financing terms are predetermined in the protocol and debt repayment liability is a government liability in order to encourage infrastructure projects in the country. Since the first financial protocol came into effect, two additional protocols have been signed, which expanded the framework amounts and the possible financing plans.

In March 2012, China and Israel signed a $300 million agricultural financing protocol, under which Israeli agricultural and water technology exporters can finance projects in five Chinese provinces over a 12-year financing period at fixed interest. Implementation of this protocol was delayed because of additional clarifications that were needed between the countries, and the first financing agreements under it were only signed in 2014.

As mentioned above, this is a cash transaction for the Israeli exporter. As each milestone is passed under the commercial contract and approved by the Chinese bank, Bank Hapoalim provides a loan to the Chinese bank and pays the proceeds in cash for the exports. The Israeli exporter bears a part of the transactions financing cost.

Oren Cohen is the Projects, Infrastructures and Foreign Trade Transactions Financing Unit director at Bank Hapoalim

Published by Globes [online], Israel business news - www.globes-online.com - on May 22, 2015

Copyright of Globes Publisher Itonut (1983) Ltd. 2015

5 Comments
View comments in rows
Update by email about comments talkback
POST
Comments

 
Oren Cohen
Oren Cohen
Twitter Facebook Linkedin RSS Newsletters Israel Business Conference 2018