BNP Paribas and the opening up of China (2/3) : financing development
René Thomas, Chairman of the BNP visiting the municipality of Shenzhen (China) in 1985. René Thomas, Zeng Xigpei, Vice mayor of ShenZhen and Wang Quan Guo, Chairman of the company in charge of Daya Bay nuclear site, attending a cocktail - BNP Paribas Historical Archives - Reference 9Fi702-6
Enthusiastic about the opening of China – the lasting nature of which was still uncertain – BNP and Paribas were among the first Western companies to work on the field in the People’s Republic. As the 1970s gave way to the 1980s, the two banks played a pioneering role in the development of Franco-Chinese and, more broadly, Sino-Western economic relations. Business prospects were scant initially but quickly took form. It was now up to the banks to provide the financial resources required to carry out major modernising projects.
The credit revolution in China
China’s opening up to trade with the West naturally had to be accompanied by the greater use of international financing mechanisms. With the purchase of hardware, software and engineering from outside its borders, the Chinese became major importers and soon faced the inevitable problem of a trade deficit. Apart from generating financial surpluses by increasing their own exports, how could they resolve the situation? For the most part, they did so through financial practices, the nature of which changed drastically in the country in this period.
From intransigence…
Traditionally, China had an uncompromising attitude towards foreign loans, the Chinese considering that a sovereign state could not be burdened by debts. Instead of debt, they preferred free or equal assistance.
This policy was first relaxed in the early 1970s : from then on, the Chinese sought to borrow through unconventional means. Typically, they would get their banking partners to extend credit to their supplier so that the supplier could, in turn, grant deferred payments to the Chinese. This arrangement was referred to as “supplier credit”.
Paribas granted such credits to China for the major 1973 contract on the supply of a petrochemical complex by Technip. As they had not been financed directly, the Chinese considered that they had not made use of a loan but simply negotiated a good deal.
Of course, this was simply a way of avoiding to say that China was a borrower. But the problem remained, as the need to use supplier credit made it difficult to finance large projects.
… to pragmatism
This issue was resolved by the reforms undertaken in the late 1970s, subsequent to which the Chinese were willing to take on foreign debt. The Bank of China, the institution responsible for most external financial transactions, resigned itself to the use of arrangements that had long been prohibited.
BNP and Paribas were firmly convinced of the need to maintain relations at the highest level with this venerable institution, the development of which would go hand in hand with the modernisation policy. The banks also formed a relationship with the China International Trust and Investment Corporation, responsible for the introduction of foreign technology and capital.
The key requirement now was harnessing creativity to offer the Chinese the most attractive financial conditions. The attitude of BNP and Paribas in this respect explains why, as the 21st century approached, the two banks ranked among the top three French banks exporting to China.
Giving China the means to develop
From supplier credit to buyer credit
China’s financial renewal was initially evidenced in the use of buyer credit, used alongside supplier credit to finance imports of Western products. This method of financing was legitimised by the signing of economic cooperation agreements by the French and Chinese governments starting in 1978. In parallel, Paribas and BNP were among the first banks to sign credit agreements with the Bank of China. Granted directly by a foreign bank to a Chinese buyer, buyer credits allowed the importer to obtain financing at an attractive rate and the exporter to be paid in cash.
Apart from buyer credit, the main trend in the 1980s was the shift towards leasing, whereby a piece of equipment is made available to a company for a fixed period of time in exchange for a regular payment. In this respect, Paribas created a joint venture called Leasepack in 1984 alongside the China National Packaging Corporation. Through its leasing business, the company made it possible to complete numerous projects across all packaging sectors, from food and textiles to electronics. For its part, BNP created two leasing companies in 1985: South China Leasing Co Ltd and China International Non Ferrous Metals Leasing Co.
Transmitting financial know-how
The Chinese also needed to be introduced to the most modern tools in terms of credit. This was a vital issue, for example, in the negotiations for the buyer loan to finance the Shanghai metro. This was because the Chinese were not familiar with the concept of net present value, which factored in long-term currency fluctuations, an essential parameter for comparing offers. However, Chinese financial experts gained a firmer grasp on this concept through contact and training with Paribas and BNP.
Taking into account the drift of the French franc, these experts came to consider that the offer proposed by Paribas for the financing of the Shanghai metro was competitive with a Japanese offer that initially seemed more attractive. The sophistication of Paribas’ financial offering in Shanghai was reminiscent of the innovative solution proposed a few years earlier by Patrick Deveaud for the financing of the Caracas metro. French banks, then, were well equipped to meet the needs generated by the development of exports to China.
Health, transport, energy, etc. : BNP and Paribas’ priorities in China
Having initiated in 1978 the first framework agreement signed between a French bank and the Bank of China for the granting of buyer loans, BNP swiftly became a key partner, in some years handling half of French exports to China. The bank made its mark at the end of the 1970s by financing a technology transfer contract in the IT industry. The 1980s were marked by the financing of the Daya Bay nuclear power plant, for which BNP granted one of the largest buyer loans ever provided by a French bank. The 1990s saw the bank lead on major projects financed by buyer credit, such as the sale of Airbus aircraft and the construction of new power plants. BNP business activity extended well beyond industry to cover a wide range of fields, as illustrated by the project to finance China’s first emergency medical aid service in Suzhou.
An emergency medical aid project in Suzhou
In China at the time, the response to medical emergencies was considerably inferior to that in developed countries. However, Chinese officials were determined to build a health system adapted to the real needs of the population. As a result, the municipality of Suzhou set out to create the first emergency medical aid service in China. Seeking to invest 25 million francs in the project in 1994, the company Med In France chose BNP as its banking partner on the strength of its local presence in Suzhou. The city was already the site of active cooperation between France and China, the main customer of the project being the Franco-Chinese hospital in Suzhou. Going far beyond the construction of a simple health centre, this project stands as an emblem of French presence in the region through recognised know-how in the field of health.
Paribas also played a pioneering role. In October 1979, the bank was in charge of financing the construction of the machine room of the Yuan Baoshan power plant by Alsthom, the first buyer loan signed by the Chinese. Paribas focused on the priority sectors of transport, communications, energy and food. It financed major projects in the 1980s, including the sale of civilian airborne radar by Thomson and the supply of power plant equipment and locomotives by Alsthom. The bank also contributed to smaller-scale projects such as the supply of hotel equipment, the development of cement factories or the import of French tunnel-boring machines for the construction of the first metro line in Shanghai.
It soon became apparent that the financing of projects could not be based solely on the granting of credits. Increasingly, the Chinese expressed the need to use diverse and sophisticated financial techniques. Paribas and BNP have not failed to adapt to the financial developments that have marked China during the last decades…
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