¡¡¡¡By Sun Jiakang, Managing Director of COSCON

¡¡¡¡Shipping is a capital-intensive industry. Buying ships needs big money and, except for very few cases in which cash payment is made, ships are generally ordered and built under finance. So what's the best way to catch current opportunities for common development of Chinese carriers, shipbuilders and related investors, and to invigorate China's shipping finance amid the change of global trade. This is clearly an issue involving shared obligation for all concerned.
¡¡¡¡What follows are some suggestions for discussion, drawn from experiences both in COSCO's fleet expansion and international ship financing.

¡¡¡¡A great gap between China and the developed countries

¡¡¡¡According to IFSL, standing loans for ship purchases around the world reached US$275 billion in 2006, up 37% from the US$200 billion of 2005. The same year, global ship leasing amounted to US$68 billion in value, of which about US$6 billion came from newly developed shareholders and about US$7.5 billion from company bond issue. Financial leasing was also active, generating around US$3 billion in Germany, Norway and the UK respectively every year. In comparison, China played only a small part in the international market and exerted only a minor influence.
¡¡¡¡Quite unexpectedly, however, the world witnessed a capital market boom in China in 2007, with A-stock IPO soaring up to as high as 447 billion Yuan, which has, to a certain extent, contributed effectively to the growth of shipping stock as a whole, though generally a great gap remains between China and the developed countries in terms of ship loans, long-term chartering and financial leasing etc.

¡¡¡¡On increasing the commercial atmosphere of ship financing and the vitality of financial institutes. Currently, though rich in deposits and eager to provide ship loans, banks at home suffer generally from a lack of professionals who are well acquainted with the design of competitive shipping related products, conditions and terms. It is therefore necessary to cultivate a batch of shipping-centred financial institutes as soon as possible.
¡¡¡¡Since Shanghai is currently working hard to build itself into an international and finance centre, breakthroughs may be made there in this respect.
¡¡¡¡Domestic carriers are presently struggling with heavy operation costs. In addition to the 5% operation tax, many shippers feel the burden of income tax and the 27.5% ship import duty and import VAT. But in Hong Kong and Singapore, operation tax is often not levied, and income tax is collected only for the part of profits that's made within the local area. In Mainland China, banks have retained the 5% operation tax even for loans released at home, resulting in higher operation expenses on the home market than abroad. If carriers and banks can thus be drawn to Shanghai for proposed service competition, much may be done to help the city's shipping and finance centre development.

¡¡¡¡Investmen & Finance Policy. Most developed shipping countries provide various kinds of policy support to the shipping industry, in sharp contrast with China where, with many services still maturing, less policy support has been given.

¡¡¡¡Ship Financing.Financial leases, though popular on the international market, are only making starting steps in China, as is evidenced by the launch of Gongyin Financial Lease Company at Bihai District of Tianjin by ICBC on Nov. 28, and the establishment of Jianxi Financial Lease Company and Jiaoyin Financial Lease Company by China Construction Bank and China Communications Bank respectively on Dec. 28, 2007. More yet can be done to encourage this financial service from the angle of policy support, and by innovation on the taxation system for financial lease institutes, varying the rates of operation tax for different businesses, and reducing or cutting equipment investment tax etc. Where sold ships are leased back, VAT or operation tax might be completely exonerated.

¡¡¡¡Ship Industry Fund.A ship industry fund can be set up to absorb investments from society, and ship owner and ship operator separated an appropriate fund management structure. Moreover, China should further sharpen its competitive ability in international shipping and share with the world its shipping prosperity brought about by economic growth.

¡¡¡¡COSCO fleet development

¡¡¡¡Using loans from commercial banks is a common ship financing strategy. COSCO also adopted this approach in early expansion, but then diverted into more diverse methods, including the following:

¡¡¡¡Firstly, long-term chartering. COSCO changed its strategy "from ownership to control" during the 10th five-year period and has upped the proportion of chartered ships in its fleet make-up to 55% as against the less than 15% at the end of the previous five-year period.

¡¡¡¡Secondly, issue of commercial papers and company bonds. COSCO began to issue commercial papers and company bonds on the international market from the end of last century, successfully pooling considerable amounts of money from Europe, the U.S.A. and China.

¡¡¡¡Thirdly, IPO and Additional Stock Issue. China COSCO issued 2.244 billion "H" shares in Hong Kong in 2005 for 9.7 billion HKD, and then 1.783 shares in 2007 for 15.2 billion Yuan. In the same year, 433 million more shares were again sold to targeted customers for an extra 12.7 billion Yuan, all to be spent on dozens of new ships.

¡¡¡¡Fourth, financial lease. Using its extensive overseas network and taking advantage of the favourable policies and tax rates offered in other regions of the world, COSCO has actively but steadily increased its fleet capacity by various methods such as tax lease, purchase lease and back lease of sold ships etc.

¡¡¡¡As mentioned above, COSCO has greatly expanded its fleet structure, and enhanced its competitive edge using a diverse set of financing strategies. And the result? It claimed a container capacity of less than 200,000 TEU at the end of the 9th five-year period, with less than 15%  above 3000 TEU in single-ship capacity. Today, however, the fleet has grown to more than 450,000 TEU and more than 75% of the ships covered are of and above 3000 TEU. With the completion of 400,000 TEU currently on order, total capacity is expected to reach 1 million TEU by 2012.