Chinese shipyards leave banks holding bag for late projects
Chinese shipbuilders' refusal to pay refunds on late projects creates legal problems for lenders
Chinese banks are stuck in a lose-lose legal battle between domestic shipyards and foreign buyers over billions of dollars in refund guarantees that are supposed to be paid out if shipbuilders fail to deliver on time.
One in three ships ordered from Chinese builders was behind schedule last year, according to data from Clarksons Research, a British shipping-intelligence firm. Although that was an improvement from 36 per cent in 2012, it was well behind rival South Korea, where shipyards routinely delivered ahead of schedule.
That means Chinese banks may be on the hook to pay large sums to buyers if the yards cannot meet contract terms, with little hope of recouping the cash from the yards. China is the world's biggest shipbuilder, with US$37 billion in new orders received last year alone. Buyers pay as much as 80 per cent of the purchase price up front.
Chinese bankers rushed to finance shipbuilding after the 2008 global financial crisis, as Beijing pushed easy credit and tax incentives to sustain industrial employment in the face of collapsing exports.
The whole issue of refund guarantees has been a big headache
Fees generated by offering such guarantees looked like easy money until massive oversupply and falling demand started taking a toll on the yards around 2010. Shipyards fell behind schedule and buyers demanded their money back. But behind or not, the builders, keen to keep orders on the books and prepaid money in their pockets, have filed injunctions against banks in Chinese courts to prevent them from paying out.