China banks mull ship mortgages to dodge US levies

China’s biggest banks are considering a rare move away from shipping finance, reorienting how the country manages its exposure to the maritime sector. The leasing units of at least two state-owned banks are in very advanced talks with Beijing’s financial regulator about converting long-term vessel leases into mortgage loans.

This is a defensive proposal against the US tariff move. In altering the composition of their shipping portfolios, banks want to shield themselves from steep US port fees first imposed in mid-October and possibly from Chinese shipowners. Industry insiders say the timing is key: Some of China’s biggest leasing houses have billions of dollars locked in vessels that often visit American ports, and the overall trade war backdrop can only heighten tensions.

The National Financial Regulatory Administration (NFRA), China’s top banking watchdog, is closely watching the talks, and people familiar with the matter said the regulator hasn’t made a decision and is considering the financial risks of allowing banks to hold shipping mortgages. This industry was traditionally seen as too risky.

People in the talks say it is a highly sensitive process. On the one hand, Beijing would like to protect its lenders and shipping companies from Washington’s measures. On the other hand, regulators are wary of exposing banks to new risks when China’s financial system is already under pressure from soft property markets and slower growth.

The deliberations underscore the scale of China’s footprint in shipping. With nearly $100 billion in shipping assets already on long-term leases to China-backed firms, Chinese banks and leasing companies lead the global market. Any change to the structure of how those assets are funded would reverberate across international shipping and could reshape China’s standing as the world’s largest maritime lender.

Chinese lenders explore mortgage model for ships

The thought arose in August when leasing companies and the shipowners met with NFRA officials. In China, lessors have been the key players in shipping finance worldwide for over a decade, replacing Western banks that have retreated. In a standard leasing contract, the owner buys the vessel and leases it to the operator for over ten years or longer.

The legal liability and financial responsibility are reversed if the leases become mortgages. The ship owner owns the ships, but the bank finances them. Mortgages are generally shorter — around five years — and shift the risk of market downturns and defaults from landlords to operators and their lenders.

By crossing that line, Chinese banks would be taking an extraordinary leap. Shipping assets have long been considered cyclical and volatile, with values influenced by the ebbs and flows of trade, freight rates, and global demand. In case of default, these banks would have to spend years in court trying to recoup their money.

However, other lenders say the risk could be worth it if mortgages shield their portfolios from US exposure.

Banks brace for US penalties

The urgency comes from an American plan unveiled in April by President Donald Trump. Effective October 14, Chinese-built and Chinese-operated vessels calling at US ports will be charged fees based on cargo volume. The highest fees are likely imposed on vessels directly owned by Chinese companies.

The United States says the duties are intended to revitalize its shipbuilding industry and reduce dependence on Chinese maritime muscle. However, Beijing views this step as a direct challenge to controlling global shipping finance.

As of last year, Chinese leasing companies owned about $100 billion worth of shipping assets in total, according to Clarkson Research Services. Shipping makes up as much as 40% of some lessors’ portfolios, underscoring their US policy exposure.

Industry sources said some shipowners are already looking for ways around the levies. Among the ideas under consideration is raising charter rates on ships that do not call at US ports and overhauling financing for vessels that do. Others are tapping non-Chinese banks for the new money to cut risk.