China's Superbank

Peter Bosshard
China Development Bank has funded all major Chinese hydropower projects
China Development Bank has funded all major Chinese hydropower projects

Li Liguan lives at the outskirts of Loudi city in Hunan province. A former farmer, he was uprooted from his land to make way for a stadium. Now he tries to benefit from the construction boom by hauling bricks and renting out a room. His fate is typical for the hopes and injustices of China’s development model.

The engine that transforms the lives of millions of Chinese citizens like Li Liguan is China Development Bank (CDB). The bank channels capital to key sectors and projects in the world's fastest growing economy - an essential role in any development state. “Understand CDB and you understand the core of China’s state capitalism,” Henry Sanderson and Michael Forsythe, two financial journalists, assert. With their new book, China’s Superbank, they shed light on the inner workings of China’s rise as a global power.

CDB is not only the house bank of China’s powerful state-owned enterprises. It has also prepared the business plan for the country’s infrastructure development and urbanization. Through state-guaranteed bonds, the bank mobilizes savings for the massive expansion of the country’s power, transport and telecom sectors.  CDB has for example funded all major Chinese hydropower dams.

Under its President Chen Yuan, the CDB invented a model that changed China’s landscape. The bank allowed local governments, which were prohibited from running deficits, to create financing vehicles for special purposes outside their budgets, and to use their land as collateral for loans from CDB. As the bank invested in local businesses and infrastructure, the value of the land increased, and in a veritable perpetual motion machine, local governments could take up more loans. Up to half of CDB’s loan book in 2011 consisted of lending to local governments such as Loudi.

CDB now funds dams around the world, including on the Nam Ou in Laos
CDB now funds dams around the world, including on the Nam Ou in Laos
International Rivers

With its close relations to the government and state-owned enterprises, CDB was well-positioned to finance every major Chinese policy initiative, from the huge economic stimulus in 2008 to the current expansion of the renewable energy sector. With assets of $1 trillion, it was the world’s largest development bank by 2011, overshadowing the World Bank and Brazil’s BNDES.

When the Chinese government encouraged its companies to go out, CDB again stood ready to provide finance. It offered multi-billion dollar credits to long-time clients such as China National Petroleum Corp, Chinalco and the Three Gorges Corporation so they could make acquisitions overseas. It also extended large loans to governments in resource-rich countries like Venezuela, Russia and Ecuador. Mirroring a practice it had developed in China, the CDB required some governments to sell oil and minerals to Chinese companies, which deposited part of the purchase price directly into CDB accounts. This allowed the bank to lend to countries that Western banks consider too risky.

At the end of 2011, CDB had outstanding foreign currency loans of $187 billion. The projects it funds include dams on the Nam Ou in Laos, controversial sugar factories in Ethiopia's Omo Valley, the glitzy headquarters of the African Union and a real estate project in San Francisco. (In the hydropower sector, China Exim Bank funds even more projects than CDB.) Through the China Africa Development Fund, CDB also provides equity capital for manufacturing projects and job creation in Africa.

Chen Yuan’s ambition was to turn a bureaucratic monster into a competitive global bank. As a typical example of what the government calls socialism with Chinese characteristics, CDB is today a mixture of a development and commercial bank. It was formally commercialized in 2008, but is still fully owned by the Chinese state. Its bonds are treated as if they were guaranteed by the government, but its interest rates are commercial. The bank has often financed political pet projects such as the Three Gorges Dam, the South-North Water Transfer Project, the Beijing Olympics and the Shanghai Expo. Yet it is turning into a full-service bank with private equity and securities arms, and funds many profitable projects which commercial banks would be eager to take on. 

With projects like the headquarters of the African Union, CDB has become the world's biggest development bank
With projects like the headquarters of the African Union, CDB has become the world's biggest development bank

Sanderson and Forsythe cover their subject with a broad analytical mind and the trained eyes of financial analysts. “If the Communist Party is God, CDB is its prophet, extending the power of the Chinese state across the globe and cementing its power at home,” they conclude. Many cash-strapped governments with big infrastructure needs will be happy to hear the CDB’s gospel. Even Western governments, which have urged China to liberalize its banking sector since the 1990s, nowadays welcome investment from Chinese state banks to back up their own struggling institutes.

CDB has been successful in terms of boosting growth and reducing poverty. Yet this record comes at a high social and environmental cost:

China’s urban boom is based on the systematic grab of poor farmers’ lands. The city of Loudi sold the land it had seized from Li Liguan at 16 times the compensation rate which the farmer received. This is normal practice throughout China. As political scientist Victor Shih tells Sanderson and Forsythe: “Without suppressing land compensation, local governments can’t make the margins to pay back the banks. In essence, they are the engines of inequality in China.” Up to 65 percent of all large-scale protests in China are due to land grabs and compensation disputes, and some 60 million farmers are expected to be uprooted by China’s continued urbanization over the next two decades.

China is also reaching the ecological limits of growth. Its air and water have become public health risks, and critical ecosystems are rapidly degraded. With its relentless focus on steel and concrete, CDB has contributed to this crisis. Yet the bank has not developed concepts to integrate social and environmental aspects into its business model, and its environmental standards lag behind international best practice.

Even in economic terms, CDB’s success story is facing a challenge. The bank’s ambitious funding of urban projects depends on an ongoing real estate boom. With millions of families moving to the cities, this boom may continue for a while. Once it stops, and economic growth no longer buffers the tensions of growing inequality, CDB will face a financial problem – and China may face a social explosion. China’s super bank needs to address these challenges as it becomes the lender to the world.

Peter Bosshard is the Policy Director of International Rivers.

Henry Sanderson, Michael Forsythe, China’s Superbank, John Wiley & Sons 2013

Thursday, April 11, 2013