New book reveals how China’s superbank takes on the world
China Development Bank has emerged as one of the most important financial institutions in the world, bankrolling the country’s rise at home and abroad, but little is known about its operations. Justin Jacobs reviews a new book which helps shine a light on the secretive bank
Over the past two decades, China has become a central player in global energy markets, driven by the need to secure the oil and gas resources to fuel its economic growth and the desire to makes its state-run oil companies internationally competitive.
And no single institution has played as important a role in China’s rise as a global power, and its quest for resources abroad, as the state-backed China Development Bank (CDB), argue Henry Sanderson and Michael Forsythe in their book China’s Superbank: Debt, Oil and Influence - How China Development Bank is Rewriting the Rules of Finance.
“In one decade, CDB has become the financial enabler of both China’s global expansion and domestic boom,” Sanderson and Forsythe write. It has pumped around $2 trillion of loans into China’s local governments and bankrolled the country’s expansion abroad. Understanding what makes CDB tick, then, is vital to understanding China’s economic rise. Not that CDB makes it easy. The bank reveals little about its operations, which has fuelled suspicion in some parts. CDB releases annual reports, but they do not go into detail. Venezuela, which has received about $40 billion in loans from CDB, for instance, is not mentioned in the bank’s 180-page 2011 annual report. It is this opacity at CDB that makes the doggedly reported China’s Superbank a welcome arrival.
Sanderson and Forsythe first examine the development model CDB pioneered at home. Crucial to that has been its creation of local debt markets. Local governments in China had long struggled to raise funds for infrastructure projects and basic services, which inhibited economic growth. The central government in Beijing, always fearful of giving away power to its cities and provinces, limits local governments’ ability to levy taxes, and without tax revenue commercial banks would not lend the cash local governments needed to kickstart growth.
The key insight made by Chen Yuan, CDB’s leader since 1998, was that while local governments did not have tax revenues to back loans, they did have one potentially valuable asset: land. CDB would allow local governments to use the revenue from future land sales as collateral for loans.
Chen believed a virtuous circle would take hold: CDB would lend on the basis of land values, and investment from the loans in critical infrastructure such as roads, trains and energy would fuel higher land prices, which would allow local governments to borrow and spend more, which would further drive up land prices. It was risky, far too risky for commercial banks. But Sanderson and Forsythe argue that Chen’s status as a son of one of eight founders of the Communist Party gave him the clout needed to press ahead. And the gamble has paid off. CDB has shovelled cash into local governments, sparking an infrastructure and housing boom that has created an enormous amount of wealth.
Alternative market model
This state-backed infrastructure-led development model has come to be seen in many parts of the developing world as an alternative to the Western free-market model. The financial crisis, the authors argue, gave China and CDB an opportunity to export the model. “As European and American banks have faced government bailouts and downgrades to the debt ratings, the world’s locus of financial power has shifted," they claim.
As Western financial institutions were forced to retreat, CDB stepped up. And the tool of choice for CDB abroad was the oil-for-loan deal, which in many ways mirrored the land-for-loan deals it pioneered at home. CDB would allow borrower countries to service their loans through revenue generated by future oil sales. As well as Venezuela’s oil-backed loans, CDB has struck similar deals for tens of billions of dollars more in Brazil, Ecuador, Ghana and beyond.
Much has been made of China’s motivations for striking these deals. Some see them as a Trojan horse for China to establish broad political and military influence throughout the world. But the evidence points to the contrary. CDB has not tied its oil-for-loans deals to broader military engagement, nor has it sought publicly to influence political outcomes in the countries in which it has established itself, beyond the encouraging the stability needed to keep oil flowing. The oil-for-loans agreements, though, do seek to maximise the economic benefits that flow to China and its, often CDB-backed, state-run companies. The deals are used to win lucrative contracts for China’s national oil companies. And while the loans do not usually come with the sort of political conditions often attached to World Bank or International Monetary Fund lending, they have often required borrowers to hire Chinese construction and engineering firms. As those conditions have caused some unease, the bank has started to issue portions of its loans in yuan, which simply makes it “more convenient”, as one Chinese official puts it, for borrowers to hire Chinese contractors. “In a way, it is corporate welfare, Chinese style,” the authors write.
The authors offer both praise for and a warning about the CDB model. They applaud the innovation and boldness that has lifted hundreds of millions out of poverty at home and helped secure the country’s energy needs in a remarkably peaceful way. But they also warn of hubris and recklessness in the bank’s lending practices. At home they point to white elephant projects of questionable economic value pushed by spending-addicted local officials that could leave the banking system on the hook for trillions of yuan in bad debt.
Abroad, they warn that China may have gone too far, too fast and risks becoming the latest in a long string of lenders to be burned in high-risk countries such as Venezuela and Ecuador. “The (Hugo) Chávez government is pro-Chinese, but a new government may seek new terms with China, just as it has done with American oil and other investors in the past.”
China’s avowed policy of non-interference opened the door to many countries, particularly in Africa and Latin America. But like the Western financial institutions that came before, China, the authors argue, will likely come to realise that helping to shape effective institutions, fostering a competent civil service and providing a measure of transparency will help stave off corruption and local resentment and ensure its loans are paid back. But that will require a far more sophisticated understanding of local governance, a deeper level of engagement.