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.
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