Chinese bank emerges from the shadows
|Feb 4, 2008|
Chen Yuan, is the only bank chief in China who is a full minister and member of the ruling State Council
The China State Council’s
plan to turn the China Development Bank into a commercial institution should
transform what has been an obscure policy bank into a global financial player.
It is also an indication of how China,
besides routing investments through its sovereign investment fund, intends to
use some of its massive US$1.4 trillion in foreign exchange reserves.
Approval should come soon
for the 14-year-old bank to list on the stock market in the first half of this year, and it should
quickly become both
a major lender to the booming domestic market and an international investor following
both its own commercial
instincts and national policy objectives.
And, while it may be obscure, it is already China’s most profitable bank and
one of the biggest bond issuers in the country.
Even before the change, the
bank has been aggressively carving out a foreign presence. As an indication of
its ambitions, it acquired a stake in Barclays Bank last July, has invested in
six overseas funds, including two worth a combined US$10 billion in Africa and
Venezuela, and was about to bid for a stake in Citibank in January when the
State Council vetoed the idea. It is looking eagerly for other foreign
It also has back-door clout. Its governor, Chen Yuan, is the only bank chief in China who is a
full minister and member of the ruling State Council. Chen, 62, is the son of Chen Yun, a leading
revolutionary organizer in the 1920s and 30s and one of the “Eight Immortals” of the Communist Party who was a
senior policy maker for 50 years until his death in April 1995, at the age of 89.
The CDB was created in
March 1994 to provide policy loans to major projects designated by the
government, especially transport, communications, basic industries and
infrastructure. These projects included the Three Gorges Dam and Shanghai
Pudong airport. It does not take retail deposits and has only about 32 branches and four
representative offices across the country.
Then a deputy governor
of the central bank, Chen was put in charge of the CDB in 1998 and drove a
rapid expansion of its loan portfolio to 2.3 trillion yuan at the end of 2006
from 1.04 trillion yuan in 2002. The surprise in all this was that such policy lending did not,
as it had for the
previous 40 years, mean losses but profits. Despite doubling its loan
portfolio, the bank’s ratio of non-performing loans fell from 2.54 percent in
2002 to 0.75 percent at the end of 2006 and 0.59 per cent at the end of last
year. It has posted a
net profit every year, reaching 28 billion yuan in 2006, up from 12 billion yuan in 2002.
Chen lobbied hard to
change the institution into
a commercial bank, arguing that infrastructure projects could raise money on
their own and were no longer dependent on policy loans. He said that China needed a
well-funded financial institution as part of the state policy of overseas
His arguments convinced
his colleagues in the State Council, who approved the bank’s US$3 billion purchase
of a 3-percent
Barclays stake. Last December the China
Investment Corp announced that it was injecting US$20 billion into CDB, “to raise its capital adequacy
ratio, reduce its vulnerability to risk and help its all-round
The State Council plan
will allow the CDB to do middle and long-term financing and limited short-term
business, but exclude it from retail and foreign exchange in order to differentiate
it from other
commercial banks. It will have two separate account books, one for national
loans and the other for company loans: one will cover policy loans and the
other commercial ones.
CDB has set up two
funds, each with US$5 billion. One is the Sino-African Development Fund, to
invest in, manage and advise projects in Africa. The other, the Sino-Venezuelan
Fund, was set up at the request of President Hugo Chavez, who visited China last
year. It provides
loans to Venezuelan companies that export oil to China, which has become a major
is exploiting the West’s antagonism to Chavez to increase its oil purchases and economic
presence in that country.
Chen’s most audacious
play came last month when he proposed taking a stake in Citi after its heavy losses due
to the sub-prime crisis. Such a large investment required the approval of the
State Council, which was split. Some argued that this was a rare opportunity to
buy a piece of one of the biggest American banks at a bargain price and that the share price would recover.
But the majority ruled
against it, saying that CDB had not completed its transition into a commercial
bank and did not have sufficient expertise to manage such an investment.
Opponents also pointed out that Barclays’ share price has dropped one third
since CBD bought it last July.
On January 15, Citigroup
announced a net loss of US9.83 billion for the fourth quarter 2007, its biggest
loss since 1998. Citi turned for funds to the Kuwait Investment Authority,
Prince Alwaleed bin Talal of Saudi Arabia, the Government Investment
Corporation of Singapore and other corporate investors.
In January, the CDB
announced an investment of
US$30 million for 8.57 percent of a new
US$350 million Infinity I-China Fund, which has a 10-year term and will invest
in high-technology companies.
The largest privately owned investment house
in Israel, Infinity has
managed US$500 million in an Israeli-Chinese technology fund since 1993, with
offices in Tel Aviv, Suzhou, Hong Kong and New York.
This was CDB’s sixth
overseas investment, following those in Africa and Venezuela
and joint venture funds in Belgium,
and Asean. Last week the bank denied a report in the Chinese media that it
would pay US$5 billion for a stake in United Bank for Africa, one of the four
biggest banks in Nigeria.
CDB will be the first of
three policy banks to list, probably in the first half of this year. The other
two are China Everbright Bank and Agriculture Bank.