Chinese bank emerges from the shadows

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

acquisitions.

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

expansion.

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

commercialization.”

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

customer. Beijing

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,

Italy

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.