The world’s most powerful bank?

The US magazine Foreign Policy recently ran an article titled “Hugo’s Banker” (meaning the late President Chavez of Venezuela) describing as the world’s most powerful banker Mr. Chen Yuan, the Chairman of China Development Bank (CDB). In what sense is this true? CDB is certainly very large – its total lending at the end of 2011 (the 2012 annual report is not out yet) was RMB 5.4 trillion ($864 billion). But most of this was in China. ICBC, China’s largest bank had total lending of RMB 8.6 trillion ($1.4 trillion). It is not the scale of bank lending in the world’s second biggest economy that the article was interested in. It is China’s growing financial influence abroad.

CDB’s foreign net lending outstanding at the end of 2011 was RMB 849 billion ($135 billion) and has grown since then. The World Bank group (IBRD plus IDA) had $136bn of total net lending in June 2012. So CDB is already matching and likely by now to have outstripped the World Bank globally. Does this matter? Is it, as Foreign Policy’s author implies, something for the west to worry about? I visited CDB at its soon to be vacated head office in Beijing recently, the meeting having been kindly arranged by a current MFin student from the bank.

History of China Development Bank

CDB was founded in 1994 along with two other policy banks, Agricultural Development Bank of China (quite separate from the older commercial bank Agricultural Bank of China) and The Export-Import Bank of China.  By 1997, after a surge in lending, CDB had non-performing loans (NPL) equivalent to a massive 43% of assets, according to the 2011 Harvard Business School case on CDB. From 1998 the bank was reformed under a new leader, Mr. Chen, who strengthened risk management while overseeing continued loan growth. CDB became know then as a commercial bank.  In 2008 the introduced a conventional governance structure with a board representing its two state shareholders, the Ministry of Finance and Huijin (a subsidiary of China Investment Corporation, the sovereign wealth fund) joined later by a third, the National Council for Social Security Fund. 

The bank’s mission is to: i) support national infrastructure, primary industries and key economic priorities; ii) promote regional development and urbanisation; and iii) facilitate China’s cross-border investment and global business cooperation. It lends mainly in the areas of infrastructure, rural development and increasingly urbanisation. It was a major lender to the Three Gorges Dam and to the Beijing Olympics. It also lends to small and medium enterprises, student loans and strategic emerging industries. Remarkably, its NPL ratio has been only 0.3% for several years.

A commercial bank?

The description of CDB as a commercial bank is a bit confusing. The conventional definition of a commercial bank is a deposit taking institution. But CDB has no intention of taking deposits, not least because it makes little sense to back medium and long term loans with short term deposits. Like other development banks it is funded by bonds issued to the capital markets (it’s the second largest such issuer in China after the central government) and has no retail operations.

The term commercial means in this context, I think, that the bank wants to emphasise that it is profitable and uses market based risk analysis. But it also means that the bank’s operations are expanding beyond the conventional policy lending area, particular outside China. And this is where some western apprehension arises. Increasing competition for lending in the Chinese economy combined with the growth of Chinese economic and business interests outside mean that CDB is increasingly shifting its emphasis abroad. Its sheer size means that it already makes waves. Already present in over 100 countries, CDB is not so well known in the richer countries but is a major player in Latin America, the Caribbean, Africa and developing Asia. It can be found lending to infrastructure projects linked to Chinese natural resource projects such as oil company Sinopec. Its lending is usually but not always linked to the presence of Chinese corporates. Its original goal of increasing prosperity for Chinese people has been extended to that of helping other low income countries.

But CDB is not confined to low and middle income countries. The Chinese government has had talks in the last year with the British government on a range of areas of cooperation, including the very capital intensive nuclear power sector. The British may be trying to use the threat of Chinese competition to put pressure on the French company EDF to get on with building new reactors at Hinckley Point in the west of England. But it’s quite possible that China could get involved in a wider expansion of nuclear power in the UK. CDB might well then provide part of the financing. This is clearly some way from the bank’s early emphasis on developing the Chinese economy. And it brings CDB potentially more directly into competition with western banks.

The ability to lend confers influence, but whether CDB has independent power is harder to assess. Existing western banks routinely mobilise tens of billions of dollars for large commercial projects, but this doesn’t alarm people as it is seen as normal commercial practice. CDB might appear different because it is owned by the Chinese government. Other countries use finance as a commercial tool, mainly in the form of export finance (the US Exim bank, German KfW and Japanese Bank for International Cooperation are all quasi-agents of their respective governments). The World Bank, whose head has always been an American, was widely seen as an agent of western foreign policy during the Cold War, and even afterwards when it embraced the Washington Consensus on privatisation and deregulation in the 1990s. It is therefore the size and speed of expansion of CDB that perhaps rattles cages in the US.

Despite its rapidly growing economy, China has relatively international power at present (as a recent book China Goes Global emphasises – see The Economist for an interview with the author David Shambaugh). The extraordinary success of the economy may be admired abroad but the Chinese “model” is not easily copied. Its military still lags a long way behind the US. And culturally China has little impact at present – it lacks “soft power”. But perhaps China’s money is its soft power. CDB takes on more risk than western banks yet still so far has remained profitable. It can support both Chinese corporate expansion and the goals of the Chinese government more generally. A loan here or there may be helpful in encouraging a country to support or at least not block Chinese interests in critical votes at the United Nations for example. But it would be hypocritical of western countries to imply that this sort of influence was unique to China.

CDB for its part emphasises its cooperative relationship with the World Bank and other regional development banks, which must feel even more disconcerted at its rise. I have heard it argued that cheap Chinese money sometimes distorts local government policy decisions. One might be tempted to dismiss this as sour grapes when it comes from western agencies feeling threatened by CDB money. But more recently the governor of the Central Bank of Nigeria argued in the Financial Times that Africa needed to be realistic about China’s goals, which may be in some degree in competition with those of African governments.

The economic impact of CDB

Macroeconomically CDB’s increasing foreign lending helps the recycling of a (now diminishing) Chinese foreign surplus back to the rest of the world, which is a stabilising influence. China’s total foreign direct investment remains quite small relative to the size of the domestic economy but this will probably change as Chinese firms become globally competitive, as Indian ones have already (my colleague Peter Williamson’s book Dragons at Your Door is on this theme).

From a western consumer’s point of view, anything that brings more financial resources to the market is to be welcomed as it means lower interest rates, all else being equal. Competition is a good thing, though not of course for the incumbent banks. CDB’s admirable profitability and NPL record don’t suggest that the bank will buy market share in new markets at the risk of large losses. But to the extent that it has a competitive advantage in cheaper funding from Chinese capital markets it could disrupt some existing wholesale banking activities. The Chinese will be aware that this sort of competitive advantage is illusory – Japanese financial expansion on the back of apparently cheap capital led to hubristic expansion and a dramatic reversal when the homegrown bubble burst.

But CDB is likely to be a major player on the international financial stage in coming years. Western banks and governments will need to get used to it.