The reform of China Development Bank (“CDB”) in 2008 has transformed the once largest policy-oriented bank in China into a commercial bank. It has far-reaching effects on CDB’s role to become the world’s leading financier of cross-border infrastructure and energy projects. This article aims to explore the strategic role of CDB as of today and the opportunities ahead of its commercialization.

EARLY YEARS OF CDB

CDB was founded in 1994 as one of three policy-oriented banks in China, and was the only one given a ministry status which means that it reports directly to the State Council.

CDB’s primary function was to implement the central government’s macroeconomic policies and developmental plans through direct and indirect financing of key projects involving infrastructure and pillar industries in China.

However, since its establishment, CDB has faced a number of financial and systemic issues, including (a) low profitability; (b) a high non-performing asset ratio (“NPA ratio”) (CDB’s NPA ratio in 1997 was at a stunning 42%); and (c) severe corruption and public misfeasance of funds. These were mainly due to CDB’s overriding policy to support state enterprises/industries/strategies, somewhat regardless of borrowers’ credibility.

In these circumstances, the central government decided to implement a series of reform to improve CDB’s efficiency and its capacity to cope with international challenges.

REFORM OF CDB

CDB’s first reform was initiated in 1998 with the appointment of former Vice-Governor of the People’s Bank of China (“PBOC”) CHEN Yuan as its Governor. Chen brought about a number of substantive changes to CDB including (a) the engagement of PricewaterhouseCoopers to audit CDB in accordance with international accounting standards; (b) the implementation of Basel standards to CDB’s practice; (c) the collaboration with the National Audit Office to combat public misfeasance of funds; and (d) the restructuring of CDB’s portfolio to recover non-performing assets.

These changes were further reinforced by the long-waited commercialization of CDB in December 2008. The mostnotable change from this is that CDB’s credit scale becomes theoretically unlimited like other commercial banks, although there remains certain applicable policy limits. Moreover, CDB will continue to enjoy a zero-risk rating (as a sovereign financial institution) for RMB bonds it issues until the end of 2011. These have given CDB a competitive edge in funding its expanding operations. Indeed, in just two years after its commercialization, CDB has made a number of remarkable achievements including the following:

  • financing over 80% of the central government’s RMB4,000 billion investment plan since 2009;
  • becoming the biggest international financier in China, with the percentage of loans it made to borrowers outside mainland China increasing significantly from below 1% in 2000 to 16.2% in 2010;
  • closing numerous world-record deals, including (a) US$10 billion and RMB70 billion “Oil for Loan” financing with Venezuela in 2010 for various eligible infrastructure and other projects; (b) US$25 billion “Oil for Loan Agreement” with two Russian companies in 2009; and (c) the acquisition of a £1.5 billion major stake in Barclays in 2007;
  • becoming the largest bond issuer in China (totalling RMB850 billion, including RMB5 billion issued in Hong Kong) after the Ministry of Finance and the PBOC; and
  • successfully restructuring its asset portfolio whereby its NPA ratio dropped significantly from 42% in 1997 to 0.68% by the end of 2010.  

The table below shows the key performance statistics of CDB in 2000, 2008 (prior to commercialization) and 2010, illustrating CDB's tremendous growth in recent years:

click here to view table.

CDB’S STRATEGIC ROLE AND OPPORTUNITIES AHEAD

Undoubtedly, CDB has evolved from a domestic bank to a leading international financier with a focus on project investment. In particular, CDB has a strategic role in carrying out China’s various development plans:

  • first, CDB is a convenient platform to channel funds for coping with the dire need for China’s foreign currency reserve and for strategic enterprises to “go global”. Indeed, CDB has already become the largest foreign investment bank in various countries, including Australia, Brazil and Venezuela. It also enjoys leverage from its leading role in the China-ASEAN Inter-bank Association for projects in “BRICS” jurisdictions;
  • second, to fulfil China’s “loan for resources” strategy, CDB finances the central government and other enterprises to acquire strategic resources, such as crude oil, coal, iron ores, power stations, etc. overseas. Specifically, 51% of the total outstanding loan balances of CDB in 2010 were applied to the coal, petrochemical, electric power and public infrastructure industries; and
  • third, in a recent speech regarding the Euro crisis, Premier WEN Jiabao expressly stated that China will continue to lend a helping hand to Europe by making further investments. He further hinted that China prefers making substantive investments to simply acquiring treasury bonds. In this regard, the role of CDB as a project investment bank will become increasingly important for China’s macro economy.

Accordingly, CDB, as the largest Chinese financier of medium to long-term projects, will continue to enjoy the opportunities and benefits from its strategic role for many years to come.