What the hell is the China Development Bank (CDB) and why is it helping fund Barclays Bank’s acquisition bid for ABN AMRO? If that was your reaction to the surprise announcement in July then you were not alone.
Truth be told, what exactly CDB is supposed to do has been the subject of much debate amongst Beijing scholars and even the top leadership of the Communist Party.
Thanks to the persistent lobbying of Chen Yuan, CDB’s president and a third-generation “princeling” (offspring of a revolutionary luminary or senior government official), the bank received approval at the beginning of this year to transform itself into a commercial enterprise.
The acquisition of 3% of Barclays is supposed to be part of this transformation, with promises of training and technology sharing in the contract.
But CDB is not a commercial enterprise. It is known in China as a “policy bank”, whose main function is to lend to pet government projects and support the policy of the Communist Party through its every action.
It has just 36 outlets across China and is not allowed to take deposits, instead raising money through bond sales. It works in a similar way to the World Bank or Asian Development Bank except that it only has one constituent member and its stated aim is to advance the interests of the Chinese Communist Party, not humanity or the Asian region.
The lack of any sort of branch network left many people doubting that the deal will give Barclays much greater access to the Chinese market as trumpeted by its management. But in the murky world of Chinese finance, selling a stake to a policy arm of the government that is run by a powerful and connected member of the party elite is exactly the way to advance your business interests.
While it may not be an institution bent on achieving nefarious objectives and disrupting the global economic order, CDB’s role as a policy tool of the Communist Party will make many in the developed, democratic world think that way.
It is a fair bet that this sort of deal would face far greater obstacles if it happened to be in the US instead of the UK, which has one of the most liberal attitudes to foreign investment in the world.
The concerns of many outside China are exacerbated by CDB’s role as the piggy bank for some of Beijing’s more controversial projects.
CDB was the chief source of funds for the Three Gorges Dam, which involved the relocation of millions of peasants and the ecological destruction of the country’s largest river.
The bank is financier for the country’s military industrial complex and just two months ago it established a US$5bn China-Africa Development Fund to support and promote Chinese companies wanting to exploit Africa’s oil and mineral wealth.
In March 2005, CDB lent US$3 billion to the controversial 50-year South-North Water Diversion project to bring water from China’s wet southern regions to its parched north. World Bank advisers have warned that joining two heavily polluted major water systems has never been done before and is likely to have catastrophic unforeseen consequences.
A creator of harmony
CDB’s lending is not confined to giant prestige projects.
Also in 2005, US$645 million went to the Liaoning provincial government to build housing for people living in temporary shelters. The bank said the loan was regarded as a “major contribution to building a harmonized society by the local government and people.”
CDB says the amount of its loans that have gone bad is negligible but it is hard to see how lending to Liaoning housing projects could bring long-term profits.
In the next few months CDB is expected to receive a US$20bn recapitalization loan from the government, ostensibly for the bad loans it says it doesn’t have. Many analysts suspect the bank is lying about the scale of its impaired assets and say a large portion of the money is earmarked for overseas acquisitions like the Barclays investment.
With China already looking to spend its foreign exchange reserves on offshore acquisitions, the world can expect a lot more shopping sprees from institutions like CDB whose operations “follow the principle of rigorous commitment to supporting the government’s infrastructure development and objective of building a harmonious society.”