China's Superbank Debt, Oil and Influence - How China Development Bank is Rewriting the Rules of Finance

HENRY SANDERSON has been a reporter for Bloomberg News since April 2010. Prior to that, he was a reporter for the Associated Press in Beijing and Dow Jones in New York. While at Bloomberg, Sanderson has covered corporate finance, focusing on China's banks, the bond market, and the emergence of the yuan as an international currency. He is a graduate of the University of Leeds (with a BA in Chinese and English literature) and Columbia University (with a Master's in East Asian Studies).

MICHAEL FORSYTHE has been a reporter and editor for Bloomberg News since 2000. Prior to that, he was an officer in the U.S. Navy for seven years, serving on ships in the U.S. 7th Fleet. The highlight of his career in Washington was overseeing Bloomberg's coverage of the historic 2008 presidential election. Since returning to Beijing in 2009, Forsythe has focused on policy and politics, with particular emphasis on the international impact of "China Inc." He is a graduate of Georgetown University (with a BA in International Economics) and Harvard University (with a Master's in East Asian Regional Studies).

Chapter II: Building the Bank
1. Chen Yuan and his father's planning apparatus
2. Origins of the bank, 1994
3. Chen takes over
4. Risk management and lending innovations
5. Building a bond market
       
       This chapter will introduce Chen Yuan and his father, whose bronze bust sits in the lobby of CDB Capital's office in Beijing. Chen Yun helped write China's first five-year plan in the 1950s and oversaw the planning apparatus that gave rise in 1994 to the China Development Bank. The contrast between father and son shows the evolution of a Communist cadre from a Marxist revolutionary to a globe-trotting, English-speaking banker who sends his children to America for their educations. Chen Yuan overcame the disappointment of being passed over for the job of China's central bank governor to build what many consider the best-run bank in China. He introduced heretofore unknown principles of risk management into the least likely of lenders, a bank designed to serve the goals of the socialist state. Chen's bank is unique among Chinese lenders in that it is financed almost completely by bond sales.  The majority state-owned commercial banks that are now the world's biggest banks by market capitalization rely on deposits to fund their lending. The result is that China's bond market owes its existence in many ways to CDB.

Chapter III: Going Global in Service of the State: Lines of credit to Huawei, ZTE and Clean Energy Industry
1. Huawei, ZTE get lines of credit to loan overseas and world reaction
2. Solar, Wind companies build capacity with CDB loans
3. The world cries foul
  
            In 2004 China Development Bank began a relationship with Huawei Technologies Co., then a second-rate maker of telecoms equipment. Within a few years Huawei and its crosstown rival ZTE Corp. had a combined $45 billion line of credit from CDB that allowed them to give loans to customers from Mexico to Bangladesh for the purchase of their equipment. The result: Huawei is now the world's no. 2 telecom equipment maker and ZTE occupies the No. 5 position. Now CDB is repeating its success with some of China's biggest alternative energy companies, including Suntech Power Holdings Co. and Yingli Green Energy Holding Co. The goal in both instances is the same: serve the state. The tech loans further China's goal of nurturing global champions that can take on multinationals in the U.S. and Europe. That goal plus the push to reduce China's chocking pollution drives the loan push to the solar and wind companies. The problem is that the loans may be unfairly helping Chinese companies, according to a growing chorus of officials in the U.S. and Europe, most recently U.S. Undersecretary of State Robert Hormats, who said on May 3 that China''s state capitalism is ''putting our companies at a competitive disadvantage.'' The U.S. is investigating the role China's soft loans play in hurting the U.S. clean energy industry.

Chapter IV: Going Global in Service of the State: New Colonialism in Venezuela and oil-for-loans with Brazil, Russia, Turkmenistan
1. Chavez Ties Fate to China
2. CDB Loan-for-oil Innovation
3. Haggling With Russia
4. Dominating Central Asia
5. Feeding Brazilian Ambition

     In April, the bank dispatched a team of 100 officials to Venezuela to help supervise investments in the country from the $20.6 billion loan CDB arranged in 2010. Chinese loans fund projects such as public housing that are being built by Chinese companies, resulting in a double windfall for China Inc. The overarching goal is to secure oil and gas supplies for the motherland, the world's biggest energy consumer. CDB negotiators drive hard bargains, hiring teams of New York lawyers to negotiate oil-for-loans programs and holding out for years when, as in the case of Russia, the other party won't agree to favorable terms. In a developing world starved for cash, China, through CDB, is providing the liquidity. Can CDB succeed in the developing world where so many well-known western banks have failed? Venezuela is ranked as one of the two countries in the world most likely to default -- the other being Greece, another recipient of CDB loans -- by CMA Datavision.

Chapter V: Going Global in Service of the State: The China-Africa Development Fund
1. Making Friends in Kenya
2. Zimbabwe, Angola

     James Mwangi, the CEO of Equity Bank Ltd., Kenya's biggest lender by customers, was in a good mood at the Summer Davos meeting in Tianjin in September 2010. His bank has just signed a 4 billion-shillings loan ($50 million) agreement with China Development Bank in May. The loan allowed them to lend to small and medium-sized companies for half the normal interest rate in the country, he said. The bank's 7.8 billion yuan China-Africa Development Fund invests in Chinese companies doing business in Africa, including in a ferrochrome plant in Zimbabwe, just as global lenders scale back lending to the continent.  It dwarfs competitors such as the British Commonwealth Development Corporation and France's Proparco.

Chapter VI:  Conflicts of Capital: Private Equity with Chinese Characteristics
1. A State Monopoly
2. Deck Chairs on the Titanic; Equity stakes in indebted companies: a case study

     Global private equity firms such as KKR and Carlyle are rushing to China as quickly as their private jets will carry them signing deals with local governments to get access. Yet China Development Bank is a step ahead. The only bank in China to be granted a private equity license, its China Development Bank Capital company is run by Zhang Xuguang, a smooth-looking businessman who favors stripy suits and big ties. CDB's credit rating and state-backing can give companies the connections global private equity players lack. With investments in the Tianjin Eco-City project as well as steel and iron companies, it hopes to raise over 3 billion yuan for a fund of funds. A splashy rollout of the fund in December featured video clips from private-equity legend David Bonderman and shots of the Statue of Liberty and Wall Street.

Chapter VII: Risking it All: Loans to Local Government Investment Vehicles

     Can China escape the credit boom-and-bust cycle that has plagued global economies for centuries? Under a stimulus plan in 2009 to help China weather the financial crisis, the government ordered banks to lend to thousands of local-government backed companies across the country, stoking an infrastructure spending spree which kept China's economy booming. China Development Bank is now dealing with the results of this lending that threatens Chen Yuan's carefully-cultured policy of operating like a professional, global, bank. His bank is more exposed to so-called local government financing vehicles than any lender in China, and these companies borrow money using land as collateral. Any downturn in the property market may undercut their collateral and help stoke a banking crisis. CDB is now underwriting bonds to the same LGFVs that it has lend money to, and in some cases it is buying equity stakes, giving them more funds to pay their original debts.

1. Case study: Leshan
2. Case study: Luoji City

Chapter VIII: Conclusion

     Future of the bank: commercialization and loss of sovereign status. Is it a servant of the state or a global bank?

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