Breakingviews-Mission creep may harm China Development Bank

Thu Jun 28, 2012 3:00pm IST

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own)

By Wei Gu

HONG KONG, June 28 (Reuters Breakingviews) - Beijing’s top policy bank is spreading the love. China Development Bank is wielding its $1 trillion balance sheet not just for basic infrastructure in China, but as far from its roots as housing in California and e-commerce firm Alibaba 1688.HK at home.

CDB’s traditional mission has been funding the Middle Kingdom’s infrastructure, public housing, and agricultural projects with low-interest, long-term loans. Helping Chinese companies to export goods and services and secure resources abroad has become a new focus. The bank’s foreign currency loans outstanding jumped by 49 percent in 2011 to $210 billion, making up more than a fifth of its book. That probably makes CDB the most global Chinese bank. Overseas loans make up less than 2 percent of the total in the country’s banking system.

The domestic Chinese bond market provides almost all CDB’s funding. After raising a record $169 billion in 2011, it has said it plans to issue another $167 billion of bonds in 2012. Heavy supply has pushed up yields on its bonds, widening the gap with bonds issued by two other Chinese policy banks, the Rural Development Bank and the Export and Import Bank. CDB even had to cancel a scheduled bond auction in 2011. Yet its balance sheet expanded by 22 percent last year. Its continuing funding needs look likely to push its cost of borrowing higher.

CDB’s so far minimal losses on its loans could also become more alarming as its portfolio becomes more exotic. The ratio of non-performing loans to assets was just 0.4 percent in 2011. The bank’s loans usually rank senior to other state-owned banks. It also doesn’t hurt that CDB Chairman Chen Yuan’s father was a top Communist Party economic official in Mao Zedong’s era. The bank knows its home market and has substantial influence there. But that won’t help much when it comes to getting repaid in, say, California.

Overseas deals sometimes have policy logic – Chinese Premier Wen Jiabao just proposed a CDB-led $10 billion credit package for the Latin American Mercosur bloc, for instance. Financing Hong Kong Exchanges and Clearing in its bid to buy the London Metal Exchange and Alibaba’s repurchase of a minority stake from Yahoo seems more like mission creep. CDB’s rapid expansion may win new influence for Beijing, but it could also end up costing the bank.

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CONTEXT NEWS

- Chinese Premier Wen Jiabao wrapped up a tour of resource-rich Latin America on June 26 and offered $10 billion in credit for infrastructure projects, potentially implemented by China Development Bank.

- CDB is in talks with U.S. home builder Lennar to provide $1.7 billion of financing, according to a Wall Street Journal report on June 25. The funds would be used to develop two real estate projects in San Francisco.

- CDB has also committed an extra $1 billion to Alibaba Group, according to sources cited by Reuters LPC on June 22. The bank had committed a $1 billion three-year loan to the e-commerce firm earlier in June.

- The Chinese policy lender also committed a $1.8 billion loan to Hong Kong Exchanges and Clearing to finance its acquisition of the London Metal Exchange, Thomson Reuters publication Basis Point reported on June 18.

- Reuters: China's Wen offers $10 billion Latin America credit line [ID:nL2E8HQAZ2]

- Reuters: Lennar in China Devt Bank talks for $1.7 bln capital [ID: nL3E8HQ34I]

- Reuters: Hong Kong: CDB commits another US$1bn to Alibaba – RLPC [ID:nRLP01618a]

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(Editing by John Foley and David Evans)

((wei.gu@thomsonreuters.com)) Keywords: BREAKINGVIEWS CDB

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