22 October 2016
China Development Bank has established a new department to focus on financing low-cost public housing. Photo: Bloomberg
China Development Bank has established a new department to focus on financing low-cost public housing. Photo: Bloomberg

China tells policy banks to back govt priorities, overseas M&As

China is strengthening control over three major policy banks so they will be in a better position to finance projects and corporate expansions abroad while helping stabilize growth at home.

The State Council, China’s cabinet, on Sunday announced approvals for reform plans at China Development Bank, Export-Import Bank of China and Agricultural Development Bank of China, the Wall Street Journal reported.

The plans seek to reverse an increasingly commercialized strategy pursued by at least two of the banks and reinforce their role as a financing tool of the government, the newspaper said, citing government advisers and analysts.

The State Council stressed the banks’ roles in supporting government policies and strategic goals. The plans also call for the banks to improve their risk management and internal controls.

Amid the country’s slowing economic growth and rising bad debts at commercial banks, the government is looking to the policy banks to reinforce support for key objectives.

“These policy banks are being counted on to provide low-cost loans to finance things that often prove unattractive to commercial lenders, like infrastructure, farms, exports and overseas investments,” said economist Zhu Chaoping at UOB Kay Hian Holdings Ltd., a Singapore-based brokerage firm.

Beijing aims to build roads, railways, ports, telecommunications networks and other infrastructure to better connect the Chinese economy with the rest of Asia, Africa, the Middle East and Europe.

The plans are part of President Xi Jinping’s initiatives to construct the Silk Road Economic Belt for overland Asia and the 21st Century Maritime Silk Road for the seaboard links.

The twin initiatives are modern-day revivals of the trade routes that carried goods to and from China for centuries, and are seen by analysts as part of China’s ambition to challenge the United States on international affairs.

As part of the effort, China has established a US$40 billion Silk Road fund and spearheaded the setting up of a new development bank, the Asian Infrastructure Investment Bank, which has attracted interest from more than 40 countries including staunch US allies and which is expected to begin operations with US$100 billion in capital, the report said.

For most of the past two decades, China’s major policy banks had one mission: to help carry out Beijing’s economic orders and support Chinese companies when they expand overseas.

In recent years, at least two of the banks—China Development Bank and Export-Import Bank—have moved beyond these original roles to aggressively pursue commercially oriented deals, such as financing leveraged buyouts in foreign markets, the newspaper said.

China Development Bank has been involved in some of the biggest private deals in Asia, lending money to e-commerce company Alibaba Group Holding Ltd., Hong Kong Exchanges & Clearing Ltd. and Indonesia’s PT Bumi Resources. Export-Import Bank, meanwhile, has sought to fund the construction of expensive condominium towers in Manhattan and financed a multibillion-dollar casino resort in the Bahamas.

The State Council statement released on Sunday calls on China Development Bank to “play an active role” in stabilizing China’s growth.

Last year, with the blessing of the Chinese leadership, the bank established a new department headed by an official with the rank of vice minister to focus on financing low-cost public housing. The bank received a trillion yuan (US$161 billion) loan from the central bank for the purpose, the report said, citing people familiar with the matter.

The development bank, which has more than eight trillion yuan in assets, is expected to play a bigger role in efforts to ease the debt woes of local government, according to some Chinese officials and analysts.

For the Export-Import Bank, which has nearly two trillion yuan in assets, the State Council plan requires it to focus on its main role of financing Chinese exports and implementing China’s strategy of encouraging the country’s businesses to expand overseas.

The government recently appointed Hu Xiaolian, until earlier this year a vice governor of the central bank, as its new chairman.

With some 2.7 trillion yuan in assets, Agricultural Development Bank so far has largely stuck to its mission of financing Chinese agricultural companies and food producers. The State Council statement nonetheless called for the bank to better separate its for-profit business from its main business and to focus on the latter. The goal is to make it a “sustainable” policy bank, according to the statement.

For all three banks, the State Council emphasized the need to strengthen corporate governance, the report said.

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