Chinese puzzle as bank invests in Barclays
Tom Miller in Beijing
Analysts watch with interest as mainland player earmarks Euro9.8 billion for British lender
Just what is the China Development Bank up to?
That is the question analysts and market watchers are asking after the lender announced a potential Euro9.8 billion (HK$105.8 billion) investment in Barclays of Britain. Some say Beijing is positioning CDB as an alternative investment vehicle to the new State Investment Company, while others say it is another step in its journey to become a fully fledged commercial bank.
CDB's 'strategic partnership' with Barclays is ostensibly a strange match for a state-run policy bank that specialises in handing out low-interest loans to domestic infrastructure projects.
However, both CDB and Barclays stressed the commercial nature of the deal yesterday.
'This strategic and financial collaboration is the next step in the evolution of China Development Bank into a commercially operated financial institution,' CDB governor Chen Yuan said. 'CDB strongly believes this long-term investment in Barclays will be financially attractive.'
CDB, which was set up by the State Council as a policy bank in 1994, announced a plan to turn itself into a commercial entity at the National Finance Working Conference earlier this year and is working on a detailed restructuring proposal.
Although the bank's official mandate is to provide long-term financing for domestic infrastructure projects, with the mission of 'enhancing national strength and improving people's lives', it has already become a major competitor to state commercial lenders such as China Construction Bank.
'We call CDB a policy bank but it really works much more like a commercial bank. In most cases it does not care about policy issues,' said He Fan, an economist at the China Academy of Social Sciences.
Although CDB has one of the strongest financial profiles among all banks in the mainland, according to Fitch Ratings, its status as a policy lender restrains it from accepting retail deposits, limiting its funding capacity.
'Both CDB and the Export and Import Bank of China are in an awkward position because they are restricted from receiving deposits like commercial banks. They need to find other ways to fund lending and becoming more commercial; [it] could be one way of trying to improve their finances,' said Mr He.
CDB, like the Exim Bank, relies primarily on domestic debentures and foreign bonds for revenue.
Earlier this month, the lender issued five billion yuan of bonds in Hong Kong, the first debt issue in the mainland currency to be held in the territory.
As CDB makes its transformation into a commercial player, the partnership with one of Europe's strongest commercial banks will bring much needed foreign management expertise, which CDB hopes will improve its position domestically and bolster its growing business abroad.
Under the deal with Barclays, the British bank will train staff at CDB and the mainland lender will gain a non-executive board seat at what may become - should the takeover of ABN Amro succeed - one of the world's largest commercial banks.
'The agreement with China Development Bank provides Barclays with unprecedented access jointly to provide financial services to the rapidly growing Chinese market and Chinese companies trading internationally,' said Barclays president Bob Diamond in a statement.
In recent years, CDB has moved beyond its domestic remit to become an important source of funding for mainland firms investing abroad, helping to finance Citic Group's purchase of oil assets in Kazakhstan and China Minmetals' copper mining projects in Chile.
The bank is financing a new US$5 billion investment fund to 'support Chinese enterprises in developing co-operation with Africa and investing in Africa', which will target projects in infrastructure, farming, basic industries and manufacturing - though critics maintain the 'tied aid' will do more for mainland enterprises than for the poor nations it is supposed to help.
The mainland's ambitions overseas, embodied in the establishment of the State Investment Company, raise the question of whether CDB will become an alternative investment conduit for state funds directed into foreign companies and commodity markets.
'I don't think the government is looking to use CDB as an alternative state investment vehicle because it doesn't have a whopper of a balance sheet,' said John Studzinski, a spokesman for Blackstone Advisory, which advised CDB on the deal.
CDB had total assets of 2.31 trillion yuan at the end of last year.
The impetus for the strategic partnership between the two banks came initially from Barclays chief executive John Varley and was not motivated by geopolitical considerations, though it had been approved at the highest level in Beijing, Mr Studzinski stressed.
Wholly owned by the Ministry of Finance, CDB is the only non-regulatory financial institution to have ministerial status, reporting directly to the State Council. Under a special decree, the People's Bank of China is obligated to provide CDB with unconditional liquidity support.
China Development Bank founded in March 1994
Currently has 32 branches and four representative offices nationwide
The bank reports directly to the State Council
On June 26 it became the first mainland bank to issue yuan-denominated bonds in Hong Kong
Total assets (yuan b) 2,314
Outstanding loans (yuan b) 2,018
Net profit (yuan b) 28
Non-performing loan ratio 0.75%
Capital adequacy ratio 8.05%