'It's almost free money': Chinese banks offer cheap loans abroad

State policy lenders providing funds to risky regimes at low interest rates

PUBLISHED : Friday, 19 July, 2013, 12:00am
UPDATED : Friday, 19 July, 2013, 11:09am

As the cash squeeze claims victims across the mainland - from a bailout-seeking shipyard to a solar-panel maker missing a bond payment - there are places where Chinese money remains cheap and plentiful. Like Nigeria.

China Development Bank and Export-Import Bank of China are lending billions of yuan to some of the world's riskiest regimes at interest rates several percentage points below the cheapest commercial loans available at home.

That lending in turn generates overseas contracts to build airports, roads and shopping centres for state-owned Chinese firms that are mired in debt.

"As opportunities go down and risks go up at home, these policy banks have gained a lot of power, and they want to sustain themselves," said Kevin Gallagher, the author of the 2010 book The Dragon in the Room, about Chinese investment in Latin America.

"The majority of the countries that are getting the finance are countries with bond spreads that are through the roof."

CDB, with a loan book more than three times the size of the World Bank's, and China Eximbank are wholly owned by the state with a mandate to support foreign policy.

Officials from the lenders accompany the nation's leaders across the globe dispensing funds to forge ties from Costa Rica to Russia, helping secure supplies of oil, gas and minerals and creating work for some of China's biggest state-owned enterprises.

Last month in Latin America, President Xi Jinping pledged to lend US$3 billion to 10 Caribbean countries, CDB offered a US$900 million loan to build a refinery in Costa Rica, and Mexican oil company Petroleos Mexicanos received a US$1 billion line of credit from China Eximbank.

Separately, CDB made a US$4.02 billion loan to Venezuela's state-owned oil producer.

In the four weeks since China's seven-day repurchase rate, a gauge of interbank funding availability, rose to the highest level since 2003, the two banks financed a US$700 million airport and retail complex in Khartoum, Sudan; lent Russian oil producer Rosneft US$2 billion; provided US$334 million in funds for a Balkan highway; and gave a US$100 million line of credit to a bank in Nigeria and a further US$500 million to build four airport terminals in that country.

Hua Chunying, a spokeswoman for the foreign ministry, declined to comment on Beijing's international lending by policy banks. Calls to the banks' press offices went unanswered.

In many cases, China is seeking to secure energy supplies. In Venezuela, Brazil, Ecuador and Russia, CDB loans are paid for with oil shipments to China.

In other cases, the loans bring business for Chinese firms. Nigerian Trade and Investment Minister Olusegun Aganga, said last week in Beijing that China Eximbank's loan to build the airport terminals was given at concessionary rates to create contracts for Chinese firms.

The loan had a 2 per cent interest rate and a 22-year repayment period, Nigerian Aviation Minister Stella Oduah said. "It's almost free money," she said.

Even China Eximbank itself, which is financed by bonds, cannot borrow money that cheaply. This month, it sold 26 billion yuan (HK$32.8 billion) in bonds carrying interest rates ranging from 4 to 4.15 per cent, according to company documents.