Thursday, April 11, 2013

China's Superbank

China's Superbank
By Peter Bosshard
April 11, 2013

[The following book review appeared in the April issue of Environmental
Finance and on the Huffington Post. For an extended version with links
to background documents, see]

Li Liguan lives at the outskirts of Loudi city in Hunan province. A
former farmer, he was uprooted from his land to make way for a stadium.
Now he tries to benefit from the construction boom by hauling bricks and
renting out a room. His fate is typical for the hopes and injustices of
China's development model.

The engine that transforms the lives of millions of Chinese citizens
like Li Liguan is China Development Bank (CDB). The bank channels
capital to key sectors and projects in the world's fastest growing
economy - an essential role in any development state. "Understand CDB
and you understand the core of China's state capitalism," comment Henry
Sanderson and Michael Forsythe, two financial journalists. In their new
book, China's Superbank, they recount how the development bank has grown
from a bureaucratic basket case to a global player in less than two decades.

Since its creation, CDB has funded political pet projects such as the
Three Gorges Dam, the South-North Water Transfer Project, the Beijing
Olympics and the Shanghai Expo. It has also financed every major Chinese
policy initiative, from the massive economic stimulus in 2008 to the
current rapid expansion of solar and wind farms.

CDB's biggest idea was devising a business plan for China's urban
transformation. The bank allowed local governments, which were
prohibited from taking up debt, to create special financing vehicles
outside their budgets, and use land as collateral for CDB loans. As the
bank invested in local businesses and infrastructure, including the
stadium in Loudi, land values increased and local governments could take
up more loans. This perpetual motion machine will work as long as
China's real estate boom continues.

When the Chinese government encouraged its companies to go overseas, CDB
stood ready to provide finance. It offered multi-billion dollar credits
so state-owned enterprises could buy up foreign competitors, extended
resource-backed loans to countries such as Venezuela and Ecuador, and
funded infrastructure projects such as dams and highways.

In Ethiopia, for example, the bank's projects include the glitzy
headquarters of the African Union and sugar factories which are linked
to land grabs and the controversial Gibe III Dam. CDB is even backing a
real estate project to develop 20,000 new homes in San Francisco.
Through the China Africa Development Fund, it also invests in African
industries and job creation.

CDB is today the world's largest development bank, overshadowing the
World Bank and other international financiers. It still benefits from
implicit state guarantees, but has entered commercial turf with
ambitious private equity and securities arms. Western governments urged
China to liberalize its banking sector in the 1990s. Nowadays they
welcome investment from Chinese state banks to back their own struggling

While CDB boosted economic growth beyond expectation, the side effects
of its development model have become evident. The land sales which fuel
the bank's urban development plans are based on systematic
expropriations from poor farmers. The city of Loudi for example sold the
land it had seized from Li Liguan at 16 times the compensation rate
which the farmer received. This is normal practice throughout China. Two
thirds of all protests in China are caused by land conflicts, and
continued urbanization may uproot some 60 million more farmers over the
next two decades.

China is also reaching the ecological limits of growth. Its air and
water have become public health risks, and critical ecosystems are
rapidly degraded. With its relentless focus on steel and concrete, CDB
has contributed to this crisis. Yet the bank has not developed concepts
to integrate social and environmental aspects into its business model,
and its environmental standards lag behind international best practice.

"If the Communist Party is God, CDB is its prophet," Sanderson and
Forsythe conclude. Many cash-strapped governments in need of
infrastructure will be happy to hear the bank's gospel. As it becomes
the lender to the world, China's Superbank needs to address the
challenges of its development model.

Peter Bosshard is the Policy Director of International Rivers.

Henry Sanderson, Michael Forsythe, China's Superbank, John Wiley & Sons 2013

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