Coordinated Credit Spaces: The Globalization of Chinese Development Finance

Transcription

1 Coordinated Credit Spaces: The Globalization of Chinese Development Finance Gregory T. Chin and Kevin P. Gallagher ABSTRACT This article examines the emergence of Chinese development finance on the global stage and evaluates the extent to which it differs from, complements and/or competes with the Western-backed development finance institutions. Whereas the new, China-backed multilaterals are closer to the Western model, especially the Asian Infrastructure Investment Bank, this analysis finds that China s national development finance is significantly distinct along three parameters the scale and business model of Chinese finance relative to its Western counterparts, the composition and approach of China s lending portfolio, and the governance of China s development finance institutions. These differences can be seen as complements to the Western-backed system, given that much of Chinese development finance has flowed into countries and sectors in which Western development finance institutions have ventured to a lesser extent. However, the globalization of Chinese development finance, patterned on the international diffusion of what is coined in this article as the coordinated credit space model, contrasts with Western development finance, governance and business models, and has triggered a competitive stance from Western actors. Either contestation or convergence are possible trajectories for the future, and the outcome will be determined by whichever can produce conditions akin to the politics of productivity. INTRODUCTION Through good times and bad, development finance will remain a steadfast champion of the Chinese economy and a powerful engine of mid- to long-term financing. Development finance is ascendant in China, and has vast potential for development globally, as well. Chen Yuan, Chairman of China Development Bank, 2013 Until recently, development finance institutions (DFIs) and development finance have largely been relegated to the deeper background of global The authors would like to thank Carla Freeman, Eric Helleiner, Jiajun Xu and the participants of the workshop Beyond Bretton Woods, held at Boston University on 15 September 2017, for their comments on the article. They would also like to thank the anonymous reviewers for their helpful comments, and Rohini Kamal for useful research assistance, on earlier drafts. Development and Change 50(1): DOI: /dech C 2019 International Institute of Social Studies.

2 246 Gregory T. Chin and Kevin P. Gallagher policy making and relatively small subfields of economics, political science and sociology in the scholarly literature. Aside from an occasional flair of controversy, or the annual meetings of the Western-backed DFIs such as the World Bank and its regional counterparts, for the most part only specialists paid close attention to the happenings in the DFI community. The point of inflection came in late 2014, early 2015 when nations of the world flocked to join the China-led, new multilateral development bank, the Asian Infrastructure Investment Bank (AIIB). Development banking then leapt into the arena of geopolitics, front-page news stories and television controversy. While China had invited the United States (US) to become a member of the AIIB, the US not only refused to join but pressured its allies not to do so. White House officials struck out at their allies for constant accommodation of China, and the US Treasury attributed its lack of interest in joining to its perception that the bank would not adhere to the high standards of competitive bidding and social and environmental standards (Parker et al., 2015). These perceptions came from early reports that labelled China s development money to Africa as rogue aid (Naim, 2009); they depicted China s own national development banks, the China Development Bank (CDB) and the China Export-Import Bank (CHEXIM), as malevolent state policy tools surging into developing countries in a manner that defied the models and norms of their Western counterparts (Sun, 2014). Some commentators continue to make similar arguments about the nature and impact of the Chinese money that is going into the Belt and Road Initiative (BRI), a Chinese governmentbacked initiative founded in 2015 that aims to strengthen infrastructure, trade and investment links between China and some 65 other countries (French, 2017; Miller, 2017). Indeed, as this study will show, China s two national policy banks have provided more financing to emerging market and developing countries (EMDs) than all of the Western-backed development finance institutions combined. When, in 2015, US allies parted ways with the US and joined the AIIB, Chinese development banking became a thread in the burgeoning global discourse on the decline of US hegemony and the rise of China and other emerging powers. However, emerging market and developing countries were less alarmed. In fact, many welcomed China s development institutions for their focus on infrastructure and industrialization, particularly the lack of policy conditionalities that often came with financing from the Western-backed DFIs. Ethiopia s former Prime Minister, Meles Zenawi, was quoted as saying China, its amazing re-emergence and its commitment for a win-win partnership with Africa, is one of the reasons for the beginning of the African renaissance (Roopanarine, 2013). Such reaction has only stoked the broader geopolitical fires. China s national development banks are now fairly established on the global stage, as are the two new multilateral development banks (MDBs)

3 The Globalization of Chinese Development Finance 247 that China has been instrumental in founding the AIIB and the BRICSled New Development Bank (NDB). 1 But Chinese development finance also involves China s largest commercial banks and large Chinese enterprises. This article compares and contrasts the approach of Chinese development finance to the Western-backed DFIs and analyses the extent to which the Chinese coordinated credit space model complements or competes with the Western-backed model. 2 We find that the China-related DFIs especially the approach of the two national policy banks that operate abroad and the NDB have many significant differences from the traditional Western DFI/MDB model. The AIIB shares the closest resemblance to the MDBs, but has important distinctions as well. Each of these DFIs complements the system of global DFIs in some ways, but also provides new forms of competition at the borrowing country level and on the global stage. Based on in-depth interviews with officials at CDB, CHEXIM, the AIIB and the NDB, 3 the main Chinese state commercial banks and other Westernled MDBs, 4 our analyses of relevant documents and publically accessible data in English and Chinese, and the related academic and think tank literature, Table 1 summarizes the key findings that are to come. There are two key similarities across this spectrum of DFIs. First, they each deploy a similar resource mobilization model whereby the DFI relies on paid-in capital from shareholders and raises further funding on capital markets with the implicit guarantee of the sovereign shareholders. Given the credit status of the dominant shareholder(s), DFIs across the spectrum can pass on their favourable credit status for competitive financing for emerging market and developing country borrowers. However, there are differences within that general model. Chinese national DFIs operating abroad do not have callable capital, they do take deposits, and they issue bonds on both the Chinese and global markets. The AIIB and NDB do have callable capital, but borrow in both Chinese and global capital markets. Western-led MDBs have callable and paid-in capital like the AIIB and NDB, but issue bonds in global as well as local currency markets. In terms of lending practices, China s national DFIs operating abroad tend to lend in extraordinarily large lines of credit and loans for bundles of 1. BRICS is the acronym for the grouping of the world s leading emerging countries Brazil, Russia, India, China and South Africa. 2. We refer to the AIIB and NDB as China-backed to acknowledge that they are not China s MDBs but rather that China is a core founder, shareholder and champion for these new MDBs. 3. Interviews were conducted with: CDB officials, Beijing, May ; CHEXIM officials, Beijing, September 2012 and May 2017; AIIB officials, Beijing, May 2018; and NDB officials, Shanghai, May 2016 and June Additional interviews were conducted with: Bank of China (Canada), Toronto, February 2014 and November 2015; Bank of China (Hong Kong), Hong Kong, May 2017; Industrial and Commercial Bank of China (Canada), Toronto, February 2014, May 2015, June Interviews were also conducted with the Asian Development Bank, Beijing, May 2008 and the World Bank, Beijing, May 2008 and September 2012.

4 248 Gregory T. Chin and Kevin P. Gallagher Scale and Business Model Composition and approach Table 1. Chinese Development Finance: Comparative Analysis Chinese Development Finance AIIB NDB Western MDBs Paid-in capital Bond issuance (China and global market) Paid-in capital (& callable capital) Bond issuance (China and global market) Paid-in capital (& callable capital) Bond issuance (China and global market) Paid-in capital (& callable capital) Bond issuance (global and local markets) Large scale Medium scale Medium/small scale Small/medium scale Deposits n.a. n.a. n.a. USD and RMB lending USD lending USD and local currency lending USD and local currency lending Coordinated finance On-lending to NDBs Energy and infrastructure Project finance with competitive bidding Energy and infrastructure Sustainable infrastructure Project finance with competitive bidding Poverty alleviation, climate change abatement Big push Big push Big push Institutionalist/End growth/sen Governance Single shareholder Developing country-led shareholders No policy conditionality a Country systems ESRM b No policy conditionality Conditionally harmonized ESRM Equal shareholders No policy conditionality Country systems ESRM Industrialized country-led shareholders Micro and macro-level conditionalities Conditionally harmonized ESRM Notes: a While China s DFIs do not engage in Western-style macro policy conditions they can require project-level policies and financing arrangements such as commodity-backed loans (Gallagher and Irwin, 2015). b ESRM = environmental and social risk management systems. Source: Authors formulation. infrastructure and energy and other overseas national developmental projects, and do so in a coordinated fashion with a number of different (Chinese) bank and non-bank corporate actors taking part in creating what we term in this article coordinated credit spaces. The NDB, on a smaller scale, uniquely thus far, on-lends to national development banks in member countries such that the national development banks, in turn, provide financing for a number of loans. The AIIB is more like the Western MDBs, following an individual project finance approach. 5 Indeed, for the 5. As of January 2017, the AIIB has approved nine projects, investing a total of US$ 1.7 billion. The AIIB was formally established in late 2015 with 57 founding members. Membership in the AIIB is open to all members of the World Bank or the Asian Development Bank (AsDB).

5 The Globalization of Chinese Development Finance 249 first few years following its establishment in 2015, the AIIB plans to (almost) exclusively co-finance particular projects with Western MDBs (Lichtenstein, 2018). Chinese national DFIs lend in both US dollars and in Chinese currency, interchangeably referred to by China and globally as the Yuan and the Renminbi (CNY or RMB), whereas the NDB lends in RMB and dollars and has plans to lend in other local currencies (as do the MDBs on a limited scale). The AIIB, for the short term at least, plans to provide financing only in dollars. All of these DFIs expect to be repaid in the currency that they lend in, with the exception of China s policy banks, which have often required that a certain amount of loans be paid back with commodity sales (Brautigam and Gallagher, 2014). In terms of the composition of lending, all of the DFIs in which China is a key shareholder tend to focus on energy and infrastructure, which is distinct from what the Western DFIs have done until recently. The NDB Charter stipulates that the bank will focus explicitly on sustainable development and infrastructure, and our field research at the NDB headquarters in Shanghai over the period indicates that sustainable infrastructure is emerging as the key emphasis (for a definition see Alacevich, 2011; Kapur et al., 1997). In contrast, the Western MDBs invest in relatively smaller micro-interventions in health, education and the environment, and provide broader loans for policy reform (World Bank, 2017). The MDBs are largely guided by new growth theories that emphasize interventions in human capital, health and the environment, as well as new institutional theories that focus on underlying institutions. With respect to governance, China s national DFIs have a single shareholder governance structure. The NDB interestingly has five shareholders with equal voting weight across the membership despite some variation in their actual paid-in-capital contributions so far (but which should eventually be equal). The AIIB resembles the MDB model where voting power is a function of the size of paid-in capital, though uniquely with China a developing country as the largest shareholder, and with the collective developing country share of quotas outweighing those of industrialized countries. The MDBs have the same executive board structure as the Board of Governors of the AIIB and the NDB, though the MDBs have a resident board where the AIIB and NDB have a non-resident Board of Governors. In the MDBs, industrialized countries hold the majority stake on the Executive Board, whereas both the NDB and AIIB pride themselves on being developing country-led. But the AIIB and the NDB also have a Board of Directors above the senior management team, and in this way their dual boards structure differs from the Western-led MDBs. Unlike the Western-led MDBs, none of the Chinese DFIs attach explicit or overt policy conditionalities to their loans, although there is some evidence that China attaches purchasing and procurement conditions at times at the project level (Gallagher and Irwin, 2015). The AIIB, however, like the MDBs, has strict

6 250 Gregory T. Chin and Kevin P. Gallagher environmental and social risk management systems (ESRMs) that every borrower must adhere to in order to obtain financing. China s national policy banks and the NDB both defer to country systems approaches on ESRMs, though they have made the financing of sustainable development projects and renewables key project areas, and they are active in pioneering green fundraising tools, such as green bonds. In sum, China s mammoth national development finance institutions, and in some respects the NDB, have many features not found in Western MDBs, whereas the AIIB is more similar to the Western model. These institutions have a coordinated strategic space approach that involves multiple actors that lend for a variety of projects in both dollars and RMB; they engage in massive infrastructure projects. They are driven by a different economic model and history. This combination of alternatives is proving to be very attractive to a number of EMDs. Despite the fact that many of the sectors and countries that the Chinese institutions lend to are not active clients of the Western MDBs, Chinese institutions are still increasingly seen as a threat as exhibited by the outspoken comments by recent US Secretaries of State such as Rex Tillerson, the mobilization of new capital for the Western MDBs and the creation of new DFIs in the United States. Following this brief introduction and summary, the rest of this article is organized into three parts. The first analyses the globalization of Chinese development finance, as exhibited through the overseas diffusion of a coordinated credit space model that blends non-concessional and concessional lending, aid and commercial lending. The second discusses the new multilateral DFIs that China has helped spearhead, the China-led AIIB and the BRICS-led NDB. Throughout these sections the relevant DFIs will be compared and contrasted to the Western-backed MDBs. The final section summarizes the main findings and provides a framework for evaluating the future trajectory of these DFIs. THE GLOBALIZATION OF CHINESE DEVELOPMENT FINANCE In 1998, then Communist Party of China (CCP) General Secretary and State President Jiang Zemin championed the internationalization of Chinese investment and lending. According to CDB Chairman Chen Yuan, President Jiang Zemin argued that regions like Africa, the Middle East, Central Asia, and South America with large developing countries [have] very big markets and abundant resources; we should take advantage of the opportunity to get in (Chen, 2009: 33). Henceforth, China s government and Party leadership have encouraged China s large state and non-state companies to go outside ; key strategic agencies of the Chinese Party-state such as the National Development and Reform Commission (NDRC) have devised policies to support and facilitate China s national champions in going global ; and the country s policy and commercial lenders have been encouraged to provide

7 The Globalization of Chinese Development Finance 251 financing for the outward push. The transformational evolution and outward push of China s banking industry forms the backdrop and broader context within which to situate the outward Chinese push as development financier. China s development finance push outwards has been a coordinated approach at two levels. First, the highest levels of the Party-state in Beijing have set the overarching Chinese national objectives, and the global goals and aspirational parameters for the outward push, and the political elites have guided, and at times directed, the strategic investments of the state policy banks, commercial banks, national and local champion enterprises in the energy, infrastructure, mining, industry and agriculture sectors. Such Chinese overseas financing and investment have intensified during the last decade, driven by multiple factors: from China s massive holdings of foreign exchange reserves; the desire of Chinese companies to go out to acquire technology and expand market share; gaining or securing access to energy and raw materials; addressing overcapacity on the mainland; to securing alliances overseas in order to counter US measures to check China s rise, such as through the Trans-Pacific Partnership and more recent trade conflicts with the Trump administration (Chin, 2015b; Kong and Gallagher, 2017; Ye, 2015). Second, the Chinese state-guided coordinated investment approach mirrors the form of a big push approach that Rosenstein-Rodan examined as a corrective for a number of coordination failures that existed in the economy. If we recall, Rosenstein-Rodan (1943, 1961) discussed how a number of coordination failures exist in an economy that may prevent key innovations from taking off. A highly efficient electronics factory may not be competitive globally if not complemented by corresponding investments in smart infrastructure, ports, financial regulations and exchange rate policies to support such efficiencies. Some in the senior ranks of the Chinese state policy banks have drawn inspiration from Rosenstein-Rodan s views, including the former chief economist at the China Development Bank, Lixing Zou, who saw CDB as having played such a coordinating role within the Chinese growth miracle (Zou, 2014). We refer to China s global approach to development finance as the international diffusion of a coordinated credit space model as depicted in Figure 1. CDB Chairman ( ) Chen Yuan has remarked about the model that has been forged through China s own experience in, and approach to, development finance: One of the fundamental differences between China and the West is that, in China, the government serves as a foundation for our credit architecture (Chen, 2013: 42). Here, Chen is highlighting that the role of state finance and the ties between state finance and commercial banks form the foundation of what makes the Chinese financial system different from the private sector-centred financial systems of Western economies. In internationalizing the coordinated credit space model, Chinese financial institutions are exporting the coordinated financing model that has allowed Chinese banks to control credit risk, while boosting China s economic growth,

8 252 Gregory T. Chin and Kevin P. Gallagher Figure 1. Coordinated Chinese Development Finance Borrowing Government Chinese Policy Banks Government Ministries - non-concessional finance - concessional finance - grants Chinese Commercial Banks Chinese firms - non-concessional loans - seller s credits Foreign and domestic firms - non-concessional loans - seller s credits - FDI support DEVELOPMENT PROJECTS Source: Authors formulation. through the coordinated interventions of state policy banks and commercial banks. Chen writes that loans are the bread and butter of any bank; nothing scares banks more than the thought of default and credit risk... a number of domestic companies have relatively poor credit records, making them a risk that many commercial banks are unwilling to take on (ibid.). Chen highlighted that CDB has put a special emphasis on cooperation with commercial banks to optimize synergies in the banking sector (ibid.: 43). Inside China, CDB has steered commercial and private capital investment with asset swaps and syndicated loans; the policy bank has channelled sovereign credit into the local market through quasi-sovereign debt issues, which aggregate smaller pools of retail funds held by commercial banks, and consolidates them into larger, longer-term funding resources (securitization of sovereign credit to lock in longer-term loan risk) (ibid.: 43 44). The CDB has pooled financing, or co-financed with commercial banks, on projects in which the CDB has improved the conditions for commercial financing and investment, across a number of sectors. In infrastructure, the CDB has done so by providing longer-term funding and building investing/financing regimes and credit structures. As Chen (ibid.: 44) emphasizes, compared with other banks, one key difference in the way CDB grows its business is that we are not just lenders; we are active in the development of a more robust investing/financing regime. The goal is not just to supply financing at the individual project level, but to help drive the development of the market for the sake of national

9 The Globalization of Chinese Development Finance 253 development. But the approach is one of mitigating against credit risk by strengthening coordination between policy banks and commercial banks, in order to optimize efficiency in the banking sector and national developmental impact. This starts with stronger coordination between political and banking leadership, and among the leaders of the policy and commercial banks with coordination at all levels, from the government and the Party, to the financial institutions, and the enterprises as the delivery agents (ibid.: 41 42). With their approach overseas of agreeing to a coordinated credit space, China s financial institutions are transferring abroad or externalizing the aforementioned Chinese development finance lessons and experiences from their domestic context, though with some modifications. One of the key modifications is the role of foreign political leaders at the start of the process. Building on internal Party strategic planning processes in Beijing, the overseas application of the coordinated credit space model usually proceeds next to an official visit of a senior Chinese Party or government leader or in some cases the head of the Chinese policy bank as the lead Chinese official to a foreign host country. Either during that leader s visit, or in the aftermath, the finance ministry of that country and the Chinese policy bank negotiate a framework agreement, where in the host country government and the Chinese policy bank agree a list of priority national development projects for the host country. Our field research from 2016 to 2018 in Beijing and Shanghai found that negotiations then ensue in which the Chinese policy bank agrees to provide a sizeable loan to help cover the core financing for a range of projects on the priority list. In the most highly coordinated cases, Chinese commercial banks are next asked to submit letters of application to the borrowing country s ministry of finance to bid for the contract for the various projects. In some cases, the Chinese commercial banks act on their own, especially if they have long ties and an established presence in the overseas market. In these cases, the commercial bank intervenes without explicit direction from the policy bank, seeking the contract to deliver a particular overseas development project. For engineering and construction projects, the contract bid usually takes the form of an engineering, procurement and construction (EPC) project bid. The EPC includes a Chinese company as the project implementer, the supplies needed (including exports from China), a list of Chinese goods suppliers, a project feasibility study that includes the proposed project financing from the Chinese commercial bank and an environmental impact assessment. If the contract involves the sourcing of local goods from the host country, a Chinese importer is listed, and the Chinese importer signs a purchase agreement with the local company that is selling the commodity, or the Chinese company that has agreed to purchase the local goods from the local supplier. The borrowing government would then sign the loan agreement with the Chinese bank, acting on behalf of the government or the national corporation of the host country. In some cases,

10 254 Gregory T. Chin and Kevin P. Gallagher the proceeds from the sale of a specified amount of exports from the local host get deposited into an escrow account with the Chinese bank and drawn down to repay the EPC contract loan. Thus it is not the export commodity itself that repays the loan, as in a true barter system, but the proceeds from the sale of the commodity (Brautigam, 2009; Brautigam and Gallagher, 2014). The policy banks do not provide financing based on the ability to pay back on a single project. Instead they provide financing for a cluster of development projects, across and within a particular credit space, with each project having its own stream of potential benefits and risks and financing. The policy banks eye and cover the total risk/return profile across the entire cluster of projects rather than one by one. Furthermore, the Chinese policy banks do not attach overt political conditionalities on the borrowing country governments, though they do discuss the intended strategy or national plan for repayment with the partner government, and they do want to reach consensus on the plan. Instances have also emerged where Chinese policy banks have set conditions in the broad framework agreement with the borrowing country to help insure priority projects against political turbulence in the borrowing country. They have set cross-cutting commitments across differing projects, where financing for one project is tied to follow-through on another project. This strategy has been used to secure the project (and the Chinese investment in the project) against back-tracking by the host government. Argentina is a case in point, specifically the cross-default clause in the framework agreement between the CDB and the Argentine government under which, if the contract for the Santa Cruz hydropower dams construction in the Andes mountains is cancelled, the CDB s loan for the Belgrano railway project would be stopped (for a recent update see Gutman, 2018). This clause had its intended effect after Mauricio Macri took office as President of Argentina in 2015 and halted the hydropower project. However, when Macri was made aware that stopping construction of the dams would mean sacrificing the important railway project, and could upend Argentina s broader relations with China, Macri gave the dams project the go-ahead. He shifted instead to modifying the terms of the agreement to avoid going over costs, and to dampen the environmental impact, by lowering the capacity of the dams through the inclusion of fewer turbines and adding another transmission line modifications to which the Chinese side agreed (Patey, 2017). Macri attempted to appease conservation groups by calling for a new environmental assessment through the Argentine Supreme Court. But he did not stop the controversial project. With respect to ESRMs, Chinese policy and commercial banks tend to defer to host country social and environmental standards; China s new green credit guidelines require that projects financed in host countries be held to the host country standard (Gallagher and Yuan, 2017), but they have developed tools to try to secure follow-through on projects and to control for environment-related project implementation risks.

11 The Globalization of Chinese Development Finance 255 China s Policy Banks Under the coordinated credit space model, the CDB and CHEXIM lead the way. During 1994 reforms of the financial sector, the Chinese government created CDB and CHEXIM as policy banks, whose loans would explicitly support the government s policy objectives (Lardy, 1998: ). Prior to 1994, policy lending had been the responsibility of the Big Four Chinese banks (Bank of China, China Construction Bank, Agricultural Bank of China and Industrial and Commercial Bank of China); the new policy banks were designed to free the Big Four to act as commercial banks. In separating policy from commercial lending, the government sought to reduce bank managers moral hazard. If managers could blame all their losses on policy loans, they had an incentive to direct their commercial loans toward highrisk, high-return projects. The creation of separate policy banks would enable the commercial banks to be accountable for rational, market-based lending. Similar to the model of the Western-backed MDBs, these two policy banks have initial paid-in capital from the People s Bank of China and Ministry of Finance and raise additional financing on Chinese and global capital markets. CDB and CHEXIM follow slightly different mandates, which both revolve around strengthening Chinese industry. CDB mainly supports China s macroeconomic policies laid out in the Five-Year Plans focusing on eight areas of development: electric power, road construction, railway, petroleum and petrochemical, coal, postal and telecommunications, agriculture and related industries and public infrastructure. An estimated 73.7 per cent of CDB s total new loans went to these sectors (CDB, 2016). The CDB is one of the largest banks in the world with over US$ 1 trillion in assets. It is wholly owned by various shareholders within the Chinese government: the Ministry of Finance, per cent; Central Huijin Investment Ltd (a subsidiary of the China Investment Corporation, China s sovereign wealth fund), per cent; Buttonwood Investment Holding Company Ltd (owned by State Administration of Foreign Exchange of the central bank, the People s Bank of China), per cent; and the National Council for Social Security, 1.59 per cent (CDB, 2016). The CDB has ministerial rank within the government of China, and is widely credited with financing the transformation of China from an agriculture society to the manufacturing powerhouse it is today (Sanderson and Forsythe, 2013). In contrast, CHEXIM s mandate is to facilitate the export and import of Chinese mechanical and electronic products, complete sets of equipment and new- and high-tech products, assist Chinese companies with comparative advantages in their offshore project contracting and outbound investment, and promote international economic cooperation and trade (CHEXIM, 2018). CHEXIM achieves these objectives through the use of export credits, loans to overseas construction and investment projects and concessional loans. Given the implicit guarantee from the Chinese government, the policy banks can pass on competitive financing to borrowers (Walter and Howie, 2012).

12 256 Gregory T. Chin and Kevin P. Gallagher The CDB has a rating of AA, CHEXIM is A+. The interest rates on CDB s loans are on average between 3 and 6 per cent, whereas CHEXIM s are 2 to 3 per cent, given that some of them are blended with grant financing through the Department of Foreign Assistance of the Ministry of Commerce (MOFCOM) to provide concessional loans through CHEXIM s Department of Preferential Loans (Chen, 2018; Gallagher and Irwin, 2015). The financing model of the CDB and to some extent CHEXIM is fairly unique. Whereas Western-backed DFIs and MDBs conduct individual project financing, China s policy banks, at home and abroad, take a more portfolio approach and finance what they refer to as strategic credit spaces where bundles of loans or lines of credit are issued for an array of coordinated and corresponding projects (Xu and Carey, 2015; Zou, 2014). The policy banks seek to construct markets where they are yet to exist, with an eye on laying a financial credit platform to enable projects in infrastructure and industrialization. The state policy banks identify strategic regions or countries, calculating their potential land, mineral, industrialization and population growth possibilities. In those strategic credit spaces so identified, the policy banks, most often the CDB, will provide a large loan or line of credit for multiple projects to occur in that space. CDB and CHEXIM loans are more typically in the billions of dollars rather than smaller hundreds of millions typical of MDB financing. The idea is to trigger a significant amount of economic activity far beyond just one single project. Such a foundational credit outlay then is hoped to crowd in the state-owned commercial banks, Chinese construction and other firms, and local actors with the hope that the credit space is linked to numerous beneficiaries. Therefore, as shown in Figure 1, the policy banks in addition to providing financing to a borrowing country for a line of credit also provide foreign investment support (CDB) and seller s credits (CHEXIM) to Chinese firms to go abroad and bid for the same projects. As will be discussed later, China s Big Four commercial banks also provide directed financing to Chinese (and other) firms for the same projects. The CDB and CHEXIM, with aid from MOFCOM at times, provide a borrowing country with a battery of non-concessional loans (CDB), concessional loans (CHEXIM), and grants (CHEXIM and MOFCOM). Concessional loans are mainly used to help recipient countries to undertake manufacturing projects, and large- and medium-sized infrastructure projects that bring economic and social benefits, or to finance the supply of complete plants, machinery and electronic products from China. Concessional loans are managed and delivered by CHEXIM as part of China s foreign aid budget. Figure 2 juxtaposes the overseas financing of CDB and CHEXIM alongside the major Western DFIs. As can be seen here, in a much shorter period these two banks have accrued as many assets as the overseas assets of all the Western-backed MDBs. With this financing in hand, the borrowing government sets up, and importantly provides a sovereign guarantee for, a number

13 The Globalization of Chinese Development Finance 257 Figure 2. China s National Development Banks in Context Global Assets (US$b) Export-Import Bank of China (CHEXIM) China Development Bank (CDB) European Bank for Reconstruc on anddevelopment (EBRD) European Investment Bank (EIB) Inter-American Development Bank (IDB) African Development Bank (AfDB) AsianDevelopment Bank (AsDB) World Bank (WB) Source: Gallagher et al. (2018). of development projects. If a host country does not guarantee the projects, Chinese commercial banks can acquire insurance via China Export and Credit Insurance Corporation (SINOSURE), established in 2001 through a merger of the export-credit insurance departments of the People s Insurance Company and CHEXIM (Chen, 2018). Beyond their direct loans to foreign governments, both CDB and CHEXIM loans are usually loosely or directly tied to the commercial activities of China s state enterprises in developing countries; for example, in infrastructure investment and construction, or joint-venture partnering or acquisition. The CDB loans are provided either as direct financing to the Chinese enterprise, or as financing to the foreign partner of the Chinese state company (Lin and Wang, 2017). Table 2 and Figure 3 present the sectoral and geographic distribution of CDB loans (CHEXIM loans are harder to obtain) as of The CDB has made over US$ 573 billion in loans overseas since its inception, and has a current international loan book of US$ billion almost twice that of the World Bank in recent years. As Table 2 shows, the largest overseas loans are in energy power plants and distribution, manufacturing and infrastructure. Of the loans in the energy sector, about half are designated to upstream oil, gas and coal exploration, while the other half are in electric power plants dominated by coal and large hydroelectric power plants and a small amount of wind and solar (Gallagher et al., 2018). The Asia-Pacific region is where the largest amount of finance is concentrated in the CDB loan book, accounting for 56 per cent of outstanding loans. This is not surprising due to the fact that the CDB is a key financier of the BRI, or new Silk Road, throughout Asia. 6 The second largest destination for CDB overseas finance is Latin America and the Caribbean at 18 per cent, followed by Eurasia at just over 13 per cent. Roughly half of the projects financed by Chinese development banks (in terms of dollar volume) are 6. The BRI consists primarily of the Silk Road Economic Belt, linking China to Central and South Asia and onward to Europe, and the New Maritime Silk Road, linking China to the nations of Southeast Asia, the Gulf countries, North Africa, and on to Europe.

14 258 Gregory T. Chin and Kevin P. Gallagher Table 2. Scale and Sectoral Distribution of CDB Global Financing, 2015 Total Loans (US$ billion) Balance (US$ billion) % the total Mining % Energy % Infrastructure % Manufacturing % Agriculture % SMEs % Financial Services % Total % Source: China Development Bank (2015). Figure 3. Global Distribution of CDB Loans 180 (US$ billions, 2015) Latin America and Caribbean Eurasia Asia-Pacific Africa Middle East-North Africa Source: Wang (2016). commodity backed whereby a portion of the loan is repaid in the form of collateral, the majority of which is secured by oil. However, Ghana secured a Chinese loan for its Bui Dam hydropower project with the export of cocoa beans. Indeed, across Africa, China has secured loans from copper, diamond, cocoa and other sales (Brautigam and Gallagher, 2014). This form of finance has been practised in China for over a decade and in Japan for a considerable amount of time (Brautigam, 2009; Stallings and Kim, 2017). In countries without good credit ratings and therefore little ability to reliably provide guarantees, a resource guarantee increases security and lowers risk. It also allows projects to be financed at better interest rates. Indeed, securing loans to municipalities through land collateral was a cornerstone of the CDB s domestic finance strategy on the Chinese mainland (Chen, 2013; Sanderson and Forsythe, 2013).

15 The Globalization of Chinese Development Finance 259 Commercial Banks and Chinese Enterprises The broader framework agreement between the Chinese policy bank and the foreign partner government provides the credit space for China s Big Four commercial banks to come in and provide financing to the Chinese enterprises and the national firms of the partner country that are associated with the various national development projects. This financing is usually at shorter maturities and for discrete parts of a given project or a set of projects. The theoretical point is that the ontological scope of Chinese development finance needs to be expanded conceptually to include these other elements of China s development financing in developing countries that are coming from China s state commercial banks. This large and growing amount of Chinese development finance, as well as the commercial activities of Chinese state companies in developing countries, should not be missed. These commercial loans are provided either as direct financing to the Chinese enterprise for their projects in developing countries, or as financing to the foreign partner of the Chinese state company that is involved in a project with an overseas partner from a developing country (Lin and Wang, 2017). The details of such development financing can be seen in the lending activities of all four of China s biggest state commercial banks across all the main regions of the developing world. Bank of China (BOC), the most internationalized of the Chinese banks, first set up an office in Africa in 1997, and its presence and operations have expanded across that continent, especially recently in Southern Africa. China Construction Bank (CCB) has operated in Africa since 2000, providing support to Chinese construction and engineering companies; it has recently moved into project finance, and participates in consortium loans to African banks. China s largest commercial bank, Industrial and Commercial Bank of China (ICBC), started to finance projects in Africa after purchasing 20 per cent of South Africa s Standard Bank in 2008, a deal valued at over US$ 5 billion. All of these commercial banks have increased their lending in developing countries in Africa, as China has become the leading trading partner with, and investor in, the continent. Officials in African finance ministries, such as the case of Zambia, have acknowledged in field interviews that one reason why Chinese companies have succeeded in winning so many of the infrastructure, transport, energy and other developmental projects in their country is because the Chinese companies can secure accompanying financing from China s large banks as part of their project proposals. 7 What has largely gone unnoticed in the conventional analysis is the unprecedented role that China s commercial banks have started to play, more recently, in managing capital allocations for projects in the Chinese 7. We thank Satyam Chawla, whose graduate field research was on Chinese development finance in Zambia (September 2015 to May 2016), for this point.

16 260 Gregory T. Chin and Kevin P. Gallagher government-backed BRI. In some cases, the commercial bank may be the conduit for development funds that are allocated from China s state budget. In many other instances, the loans are arranged on a commercial basis by the PRC commercial banks themselves and the clients, often on behalf of large Chinese enterprises, for their business projects in BRI countries. According to our interviews, ICBC (not only China s largest bank but also the world s largest bank, in terms of assets and deposits) claims to be the PRC bank that is most engaged with countries across the BRI in terms of providing financial services. In August 2015, the bank reported that, across the BRI region, it had over 120 institutions in 18 countries, supporting 81 BRI projects, and providing funding of US$ 11.6 billion in total (ICBC, 2015). In the same month, ICBC also signed a cooperation agreement with SINOSURE to jointly promote the BRI. SINOSURE was already providing insurance to Chinese domestic enterprises for export, investment and projects to countries along the BRI route worth US$ billion, and paid indemnity of US$ 1.63 billion. In the lead-up to the Belt and Road Forum for International Cooperation in Beijing in May 2017, Caixin (the leading private Chinese business news source) reported that China s state enterprises are playing a leading role in the current first phase of BRI, in which a large portion of the initial projects are focused on infrastructure projects, such as highways, railways and ports. According to the China Banking Association (CBA) in 2016, Chinese companies signed US$ 126 billion in contracts for construction projects, and they have made US$ 14.5 billion in direct investments in countries along the BRI routes (Peng and Jia, 2017). According to Chinese government sources, over the last three years, about 50 Chinese state corporate giants have invested or are participating in nearly 1,700 projects in countries along the BRI routes (ibid.). Xiao Yaqing, the head of China s State-owned Assets Supervision (SASAC), remarked at the Belt and Road Forum in Beijing that Chinese state companies have built, and are building, high-speed highways in many countries, such as the 750 km of highways linking Addis Ababa, the Ethiopian capital, and Djibouti. They are also involved in building the 480 km Mombasa Nairobi railway in Kenya. In addition, Chinese state companies are constructing railways from China to Laos, and China to Thailand, and they are building more than 60 energy projects in 20 or more countries along the BRI routes, including oil and gas pipelines from Russia, Kazakhstan and Myanmar to China. China s Ministry of Commerce reports that China has been building industrial parks in other countries, where Chinese companies enter the market in groups, engaging in manufacturing and/or trade (ibid.). By April 2016, China was building 56 such parks, and more than 1,000 Chinese companies have already moved into these industrial parks. The CBA reports that, during the period , nine Chinese banks established 62 branches and offices in 26 countries along the BRI routes, in order to provide financial support for the BRI (ibid.). China s Big Four banks are now in the process of raising billions to fund investment for BRI

17 The Globalization of Chinese Development Finance 261 deals. The news agency Reuters reports that CCB the country s second largest bank by assets has been conducting roadshows to raise at least RMB 100 billion (US$ 15 billion) from onshore and offshore investors (Wu and Zhu, 2017). BOC the smallest of the Big Four lenders is planning to raise around RMB 20 billion for BRI projects. CCB and BOC are raising money via their private equity and other investment platforms. Funds from offshore investors would be in dollars, and the RMB fundraising is said to be part of the Chinese central bank s push to invest RMB overseas. This fundraising has followed in the wake of the Chinese government s announcement that it would strengthen regulations to reduce risks for domestic firms investing abroad, and to curb irrational BRI investment. China s largest lender, ICBC, and third-ranked Agricultural Bank of China (ABC) are also considering raising BRI funds. Interestingly, the current Executive Vice President of the CBA, Pan Guangwei, sees the PRC s leading commercial banks active embracing of the BRI as positive, though he has cautioned that the Chinese lenders should be aware of the risks of BRI projects, as most of the undertakings entail long-term financing but without immediate economic returns (Peng and Jia, 2017). Others, including former Chairman and President of CHEXIM ( ) Li Ruogu, have warned that many BRI countries have low credit ratings (few countries are above BB level), high debt levels, and they may have problems paying back their loans (Li and Wang, 2018). As such, Pan and Li respectively advise the PRC banks to enhance their risk controls, especially to manage foreign exchange and commodity price volatility. China s central bank governor, Zhou Xiaochuan, even proposed that BRI projects use a single currency for settlement, and he suggested that the RMB could be used. Zhou also advised that BRI countries should build more developed equity and bond markets and other financial tools to provide stable sources of funding (ibid.). Vice President Zhang Hongli of ICBC reports that the bank has yet to see any non-performing loans in its BRI projects, while Vice President Sun Ping of CHEXIM notes that the state policy bank has established risk-control mechanisms, and has set an upper limit of debt for each BRI country. CHINA AND MULTILATERAL DEVELOPMENT BANKS Alongside China s two, now globalized national policy banks, Beijing recently helped found two global development banks, the New Development Bank (NDB) and the Asian Infrastructure Investment Bank (AIIB). These DFIs also share Chinese characteristics, but they have more resemblances to the Western DFIs as well. Furthermore, China is now a member of all the major Western-backed MDBs themselves. This section of the article details a comparative analysis of Chinese development finance institutions alongside their Western-backed counterparts (see also Table 1 above).

18 262 Gregory T. Chin and Kevin P. Gallagher The NDB and the AIIB The NDB was launched in July 2015 by Brazil, Russia, India, China and South Africa collectively known as the BRICS countries. According to its Charter, the NDB provides financing to developing countries (any United Nations member country and not only the BRICS nations) to help finance sustainable development and infrastructure projects, though to date, the NDB has only provided project loans to the original five BRICS member nations. The NDB released its first set of financing packages for clean alternative energy in the spring of 2016, largely financed from green bond issuances in China s onshore RMB market. Distinct from both the Chinese national DFIs and the Western MDBs, the NDB has committed 60 per cent of its funding to renewable energy and is developing a set of sustainable infrastructure criteria for project evaluation (NDB, 2016). As a matter of principle, each BRICS member is expected to contribute an equal share towards establishing the start-up capital of US$ 50 billion, with a goal of reaching US$ 100 billion, and have equal voice in the new bank (Chin, 2014). Under the current arrangement membership has started with the BRICS nations only, though other members will eventually be added but with the BRICS member countries always holding a minimum of 55 per cent voting power; there is a non-resident Board of Governors, and a nonresident Board of Directors, above the senior management team. This stands in contrast with the Western MDBs which are dominated by industrialized countries, usually not the borrowers; the industrialized countries also have a veto power, since voting power is a function of paid-in capital and the size of the economy. The BRICS nations agreed to grant each initial member of the NDB equal voting power, regardless of the size of their economy, on the understanding that each member state will match the rest with their initial paid-in capital. If industrialized countries join the NDB (and they have been invited to), they are limited to a 20 per cent maximum voting power and can only join the NDB as non-borrowing members. The NDB makes no mention of any political or policy conditionalities that are tied to its financing, and like the CDB and CHEXIM adopts a country systems approach to social and environmental regulations. The NDB raises additional financing on global and on Chinese capital markets. In 2016, NDB issued its first green bond in Chinese capital markets for RMB 3 billion (US$ 450 million) and a duration of five years (NDB, 2018). Unlike China s national DFIs, but also unlike the Western MDBs, a significant amount of NDB financing to date has been in the form of onlending to the national development banks in member countries. In its first two years the NDB committed US$ 3.4 billion in loans for projects in renewable energy, hydropower, transportation, water and energy conservation. So far, these loans have been made in RMB, but the NDB management has said that the bank intends to lend in the currencies of its other members as well. The NDB has acquired a triple-a credit rating from two Chinese domestic