China's Superbank

Anyone wanting a primer on the secret of China's economic success need look no further than China Development Bank (CDB)—which has displaced the World Bank as the world's biggest development bank, lending billions to countries around the globe to further Chinese policy goals. In China’s Superbank, Bloomberg authors Michael Forsythe and Henry Sanderson outline how the bank is at the center of China's domestic economic growth and how it is helping to expand China's influence in strategically important overseas markets.

100 percent owned by the Chinese government, the CDB holds the key to understanding the inner workings of China's state-led economic development model, and its most glaring flaws. The bank is at the center of the country's efforts to build a world-class network of highways, railroads, and power grids, pioneering a lending scheme to local governments that threatens to spawn trillions of yuan in bad loans. It is doling out credit lines by the billions to Chinese solar and wind power makers, threatening to bury global competitors with a flood of cheap products. Another $45 billion in credit has been given to the country's two biggest telecom equipment makers who are using the money to win contracts around the globe, helping fulfill the goal of China's leaders for its leading companies to "go global."

Bringing the story of China Development Bank to life by crisscrossing China to investigate the quality of its loans, China’s Superbank travels the globe, from Africa, where its China-Africa fund is displacing Western lenders in a battle for influence, to the oil fields of Venezuela.

• Offers a fascinating insight into the China Development Bank (CDB), the driver of China's rapid economic development
• Travels the globe to show how the CDB is helping Chinese businesses "go global"
• Written by two respected reporters at Bloomberg News

As China's influence continues to grow around the world, many people are asking how far it will extend. China’s Superbank addresses these vital questions, looking at the institution at the heart of this growth.

Preface ix

Acknowledgments xix

Chapter 1 Let 10,000 Projects Bloom 1

The Wuhu Model 4

The Chongqing Model 9

Global Financial Crisis 12

A Town Called Loudi 15

Li’s Story 18

“Manhattan” in China 21

Credit Risk in a One-Party State 26

Cracks in the System 29

Chapter 2 Turning a Zombie Bank into a Global Bank 39

A Life in the Party 41

The Princeling Party: The Beginning of State Capitalism 50

Taking Over a Basket Case 55

Transforming CDB from an ATM Machine 58

Developing a Slogan 62

Beating the Commercial Banks 64

Gao Jian: Creating a Market for “Risk-Free” Bonds 68

The West Self-Destructs: The Financial Crisis 72

Moving Beyond Wall Street 75

Chapter 3 Nothing to Lose but Our Chains: China Development Bank in Africa 85

Made in Ethiopia 90

Ethiopia’s Zone: Exporting to the West 94

China Africa Development Fund: The State’s Private Equity Arm 96

Rising Role of China in Africa 101

Fixed Capital: Western-Style Lending 105

African Tiger: Can Ghana Escape the Resource Curse? 108

Fresh Capital 116

Chapter 4 Risk versus Reward: China Development Bank in Venezuela 123

Default in Bolívar’s Country 125

China’s Venezuelan Adventure 126

Loans for Oil 132

Cars, Housing, and Gold: Good Business for China 136

Ecuador 139

Russia 140

China in the Backyard of the United States 141

Chapter 5 Funding the New Economy 147

Obama’s Dream 151

Default-Free Bond Market 153

Financing China’s Global Company: Huawei 157

The Final Frontier: Private Equity 163

Acting as a Gatekeeper 167

Imprint of the State 169

Chapter 6 The Future 175

About the Authors 181

Index 183

"Despite CDB’s central role in developing China’s economy and bankrolling the international expansion of Chinese companies, China’s biggest policy lender rarely makes an appearance in most English-language chronicles of the country’s economic rise. All the more reason then to praise a superbly researched new book, written by two Beijing-based reporters for Bloomberg, in which CDB finally makes a star turn."

"Lifting the veil on one of global finance’s least understood institutions, the book is essential reading for anyone seeking insight into the workings of Chinese state capitalism." -- China Economic Quarterly, March 2013
Reviewer: Erica Downs of the Brookings Institution

"China's economy sometimes seems the work of miracles: three decades of economic growth, with GDP compounding at an annual rate of around 10%; the world's highest levels of savings and investment; vast trade surpluses, which feed the largest foreign-exchange reserves in history. The financial system has played a key role in delivering these economic feats, and no single institution within it has been more important than China Development Bank. "Understand CDB," Henry Sanderson and Michael Forsythe write in "China's Superbank," "and you understand the core of China's state capitalism." -- Wall Street Journal review, Feb 27, 2013

"The book is another useful insight into the workings of the Chinese state apparatus to come out of the Bloomberg bureau in Beijing – in July it printed an exposé about the family finances of Xi Jinping, and its website has been blocked since. One of the most striking aspects of the CDB story is how the bank managed to balance being a state-owned company with maintaining sufficient independence to function as a commercial business." -- Irish Times

"Calls for reform in China tend to come in two kinds – one, the most common in Chinese social media and popular discussion, calls for a crackdown on endemic forms of local tyranny, such as land seizures, black prisons, and bribery. The other, found among liberals within the Party and expatriate businessmen, talks about rolling back the growing dominance of the state and state-owned companies over the Chinese economy, opening more markets to competition and ending the practices that allow state-owned (or state-blessed) companies to command cheap access to capital, natural resources, and land. So far, Xi Jinping's term looks promising for advocates of the first but the book [China's Superbank: Debt, Oil and Influence – How China Development Bank is Rewriting the Rules of Finance] makes a case that land seizures are at the very foundations of China's model of state capitalism." -- The Diplomat

HENRY SANDERSON has been a reporter for Bloomberg News since April 2010. Prior to that, he was a reporter for the Associated Press in Beijing and Dow Jones in New York. While at Bloomberg, Sanderson has covered corporate finance, focusing on China's banks, the bond market, and the emergence of the yuan as an international currency. He is a graduate of the University of Leeds (with a BA in Chinese and English literature) and Columbia University (with a Master's in East Asian Studies).

MICHAEL FORSYTHE has been a reporter and editor for Bloomberg News since 2000. Prior to that, he was an officer in the U.S. Navy for seven years, serving on ships in the U.S. 7th Fleet. The highlight of his career in Washington was overseeing Bloomberg's coverage of the historic 2008 presidential election. Since returning to Beijing in 2009, Forsythe has focused on policy and politics, with particular emphasis on the international impact of "China Inc." He is a graduate of Georgetown University (with a BA in International Economics) and Harvard University (with a Master's in East Asian Regional Studies).

China's rise as a global economic superpower, the success of its top companies, and its continuing domestic boom is intricately tied to China Development Bank (CDB). This less-than-transparent institution, which is wholly owned by the Chinese government, has become the financial enabler of this nation's growth and is arguably the most powerful bank in the world.

While development banks have long existed to finance political projects, infrastructure, and other initiatives, nothing comes close to CDB in scope.

In China's Superbank, authors Henry Sanderson and Michael Forsythe—both Bloomberg journalists working in Beijing—combine on-the-scene reporting and interviews from across the world with numbers crunched from Chinese bond prospectuses to put CDB in perspective, and help you understand the economic phenomenon that is China.

Along the way, you'll not only become familiar with the growing accomplishments and influence of CDB, but you'll also gain valuable insights into the darker side of this political-financial institution—one that has never had to answer to anyone apart from its state shareholders. You'll also discover how China's seemingly unstoppable banking system could potentially be saddled with bad debt from trillions of yuan invested in projects with questionable economic value both at home and abroad.

Throughout the book, the authors:

• Explore CDB's hallmark innovation—the system of local government finance—which has transformed China's landscape in just over a decade by pumping trillions of yuan into various domestic projects
• Profile Chen Yuan, the Chairman of CDB since 1998, and discuss how he's been instrumental in reasserting the Communist Party in China's economy, while managing to preserve enough independence from the government to make decent investment decisions and function as a commercially driven institution
• Analyze CDB's China-Africa Development Fund—China's largest private equity fund investing in Africa—and its attempts to stimulate manufacturing in Ethiopia, and CDB's lending to Ghana
• Address CDB's work to secure a steady flow of oil and gas to China through loans-for-energy deals around the world, particularly to Venezuela
• Examine CDB's lines of credit that have helped new Chinese firms in telecom and alternative energy win significant global projects, as well as how the bank is developing a new form of private equity financing through CDB Capital.

As China's influence continues to grow around the world, many people are asking how far it will extend. China's Superbank addresses this vital question, looking at the institution at the heart of its growth.

Praise for China's Superbank

"The phenomenal economic rise of China and its growing global role have been driven by a unique mix of political and economic actors. China Development Bank has been at the center of much of this growth especially as the principal banker in China's overseas commodity investments. Henry and Michael's timely book, China's Superbank, details for the first time the role that CDB has played under the focused leadership of its Chairman Chen Yuan. This book is essential reading for anyone wanting to understand how China funds its growth but it also raises important questions as to whether CDB's strategy will be sustainable over the long term."
—Fraser Howie, Managing Director, CLSA Singapore and co-author of Red Capitalism

"Combining in-depth knowledge of China with hard-nosed economic analysis and first-rate journalism, Sanderson and Forsythe have written an astonishingly detailed yet lively portrait of China's muscular state capitalism. This important work tells us in concrete terms how China is expanding its influence around the world, not through military force, but through writing checks. This is a must-read for all those who take an interest in China's rising influence in the world—and its increasingly vulnerable financial system."
—Victor Shih, Associate Professor, Northwestern University

"In China's Superbank Henry and Michael shed a much-needed light on the operations and people behind China Development Bank, an apparent policy bank that in a brief decade has in many ways surpassed the power and functions of the country's Ministry of Finance. The tale of how this formerly moribund institution ignited China's local debt crisis while financing China's foreign policy initiatives is a must for anyone seeking to understand China's opaque financial system."
—Carl Walter, former COO of JP Morgan China, independent consultant andco-author of Red Capitalism

"American Cabinet members say the global reach and growth of China Development Bank keeps them up at night. After reading this book, they might not go to sleep at all. For all the tsunami of news about China's rise in recent years, the country's political and financial institutions remain vastly undereported and little understood. Mike Forsythe and Henry Sanderson's book helps correct that with remarkable detail and insights about the bank that laid the financial foundations for China's economic miracle at home, before then finding a formula to spread its money abroad."
—Richard McGregor, Financial Times reporter and author of The Party