China Development Bank leads Beijing’s ‘soft power’ agenda

By JEVANS NYABIAGE

Hungry for resources to fuel its economy, China’s eyes are on Africa. The Asian economic giant has committed $20 billion (Sh1.7 trillion) in loans to the continent.

China’s resource intensive growth model – propelled by heavy infrastructure spending and its manufacturing machine – requires large amounts of commodity inputs.

Underpinning Beijing’s engagement with Africa has been a desire to secure a number of strategic commodity supplies, in particular oil, iron ore and copper. And Africa is coming in handy.

More strategic

But more strategic, China’s policy bank, China Development Bank (CDB), is positioning itself as the primary conduit for growing Beijing’s interest in Africa.

Of China’s loans to Africa, the CDB and the Export-Import Bank of China (China Exim Bank) have financed roughly half each.

Economists say CDB’s ability to extend sizeable long-term loans, together with its home-grown expertise in financing infrastructure and its long-standing relations with state-owned enterprises in the sector, means it is an ideal funding source for Africa.

 

Africa’s relative role in meeting China’s resource needs is likely to increase and CDB loans to energy companies and governments against future commodity-related revenue streams will continue. 

“Without doubt, CDB will continue to play a powerful role in exporting Beijing’s ‘soft power’ in Africa, galvanising its broader South-South narrative,” said Standard Bank analyst Simon Freemantle.

“We expect CDB to play a greater role than its competitors in the coming years, despite the fact that the bank has been a critical driver behind China’s investment-led growth and the fact that risk attached to local government indebtedness in China has accumulated onto CDB’s balance sheet.”

In 1994, the State Council established three policy banks: CDB, China Exim Bank, and the Agricultural Development Bank (ADB). CDB was tasked with financing the construction of infrastructure.

CDB raises its capital by issuing bonds with terms of up to 30 years. The buyers are typically institutional investors on China’s interbank bond market and foreign markets.

Funds are raised based on its Moody’s credit rating of A minus. Because CDB is state-owned, via the People’s Bank of China (PBoC) and the Ministry of Commerce, the Chinese government implicitly guarantees its debt.

As it finances itself with long-term bonds rather than short-term bank deposits (as is the case with Chinese commercial banks), more than half of its loans are long-term.

Increasingly, CDB has acted as a conduit for Beijing’s international policy and is now the world’s largest development bank by total assets and China’s biggest lender, financing cross-border transactions and investments.

“China is a significant global lender, able to impose its political will and extend its economic influence. In Africa, CDB’s outstanding loans already total $18.9 billion,” Freemantle said.

More than two-thirds of African nations have received financial support from the bank; especially in the past five years.

Its financing co-operation in Africa has extended across a variety of sectors, including agriculture, electric power, manufacturing, resource extraction, communication, roads, aviation, ports, urban and social infrastructure.

Analysts expect Beijing to meet the commitment it made at last year’s Forum on China Africa Co-operation (FOCAC) to extend $20 billion in loans to African governments by 2015. 

At the time of the $20 billion announcement, the then Chinese President Hu Jintao said the loans would go to infrastructure, agriculture and manufacturing projects, as well as the development of small and medium-sized businesses throughout the continent.

A number of DEALS

Since the announcement, CDB has agreed to a number of deals, including $1.1 billion to Nigeria to build roads, airport terminals in four cities, and a light-rail line for Abuja and loans to South Sudan and Sudan of $8 billion and $1.5 billion, respectively.

Also it has advanced $350 million to construct a highway in Uganda while there are other deals in Kenya and Rwanda. There is also the $5 billion to Transnet – South Africa’s state-owned ports and rail operator – to support infrastructure development.

In August this year, immediately after China’s interbank lending markets showed severe signs of distress, resulting in direct injections by the PBoC, policy banks announced a $700 million airport and shopping complex in Sudan, $100 million in credit and a $500 million airport in Nigeria.

“Despite the price discovery process under way in China, it seems that China’s policy banks still have capital for African projects. We believe Beijing will meet its commitment to allocate $20 billion to Africa by the end 2015,” Freemantle adds.

In March, while addressing an audience in Tanzania, Chinese President Xi Jinping referred to Africa as a “continent of hope and promise”.

Such platitudes are custom, forming the crux of the Sino-African script Beijing has been crafting for many years. Yet, in the same speech, President Xi was far more candid than his predecessor, acknowledging that the relationship faces strains:

“China frankly faces up to the new circumstances and new problems in Sino-African relations,” and “will continue to work alongside African countries to take practical measures to appropriately solve problems in trade and economic co-operation so that African countries gain more from that co-operation.”

More nuanced approach

Critical to this more nuanced approach will be the extension of Beijing’s “soft power” in Africa, delivered through the extension of loans.

CDB has championed the model where lines of credit are secured by future revenue from resources, which are sold to Chinese companies.

Basically, the commodity-backed loan includes two parts: an agreement over the loan itself and over the sale of resources — mostly energy.

Even though the commodity is purchased at the market price prevailing at the time of purchase rather than some pre-established price, the supply is locked in.

The Western Corridor Gas Infrastructure Project in Ghana illustrates this.

In 2011, Ghana’s Ministry of Finance borrowed $3 billion from the CDB for infrastructure development. Ghana gained an offshore processing plant, an onshore trunk pipeline, a petroleum terminal in Takoradi and the Tema Oil Refinery.

The end goal: a natural gas-to-liquid plant linked to transport infrastructure.

Through its subsidiary, Unipeck Asia Company Ltd, Chinese conglomerate Sinopec managed to guarantee the purchase of 13,000 barrels per day of crude oil.

“We expect loans to Chinese companies with ambitions in Africa to remain elevated and Chinese loans to African government entities against future commodity-related revenue streams to continue,” Freemantle said, in a research note released last week.

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