The International Operations and Future Governanceof China Development Bank
Eiichi Sekine
Senior Analyst,
Nomura Institute of Capital Markets Research

I.

China Development Bank's expansion of its international
operations in 2009

China Development Bank (CDB), which is one of China's policy banks, has beensteadily expanding its international operations1 in recent years. However, in 2009 thisrate of expansion increased more than in any other year thus far. As of end-2009, CDB
had $97.9 billion in foreign currency loans, which are mainly used to facilitate
Chinese companies' international operations and exports of plant and equipment,
outstanding, more than either China Export-Import Bank, a government agency thatspecializes in lending to overseas borrowers, or China Export & Credit Insurance
Corporation (SINOSURE), a government agency that insures outward trade andinvestment (Figure 1).
One of the distinctive features of CDB's international operations is its loans fordeveloping overseas resources on condition that these resources are exported to China.
In 2009 it made loans for oil totaling $47 billion to Russia ($25 billion), Brazil ($10billion), Venezuela ($8 billion) and Turkmenistan ($4 billion).
Another is its efforts to step up its operations in Africa. In November 2009, CDB
opened a representative office in Cairo. In the same year it also made available a $1
billion line of credit to foster African SMEs. Furthermore, the China-Africa
Development Fund (CADFund) established by CDB opened a representative office inJohannesburg in March 2009 and a similar office in Addis Ababa in March 2010. Asof end-May 2010 the Fund, which has a target size of $5 billion to be reached inphases, with first-phase funding of $1 billion provided by CDB, had financed a totalof 30 projects in the amount of $800 million since its inception in June 2007 and acted
as a catalyst for more than $3 billion of investment in Africa by Chinese companies.

1

See Sekine, Eiichi, "Chuumoku o Atsumeru Chuugoku Kaigin no Kokusaigyoumu" (China
Development Bank's International Operations in the Limelight), Kikan Chuugoku Shihon
Shijou Kenkyuu, 2007 Autumn edition, Tokyo Club Foundation for Global Studies (inJapanese).

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Nomura Journal of Capital Markets Autumn 2010 Vol.2 No.2

Figure 1: Scale of operations of China's government-backed financial institutions($100mn)
1,400
CDB

1,200

China Exim Bank (outstanding loans)
1,000

SINOSURE (insurance underwritten)

800
600
400
200
0
2002

2003

2004

2005

2006

2007

2008

2009
(CY)

Notes: 1. For CDB we have included only outstanding foreign currency loans attributable to its
international operations.
2. Data for China Exim Bank are total RMB loans outstanding at the end of each fiscal
year and converted to US dollars at the rate obtaining at the end of each calendar
year.
Source: Nomura Institute of Capital Markets Research, based on data from CDB, China Exim
Bank, and SINOSURE

Yet another of CDB's distinctive features is its efforts to step up its operations in
Asia. In July 2009, CDB upgraded its Hong Kong representative office, opened in
1999, to a branch, which was awarded a full banking license. CDB first issued RMB
bonds in Hong Kong in 2007 and has been instrumental in developing an offshore
RMB market there.
As of end-2009, CDB's international operations covered 78 countries andterritories, and are generally regarded as a joint effort by both the public and private
sector. However, the exact relationship between the Chinese government, CDB and
Chinese companies in this effort is not clear. Neither is how the Chinese governmentorganizes its part of the effort. In the next section we therefore consider the reasonsfor CDB's establishment and its relationship with the Chinese government. We also
examine the Chinese government's internal process for deciding matters related to
CDB's international operations. We then consider some of the quantitative andqualitative aspects of CDB's operations and the challenges it faces. We also briefly
examine its privatization in 2008. Finally, we consider some of CDB's newer
international operations and the direction it is likely to take as well as its relationshipwith Japan.

The International Operations and Future Governance of China Development Bank

2

II. CDB's establishment, management and its relationship with
the Chinese government
1. CDB's establishment and role
1) Establishment process and three principles of management
In the early 1990s China reformed its fiscal and financial systems, with the banks
becoming either policy banks or commercial banks. This was because allowing thefour major state-run banks that were established in the 1980s to continue to operate aspolicy banks was one of the factors that led to rampant inflation from 1992 onwards.
As a result of these reforms, the existing state-run banks became state-owned
commercial banks while public sector lending became the preserve of three newly
created policy banks: CDB, China Exim Bank, and Agricultural Development Bank of
China.
With regard to CDB, on 17 March 1994 China's State Council issued a directive on
establishing the bank together with draft proposals for its establishment andmanagement as well as articles of incorporation. These directives provided that thebank would be a policy bank under the direct control of the State Council with thesame status as a government department and that its governor and deputy governors
would be appointed by the State Council.

2) CDB's initial role
When it was established, CDB's role as a stable long-term source of funds was toraise and attract capital for key national construction projects. CDB's role was seen as
not just covering any investment shortfalls in such projects but also as monitoring
their scale and funding as well as ensuring that investors took such investments
seriously, that a proper risk management system was in place, that investment
efficiency was improved, and that the economy grew steadily and at a high rate but ona sound basis.

3) CDB's relationship with the Chinese government at the time of its
establishment
According to the aforementioned directives of 1994, the relationship between CDB
and the Chinese government is as follows.
First, China's central bank, the People's Bank of China, is responsible forsupervising CDB's financial operations. CDB has to submit its financial statements to
the Ministry of Finance, which is responsible for monitoring and supervising it.
Second, the State Council is responsible for deciding how much CDB can lend
each year and how it can raise the necessary capital.

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Nomura Journal of Capital Markets Autumn 2010 Vol.2 No.2

Third, eligible projects have to be approved by the State Planning Commission(now the State Development and Reform Commission), the State Economic and Trade
Commission2 (as it was then), and the Ministry of Finance. Interest rates and interest
rate subsidies have to be approved by the People's Bank of China, the State Planning
Commission, the State Economic and Trade Commission, and the Ministry of Finance.
The Ministry of Finance is responsible for the budget for interest rate subsidies, which
it monitors and disburses.
Fourth, annual (domestic) issuance of bank debentures by CDB has to be approvedby the People's Bank of China and the State Planning Commission.
The aforementioned directives envisage that CDB will have the same status asother government departments in terms of organizational and personnel structure andwill be run according to the three principles of (1) financial independence, (2)managerial autonomy, and (3) symmetry of powers and responsibilities. In practice,
however, CDB is subject to the control and supervision of a number of government
departments, including the State Planning Commission, which is responsible forplanning key national construction projects, the State Economic and Trade
Commission, which is responsible for industrial policy, the People's Bank of China,
which is responsible for monetary policy, and the Ministry of Finance, which is
responsible for managing the public purse, including interest rate subsidies.

2. Status of CDB's international operations
1) Views at the time of CDB's establishment
When CDB was established, its articles of incorporation envisaged that its
international operations would consist of (1) acting as the point of contact for soft
loans from international financial organizations and overseas governments (to berelent by CDB to domestic companies), (2) issuing bonds overseas with the approvalof the Chinese government, and (3) borrowing at commercial rates from overseas aspart of the Chinese government's plans to encourage inward investment. In otherwords, foreign capital was to be used purely to assist key national construction
projects in China itself. Also, all CDB's foreign capital was raised by its International
Finance Department.

2) Reasons why CDB began to assist Chinese companies' overseas expansion
CDB began to list the companies whose overseas expansion it assisted in its annual
report for 2004. The report emphasizes (1) that many Chinese companies are eager todevelop overseas markets and the opportunities they present, (2) that these projects
2

China's State Economic and Trade Commission was demerged in 2003, with its
responsibility for industrial policy and SME policy going to the State Development andReform Commission, responsibility for trade going to the Ministry of Commerce, andresponsibility for controlling and supervising state-owned enterprises being transferred to
the newly established State-owned Assets Supervision and Administration Commission(of the State Council) (SASAC).

The International Operations and Future Governance of China Development Bank4

tend to be risky and capital-intensive and therefore unattractive to commercial banks,and (3) that CDB has a role to play with its massive capital resources and credit risk
management know-how, and states that CDB's senior management made the strategic
decision to help Chinese companies expand overseas.

3. Establishing a scheme for lending especially to Chinese companies expanding
overseas
1) CDB establishes a scheme to help Chinese companies expand overseas
A year later, in 2005, the Chinese government revealed how it expected CDB to
help Chinese companies expand overseas. On 25 September of that year, the State
Development and Reform Commission and CDB issued a joint Notice of National
Development and Reform Commission and China Development Bank about theRelevant Issues on Providing More Financing Support to Key Overseas-invested
Projects. What this meant was that, in line with the policy of the 16th National
Congress adopted in November 2002 to help Chinese companies expand overseas, ascheme was established to lend funds to Chinese companies to enable them to invest
overseas and CDB was required to allocate a certain proportion of its equity
investments and loans to this purpose3.

2) Eligible projects
Four types of project were deemed eligible for these loans: (1) projects to develop
natural resources in relatively short supply in China; (2) overseas production andbasic infrastructure projects aimed at fostering the export of Chinese technology,
goods and equipment or Chinese manpower; (3) overseas R&D center projects using
advanced overseas technology, management skills and skilled manpower; and (4)mergers with and acquisitions of overseas companies in order to make Chinesecompanies more competitive and better able to capture a share of overseas markets.

3) Process from loan application to decision on terms of loan
The loan application process is as follows (Figure 2). First, CDB and the State
Development and Reform Commission draw up a joint annual plan to help Chinesecompanies raise capital for key overseas projects. Second, CDB uses this plan toconsider loan applications from Chinese companies and issues a certificate for those it
approves. Third, companies submit an application to the State Development andReform Commission or their provincial Development and Reform Commission, towhich they append the loan approval certificate from CDB. Fourth, the State
Development and Reform Commission or the provincial Development and Reform
3

Prior to these directives, on 27 October 2004, the State Development and Reform
Commission (SDRC) and China Exim Bank issued a directive on supporting Chinesecompanies seeking to expand overseas.

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Nomura Journal of Capital Markets Autumn 2010 Vol.2 No.2

Figure 2: Organizations involved in lending to Chinese companies
expanding overseasState Council
CIC

Ministry of Finance(shareholder)(shareholder)

Central Huijin
Equitystake(shareholder) Equity
stake

Equity stakeCDB

CDB Capital

People's Bank of China(monetary policy)

CBRC(banking regulator)

SDRC(investment oversight)

Joint operation

Funds

Loan application/approval

Investment projects

SASAC
Organization
Department, CCCPC

Feasibility study application

Chinese companies
Company
oversight
Appointment ofsenior management

Feasibility study
approval

Approval to set up new company

Ministry of Commerce
Application to
set up newcompany

Notes: 1. CDB was privatized on 11 December 2008.
2. "Chinese companies" refers to enterprises controlled by the central government.
3. "Organization Department, CCCPC" is the Organization Department of the Communist
Party of China Central Committee.
Source: Nomura Institute of Capital Markets Research, from various sources

Commission considers the merits of each project and sends an approval form or
registration form to CDB, which makes a final decision on the terms of the loan.
The State Development and Reform Commission therefore has the authority tomonitor overseas projects carried out by Chinese companies and to control thefinancing of key projects both at home and abroad through its involvement in CDB's
loan application process. However, CDB screens applications at the initial stage
before the State Development and Reform Commission becomes involved. In thisconnection it is perhaps worth mentioning that the Commission lists the projects it has
approved on its website4.

4) CDB's relationship with other government departments
In its international operations CDB has connections with other government
departments besides the State Development and Reform Commission.
First, all of CDB's operations, including its international operations, are controlled
and supervised by the People's Bank of China, which is responsible for monetary
policy, and the China Banking Regulatory Commission (CBRC), which is responsible
for regulating the banks. Also, since CDB was privatized in December 2008 (see4

See http://wzs.ndrc.gov.cn/jwtz/default.htm.

The International Operations and Future Governance of China Development Bank

6

below), the Ministry of Finance and Central Huijin Investment (a subsidiary of
China's sovereign wealth fund, CIC) have a say in CDB's key decisions by virtue ofbeing shareholders.
Second, Chinese companies seeking to expand overseas need to obtain theapproval of the Ministry of Commerce to establish an overseas subsidiary. Where thecompany concerned is a state-owned enterprise, it is the State-owned Assets
Supervision and Administration Commission (of the State Council) (SASAC) that is
responsible for monitoring its operations and the Organization Department of theCommunist Party of China Central Committee that is responsible for appointing
senior managers.
Third, on 9 December 2005 the Ministry of Finance and the Ministry of Commerceissued Measures for the Administration of Special Funds for Foreign Economic andTechnical Cooperation and set up a special fund to provide subsidies and interest rate
subsidies for Chinese companies engaged in economic and technical cooperation(including overseas investment). This was not targeted solely at CDB's lending
operations. The areas eligible are reviewed each year.

5) CDB's other operations
The above notice not only permits CDB to lend to Chinese companies expanding
overseas but also to engage in other, related activities.
The first (in addition to taking equity stakes in key overseas projects) is to offer
large long-term loans. The second is to cooperate with international financial
institutions and global companies to originate international syndicated loans andoverseas loans as a way of raising capital jointly and providing financial assistance.
The third is to provide sector analyses and risk analyses of basic infrastructure andbasic/key industries. The fourth is to provide letters of credit for projects and financial
services related to overseas payments. The fifth is to offer derivatives to enable
companies to manage exchange and interest rate risks.
In other words, these measures gave CDB a seal of approval not only to lendmoney from the Chinese government to Chinese companies expanding overseas but
also to engage in related activities.

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Nomura Journal of Capital Markets Autumn 2010 Vol.2 No.2

III. Quantitative and qualitative aspects of CDB's operations
1. CDB's lending operations
1) Lending operations versus investment banking operations
As a result of the above changes, CDB's operations now consist of its (1) (domestic
and overseas) lending operations and its (2) investment banking operations (bondunderwriting, mergers and acquisitions, fund participation, equity investment andasset securitization). Its lending operations consist of (1) soft loans (long-term
preferential loans backed by the borrower's registered capital) and (2) hard loans(funded by bonds issued either in China or overseas).

2) Size of CDB's loans
According to CDB's annual reports, which are available on the Internet for as far
back as 1999, its outstanding loans have increased from RMB648.4 billion at end1999 to RMB3,708.4 billion at end-2009, an increase of 470% (Figure 3). The amountand rate of increase of its loans are clearly much greater than those of China's twoother policy banks.
CDB can finance state policy-based projects that fall into the following three
categories: basic infrastructure, basic industries, and pillar (i.e., core) industries. As of
end-2009, its outstanding loans (in descending order of amount) were to the following
categories: basic public infrastructure (RMB1,119.6 billion, 30.2% of total), roads
Figure 3: CDB's loans outstanding(RMB100mn)
40,00035,00030,00025,00020,00015,00010,000
5,000
0
1999

2000

CDB

Source:

2001

2002

2003

China Exim Bank

2004

2005

2006

2007

2008

2009

(CY)

Agricultural Development Bank of China

Nomura Institute of Capital Markets Research, from annual reports of banks
concerned

The International Operations and Future Governance of China Development Bank

8

Figure 4: CDB's loan categories (as of end-2009)(RMB100mn)
Electric power

4,769

Roads

7,061
1,250

Railways
Petroleum andpetrochemicals

3,308

Coal

441

Post andcommunications

604

Agriculture andrelated industries

749

Public infrastructure

11,196
7,706

Other
0

Source:

2,000

4,000

6,000

8,000

10,00012,000Nomura Institute of Capital Markets Research, from CDB, Annual Report for 2009

(RMB706.1 billion, 19.0%), and electric power RMB476.9 billion, 12.9%} (Figure 4).
Although it is not clear what the category "Other" refers to, it may include overseas
loans (e.g., for developing natural resources). Since 2004, CDB has listed its maininternational operations in its annual reports (Figure 5).

3) Increase in number of young staff and in number of those with higher
degrees
As we have seen, CDB's domestic and overseas loan portfolios have both been
expanding rapidly. In order to keep pace, CDB has been increasing the number of its
staff. This has increased from 3,056 (as of end-2003) to 6,221 (as of end-2008). The
increase in the number of young staff has been particularly marked. As of end-2008
3,694 (or 59%) of its staff were aged 35 or less (Figure 6).
The number of staff with higher degrees has also been increasing. The increase in
the number with MAs has been particularly marked, with 2,584 (or 42% of CDB's
staff) now having that qualification (Figure 7).
We think both these factors have probably contributed to the expansion of CDB's
operations. CDB's staff totaled 6,711 as of end-2009, and it has been reported that
CDB plans to review its staff training program for 2010–2015 and invest moreresources in this area5.
5China Securities Journal, 2 June 2010.

9

Nomura Journal of Capital Markets Autumn 2010 Vol.2 No.2

Figure 5: CDB projects (2004–09)
Year Country/region

Project

Details
CDB supported Chinese companies seeking to expand overseas, approving loans worth$780 million in 2004. These companies included China National Petroleum Company(CNPC), China Petroleum & Chemical Corporation (Sinopec), China Minmetals
Corporation (CMC), CITIC Group, China Metallurgical Group Corporation (MCC), andChina Construction Group.
CDB actively supported investment in and the development of overseas oil and mineral
resources by Chinese companies, including CNPC, Sinopec, Sinochem, MCC, and CMC.
It also proposed that five banks from the five member nations of the Shanghai
Cooperation Organization (SCO) (namely, CDB itself, the Kazakhstan Development Bank,
Russia's Vnesheconombank, the Tajikistan State Savings Bank, and the National Bank
for Foreign Economic Activity of Uzbekistan) cooperate in order to promote economic
and investment cooperation among members. As a result of its efforts, the five banks
came together to form an association. On 26 October 2005, at the fourth session of the
SCO, held in Moscow, the five banks signed a memorandum of understanding to form theSCO Interbank Association, chaired by CDB Chairman Chen Yuan.

Kazakhstan

CITIC's purchase of
Nations Energy's
stake in Kazakh oil
and natural gas
resources

CITIC's purchase of Nations Energy's stake in Kazakh oil and natural gas resources wasa major development in China's outward investment policy. CDB provided invaluable
support for the acquisition by authorizing a loan of $1.8–2.57 billion, $1.71 billion of which
had already been disbursed by December 2006. The success of the project helped towiden the area of cooperation between China and Kazakhstan as well as helping todiversify the range of energy projects in which Chinese companies could cooperate with
their Kazakh counterparts. It also strengthened economic ties between the twocountries.

Chile

Joint development CDB supports joint development of copper resources by CMC and Chile's CODELCO.
of copper resources CMC is due to take delivery of 836,250 tonnes of copper from Chile over the next 15
by CMC and Chile's years. The cooperation between the two nations in the development of Chile's copper
resources is an event of historical importance. Investment in the project will total $2.0
CODELCObillion. CDB acted as arranger, lead manager, agent and financing agent, draw up thefinancing plan and lent the project $330 million.

FranceSinochem, one of China's leading chemical companies, acquired a 100% stake in the
Sinochem's
acquisition of foreign French company Adisseo in what was the first successful example of M&A in thetechnological know- Chinese chemical industry. CDB lent Sinochem €340 million of the €400 million
howacquisition costs and guaranteed that the project would be completed by 17 January
2006. It enabled Sinochem to achieve its aim of acquiring production technology andraising the standard of China's chemical industry so that it would be able to increase its
share of the international market. The project's success helped China's methionine
industry to develop rapidly and should eventually help to solve China's "three ruralissues."Australia

CDB helps CITIC
Pacific to acquire
magnetite mining
rights in Western
Australia

This was the first overseas project in which a Chinese company acquired all the mining
rights. This enabled China to strengthen its position in the iron ore market and also
served as an example to other Chinese companies of how they could acquire a foreigncompany. CDB authorized more than $3.0 billion in loans for the first and second phasesof the project, in which CITIC Pacific will build the infrastructure for a 2.0 billion tonne
magnetite iron ore mine, from which it will then extract the ore.

United Kingdom Stake in Barclays
Bank

CDB's £1.45 billion stake in Barclays Bank was an important step in CDB's privatization.
Barclays allowed CDB to benefit from its management expertise, technology, andtraining. For its part, CDB helped Barclays to diversify and to implement its strategy of
becoming a leading global bank. The two banks cooperated in the fields of asset
management, commodity trading, client sharing, and African operations.

2004

-

2005

-

2006

2007

BrazilThe Candiota coal-fired power plant was the first project resulting from the framework
Second phase of
Candiota coal-fired for cooperation between the two countries. The plant will generate 350MW of electricity,
power plant in Brazil and CDB has committed itself to lend $430 million.

Central Asia

Central Asia natural The Central Asia natural gas pipeline is an important means of transporting Chinese
gas pipeline
imports of natural gas. 1,800km long, the pipeline will have a capacity of 30 billion cubic
meters of natural gas a year. Loans for the project will total $11.0 billion, $8.1 billion ofwhich will be from CDB.
Main projects: expansion of telecom network involving Chinese companies Huawei andZTE and Indian company Reliance Industries ($750 million loan); Sino-Russian oil
cooperation ($25 billion loan); Sino-Brazilian oil cooperation ($10 billion loan); coal-fired
power plant in Indonesia ($1.05 billion loan); renminbi loan to Kyrgyzstan (RMB13 million);
cotton cultivation and processing in Malawi ($34.72 million investment via CADFund).

2008

2009

-

Source:Nomura Institute of Capital Markets Research, from CDB annual reports

The International Operations and Future Governance of China Development Bank

10

Figure 6: Age structure of workforce (number, breakdown)(Number of people)
100%

4,000
3,694
3,500

49

51

57

59

26

24

16

17

2007

2008 (CY)

60%
1,630

2,137

1,707
1,444

1,500
1,000

47

53

2,386

2,500
2,000

80%

3,051

3,000

1,320

1,178

1,394

500

470

40%

1,488

32

30

31

31

956

1,039
878

747

881

20%

866

21

19

2004

2005

15

20

0%

0
2003

2004

2005

2006

46 or older

Source:

2007

36–45

2003

2008 (CY)

35 or younger

46 or older

2006
36–45

35 or younger

Nomura Institute of Capital Markets Research, from China Financial Yearbook foreach year concerned

Figure 7: Educational qualifications of workforce (number, breakdown)(Number of people)
3,500

100%
90%

3,000

2,923
2,531

2,500

2,193

2,192

2,040

4

6
17

15

14

80%
70%

50%

1,439

3
7

3
6

48

47

40

42

51

60%

1,500

10

13

2,584
2,128

1,799

2,000

4

56

59

47

40%
1,040
822

1,000
634

30%
809

510

500
0

117463
43

203

2003

2004

602
65

57

2005

PhD
BA
Senior high school

Source:

104

416

354

344

186

154

211
159

2006

144
2007

20%
10%

2008 (CY)

0%

33
23

21

22

1

2

1

2

3

2003

2004

2005

2006

2007

MA
Junior college

PhD

MA

BA

Junior college

32008 (CY)

Senior high school

Nomura Institute of Capital Markets Research, from China Financial Yearbook foreach year concerned

2. Qualitative aspects of CDB's operations
1) Capital increases
In order to maintain financial stability while expanding its operations, CDB has
had to increase its capitalization over the past four years while taking on new staff. In
particular, its equity capital increased from RMB50 billion as of end-2006 to
RMB196.1bn as of end-2007 as a result of a RMB146.1bn injection of public funds.
When CDB was privatized on 11 December 2008, it underwent a capital restructuringthat increased its equity capital to RMB300.0 billion as a result of a RMB103.9bn
injection.

11 Nomura Journal of Capital Markets Autumn 2010 Vol.2 No.2

Figure 8: Governance structure of CDB since privatization

Committee for Strategic
Development and Investment
Management

Shareholders' Meeting

Board of Directors

Audit Committee

Risk Management Committee

Management

Board of Supervisors

Committee forSupervision of Financial
and Internal Controls

Committee forSupervision of Business
Activities

Committee for Supervision ofRelated-party Transactions

Personnel and Remuneration
Committee

Source:Nomura Institute of Capital Markets Research, from CDB data

The capital injection at the end of 2007 was actually funded by China's foreignexchange reserves. In December 2003 CDB was given a $20.0 billion capital injection
by Central Huijin Investment Ltd ("Central Huijin"), which had been set up as avehicle for injecting public money into Chinese financial institutions.
CDB's privatization was carried out in line with the decision by the Financial Work
Conference convened by the CPC Central Committee and State Council in 2007 toreform the country's three policy banks. The decision to reform the three policy banks
is reported to have been the result of (1) a gradual shift of emphasis in the banks'
operations from the implementation of government policy to the pursuit ofcommercial objectives, (2) the need to implement government policy in new areas,and (3) problems concerning the role of the policy banks, governance, risk control,
incentive mechanisms, and regulation (People's Bank of China, China Financial
Stability Report 2009). As a result of being privatized, CDB went from being afinancial institution under the direct control of the State Council to being a joint-stockcompany under the control of its shareholders: namely, the Ministry of Finance (witha 51.3% share) and Central Huijin (with a 48.7% share). At the same time, CDB was
reorganized along lines more in keeping with a joint-stock company, with a Board ofSupervisors being set up under the General Shareholders' Meeting to supervise thebank's operations, while various independent committees were set up to discussmatters of strategic importance (Figure 8).

2) Need to improve return on assets and return on equity
As a result of recapitalizing, CDB's capital adequacy ratio, which had declined to
8.05% in 2006, rose to 12.77% in 2007 only to decline again in 2008 (by 1.46

The International Operations and Future Governance of China Development Bank

12

Figure 9: CDB: key business indicators
25%

20%

17.68%

19.15%

19.19%
15.97%

15%

12.77%
10.50%
9.15%

10%

11.31%

8.05%

11.83%
8.76%

5.97%

5%
1.22%
1.18%

0.81%

1.31%

0.72%

1.32%

0.59%

1.11%

0.96%

0.62%

0%
2004

2005

Capital adequacy ratio

Note:
Source:

2006

2007

Nonperforming loan ratio

2008
ROA

0.94%
0.76%
2009 (CY）ROE

Data are on a consolidated basis.
Nomura Institute of Capital Markets Research, from CDB data

percentage points) to 11.31% (Figure 9). We think this was because CDB expanded its
loan portfolio following the Chinese government's announcement in November 2008of a RMB4 trillion economic stimulus package. In 2009 CDB's capital adequacy ratio
improved slightly to 11.83%.
In 2009 CDB's net profit recovered sharply to RMB31.9 billion from RMB20.8
billion in 2008. CDB's return on assets declined to 1.11% in 2007 from 1.32% in 2006
and to 0.62% in 2008. CDB's return on equity declined to 15.97% in 2007 from
19.19% in 2006 and to 5.97% in 2008. Since then, its return on assets has improved to
0.76% in 2009 and its return on equity to 8.76%.
CDB's nonperforming loan ratio rose to 0.96% in 2008 from 0.59% in 2007 but
improved slightly to 0.94% in 2009.

3) CDB also needs to make its international operations more profitable
In notes to its 2008 annual report CDB provides a geographical breakdown of its
segment data (Figure 10). According to this information, (1) most of CDB's assets are
in China's eastern provinces; (2) CDB's operating expenses on its international
operations exceed its interest income, leaving it with a pre-tax loss; and, as a result,(3) CDB's (profitable) domestic operations have been subsidizing its (unprofitable)international operations.
As we have seen from the low level of CDB's nonperforming loan ratio, thestandard of CDB's due diligence and credit control is also highly rated in China, and it

13 Nomura Journal of Capital Markets Autumn 2010 Vol.2 No.2

Figure 10: Extracts from CDB's consolidated income statement (for 2008)

Interest income
Interest expense
Net interest income
Fee and commission income
Fee and commission expense
Net fee and commission income
Other income and expenditure, net
Operating expenses
Nonoperating income and expenditure, net
Gross profit

Source:Eastern
China
175,000-120,861
54,139
2,384
-109
2,275
-3,846-28,739
5,132
28,961

CentralChina
42,874-29,857
13,017
861
-11
850
19
-5,241-6
8,639(RMBmn)Western
OutsideChinamainland China
45,282
52-28,588
16,694
52
1,060
-21
1,039
26
381
-15,065-12,771-18
2,676-12,338

Nomura Institute of Capital Markets Research, from CDB data

will be interesting to see how CDB goes about improving the quality of its operations,especially the profitability of its international operations.

IV. Outlook for CDB's international operations
1. CDB's involvement in fund management and its establishment of a fundmanagement company
When CDB was established in 1994, there was much interest in what would
happen to China's existing national specialized investment corporations. In otherwords, the question was what would happen to the six investment companies that had
been responsible for investing in China's key national projects and key companies.
Eventually, the six companies were restructured and amalgamated as the State
Development & Investment Corporation (SDIC), which is now under the control of
CDB.
A few years later, on 31 August 2009, CDB Capital was established with aregistered capital of RMB35.0 billion. Its role was to engage in private equity
investment, direct investment, investment consulting, and advising clients on mergers
and acquisitions (Figure 2). We think this development was probably the result of
CDB's privatization in 2008 and the need to separate its commercial and investmentbanking functions in order to avoid a conflict of interests. As a result of this hiving off
of CDB's fund management activities, CDB's nonfinancial assets were transferred to
CDB Capital. The overseas assets consisted of the China-Africa Development Fund(CADFund), the China-Belgium Direct Investment Fund, the China-ASEAN
Investment Cooperation Fund, and the China-Italy Mandarin Fund, while thedomestic assets consisted of the Bohai Industrial Fund as well as stakes in companies
such as Aluminum Corporation of China, Jinchuan Group, Jincheng Anthracite
Mining Group, and Tianjin Eco-City.

The International Operations and Future Governance of China Development Bank

14

Furthermore, on 9 March 2010, CDB Caofeidian Investment Company wasestablished to develop Caofeidian in the Binhai New Area now under development on
the outskirts of Tianjin. The new company has a registered capital of RMB1 billion,
RMB300 million of which is CDB Capital's share.
The use of such funds to assist Chinese companies both at home and abroad, but
especially to expand overseas, is a key element of CDB's international operations.
Indeed, CDB's overseas funds could even be regarded as its overseas arms.
In addition, CDB has set up a number of financial leasing companies, which canalso be regarded as overseas arms. To be more precise, CDB restructured Shenzhen
Financial Leasing Company (founded in December 1984) in May 2008 and set up
CDB Leasing in cooperation with HNA Group and Xi'an Aircraft Industry Group inorder to provide financial support for leasing aircraft from overseas.

2. Relationship between CDB's privatization and its international operations
In this section we discuss the relationship between CDB's international operations(see above) and its privatization. CDB's privatization was approved by the StateCouncil in the form of two proposals, neither of which has been published. Also, a
general meeting was held on 1 December 2008 in the run-up to privatization to
discuss CDB's new articles of incorporation. However, this has not been published,either.
As the aforementioned policies of the People's Bank of China on the reform of thecountry's policy banks give only a general indication of why CDB was privatized, we
have to draw our own conclusions from related information and how CDB's
international operations have actually developed. Although the original aim was not tobecome either just a commercial bank or an investment bank, we imagine that, byengaging in commercial banking, CDB intended to (1) provide a service suited to thedifferent levels of development of the coastal regions and the interior, (2) provide newservices such as financial assistance to Chinese companies looking to expand overseas,and (3) determine its own future as a joint stock company, albeit subject togovernment control and supervision. CDB's then president, Chen Yuan, described
CDB's new role as "development financing" and presumably steered CDB's
commercial and investment banking operations in that direction. CDB's decision, in
2007, to take a stake in Barclays Bank can also be seen as an attempt to acquirecommercial and investment banking know-how 6 . This expansion of CDB's
international operations can be seen as part of CDB's efforts to promote development
financing, and, ever since it set up a new loan facility in 2005 in coordination with theState Development and Reform Commission, CDB's reputation with Chinesecompanies has grown along with the size of its international loans.

6

CDB has acquired Aviation Securities (established in December 2003) with the approvalof the China Banking Regulatory Commission (CBRC) and China Securities Regulatory
Commission (CSRC), and intends to relaunch the company as a wholly owned subsidiary,
CDB Securities.

15 Nomura Journal of Capital Markets Autumn 2010 Vol.2 No.2

At the same time, however, and as a result of the global financial crisis thatdeepened in 2008, perceptions of CDB's role within China itself have been reported ashaving changed, with signs that some have begun to call for CDB to return to its
traditional role as a policy bank7. Moreover, some Chinese researchers have argued
that not all the functions of a policy bank can be performed by a purely commercialbank, and some of these views can be seen on CDB's website8. CDB's chairman, Chen
Yuan, has described CDB's business strategy as a trinity consisting of "two basics andone pillar" (i.e., basic infrastructure, basic industries, and pillar industries), basic
finance, and international cooperation. In particular, basic finance consists of lending
the funds to build the infrastructure needed in rural villages, small business loans,mortgages for medium- and low-income families, and student loans. The fact that
CDB's operations expanded to include public welfare as a result of the global
financial crisis has obscured the reasons for and objectives of the privatization that
CDB had worked towards since before the financial crisis began.
When Chen Yuan became president of CDB in 1998, he helped to bolster the
Chinese economy, which had been hit by the Asian currency crisis in 1997, incoordination with the government's stimulus measures and has again endeavored tomake the most of CDB's resources during the recent global financial crisis. He is also
a deputy governor of the People's Bank of China and has a wide network of economic
and financial specialists both at home and abroad. As he is also the son of the late
Chen Yun, one of the founders of the PRC, a former first vice premier and an
authority on economic policy, he is also an influential figure in Chinese politics.
While we cannot rule out the possibility that the moves to transform CDB into acommercial and investment bank as part of its privatization may yet be modified, acomplete reversal of the process is unlikely. Likewise, we cannot see any change in
CDB's efforts to expand its international operations. However, it does face some newchallenges, including what to make of its traditional role as a policy bank and how toachieve both quantity and quality under its new governance.

3. CDB's international operations and Japan
That leaves the question of the future relationship between CDB's international
operations and Japan.
First, we need to understand the direction in which CDB's international operations
are taking CDB. CDB therefore needs to publish enough information about its
operations, including its international operations, to enable outsiders to do this. In
Japan, when a new public-sector financial institution is established, the law governing
it and a detailed description of the activities it may engage in and the rules it must
follow must be enacted and published. In the case of CDB, new articles ofincorporation were enacted after it was privatized (just as they were before).
Publishing such information would enable a comparison with similar Japanese
78“CDB turns away from the path of reform,” November 1 2009, Financial Times
Guo Tianyong, Director of the Research Center of the Chinese Banking Industry, Central
University of Finance and Economics, Beijing

The International Operations and Future Governance of China Development Bank16

institutions. Moreover, this would enable those familiar with the experience of suchinstitutions in Japan to pass on this knowledge to their Chinese counterparts,
depending on their needs.
Second, if Chinese companies expand overseas in concert with Japanesecompanies, CDB might finance the Chinese companies while Japanese financial
institutions might finance the Japanese companies. In a world where companies areactive globally, Japanese companies expanding into China may want to sell the
products they produce there to a third country, while Chinese and Japanese companies
may want to market their products jointly in such a country. It might be worthwhile
for Japanese financial institutions to consider developing an investment banking
capability that would cater for such needs in concert with CDB.
Third, CDB itself needs assistance with raising capital. In the past, CDB has issued
global bonds. However, in future, it might want to raise fresh capital on international
financial markets to finance the expansion of its international operations. Furthermore,
if foreign investors were given access to China's interbank bond market, they would
be able to buy directly any bonds issued by CDB. Also, CDB might have to raise
capital not by issuing bonds but by issuing new stock in order to boost its capital
adequacy ratio. In such a situation, we can imagine that it might want to offer stock to
strategic overseas investors with the potential for synergies in its international
operations. Whether or not CDB needed to issue bonds or stock, Japanese financial
institutions, which know the situation in neighboring China better than institutions inother countries, are—indeed, have to remain—reliable partners. As we have seen,
CDB has scope for cooperating with such institutions in its drive to improve staff
training.
CDB's international operations and governance are also important because of thepotential for such tie-ups with Japanese institutions. We will continue to monitor
developments at CDB carefully.

17 Nomura Journal of Capital Markets Autumn 2010 Vol.2 No.2