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China Cleans Up Policy Bank

Posted by: Ihlwan Moon on December 31, 2007

(My Beijing-based colleague Chi-Chu Tschang wrote the following. Respecting China’s tradition, Chi-Chu filed it well before the turn of the year.)

It’s a Chinese tradition to clean house and pay off all debts before the new year begins. So, on the last day of 2007, China announced that the country’s sovereign wealth fund, China Investment Corp., signed a deal with China Development Bank to give the country’s largest policy bank a $20 billion capital asset injection.

Unlike the four other state-owned commercial banks to get a government bailout, China Development Bank was established in 1994 as a policy bank answering directly to China’s cabinet, the State Council. China set up three policy banks at the time to ease the burden of state-owned commercial banks approving loans for government projects, resulting in a mountain of bad loans on their balance sheets. China Development Bank has been one of China’s most aggressive lenders, providing the financial backing for Beijing’s most ambitious infrastructure projects, including the Three Gorges Dam, the South-North Water Transfer Project, and the strategic oil reserves project.

More recently, China Development Bank has started to expand overseas on behalf of the Chinese government to provide loans for infrastructure projects in Africa, Southeast Asia, and South America. In July, China Development Bank invested 2.2 billion euros in Barclays to help the British bank beef up its ultimately failed bid for ABN Amro. Since then, the bank has also been the subject of several false rumors, including the bank would take a stake in Rio Tinto to block BHP Billiton’s merger with the world’s third-largest mining company.

Now that Beijing has finished the heavy lifting of restructuring three out of China’s so-called “Big Four” state-owned commercial banks and China Everbright Bank, it’s turning its attention to transforming the country’s three policy banks into commercial banks and weaning them off the central government’s coffers. Financial mandarins decided to tackle China Development Bank first because it’s actually in relatively good shape, with a non-performing loan ratio of 0.72% as of end-2006, according to the bank’s web site. The asset injection will boost China Development Bank’s capital adequacy ratio just barely above the 8% minimum imposed by Chinese regulators. By comparison, the two other policy banks, China Import-Export Bank and Agricultural Development Bank of China are in a lot worse shape and pose bigger challenges for the Chinese government.

Now all eyes will be focused on the long-awaited bailout of China’s last and most insolvent of the “Big Four” state-owned bank, Agricultural Bank of China. On Dec. 25, CIC Chairman Lou Jiwei said that one-third, or $66.6 billion, of the $200 billion sovereign wealth fund would be used to restructure China Development Bank and Agricultural Bank of China. This suggests that China will spend upwards of $45 billion, or the combined amount it spent to bail out China Construction Bank and Bank of China, to write off Agricultural Bank of China’s mountain of bad loans.

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