By Jamil Anderlini

What do China’s military-industrial complex, the Three Gorges Dam, a logging project in the Indonesian rainforest and Barclays Bank all have in common?

They’ve all received investment from China Development Bank, the self-proclaimed largest development institution in the world by assets.

The list of CDB’s investments in China and around the world, its opaque governance structure and its role as a policy tool of the Chinese government might give pause for thought to directors on the Barclays board.

They will soon be sharing a seat at the table with a CDB representative, following the groundbreaking sale to CDB of as much as 7.7 per cent in a Barclays merger with ABN Amro.

According to its mission statement the CDB “strives to become a pioneer, pacesetter and vanguard in the construction of socialist market economic system, in order to propel China’s overall, concerted and sustainable economic and social development”.

Its outstanding loans to large state-owned enterprises and infrastructure projects favoured by Beijing totalled about Rmb2,130bn ($281bn) by the end of June, with 78.6 per cent of these going to infrastructure projects and “the industries of energy, communications, transport and raw materials”.

As part of its role in supporting Beijing’s policy initiatives the bank is also a major source of cheap funding for companies directly linked to the rapidly modernising People’s Liberation Army.

Late last year, CDB granted a Rmb40bn line of credit to China Aviation Industry Corp I, the largest domestic producer of military and civilian aircraft.

The bank even provided special funding to combat the Sars health scare in early 2003. More recently, CDB’s focus has shifted from domestic projects to supporting overseas expansion by the country’s conglomerates, particularly in resources-rich areas of Asia, South America and sub-Saharan Africa and notably in the oil and minerals sector.

Companies like China National Petroleum Corporation, Sinopec and Minmetals are large recipients of generous state-directed loan packages from CDB, as are “national champions” trying to build international brands such as Chery Auto and technology companies Huawei and Lenovo.

Late last year, CDB governor Chen Yuan told the FT that the bank was negotiating to set up a funding mechanism for several projects in Venezuela, a country with a very hostile relationship with the US. The Venezuelan government had earlier said it was preparing a $6bn fund, with $4bn from CDB, to build houses, roads, railways and communications.

Just last month CDB announced the establishment of a $5bn “China Africa Development Fund” to provide cheap funding to Chinese companies investing in Africa, particularly in the oil and minerals sectors.

The fund was billed as “economic assistance” for impoverished African nations but most observers see it as part of China’s strategic goal to secure the natural resources needed to fuel its dirty and wasteful high-speed growth.

In Indonesia, where a large proportion of China’s legal and illegal timber imports come from, the CDB was the intended financial backer for what was touted as the world’s largest palm oil project in one of the world’s most diverse ecological areas on the island of Borneo.

According to Stuart Chapman, spokesman for the World Wide Fund for Nature’s (WWF) Borneo programme, the CDB was reported to have promised a loan of up to $8bn for a palm oil project that was being used as a cover to log large areas of valuable virgin rainforest, home to rare orangutans and pygmy elephants. In fact, the altitude of the planned plantation was too high to support palm oil production and the project was stopped by the Indonesian government.

“As far as we know, CDB agreed to the loans without doing a basic financial feasibility study and without taking into consideration the huge environmental impact of the project,” Mr Chapman said. He said it was not clear if China was the intended beneficiary of the timber that would be cleared to make way for the bogus project. Although its role is to lend to projects encouraged by the state, CDB actually has one of the strongest asset quality and earnings profiles of any Chinese bank, including the large listed commercial banks, according to ratings agencies Fitch and Moody’s.

The fact it is not allowed to take deposits and must raise all its money through local and foreign-currency bond issuance is outweighed by its assets being mostly made up of relatively safe government-backed loans and its extremely low operating costs - the bank has only 36 outlets across China.

At the start of the year Beijing announced its intention to “commercialise” CDB, a policy aim that was part of the stated rationale for the Barclays investment. One analyst who asked not to be named said the most likely goal of “commercialisation” was introducing a proper accountability and governance structure in what is essentially still a government department.

“CDB has quite a similar structure to China itself. Without democracy it depends heavily on the quality of its authoritarian leader,” the analyst said. “If they are capable the country can progress smoothly but if they are evil or incompetent the country will quickly run into trouble.”

CDB’s highest-profile projects

*2005: Lent Rmb4.9bn to the Liaoning provincial government to build housing for people living in temporary shelters.

*March 2005: lent Rmb21.3bn to controversial 50-year South-North Water Diversion project to bring water from China’s wet southern regions to parched north.

*December 2006: Lent Chery Auto Rmb5.8bn to help “going global” strategy aimed at selling cheap cars to developed countries.

*June 2007: Set up a $5bn China-Africa Development Fund.

Copyright Fund China 2008.

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