By Jamil Anderlini
Published: April 5 2011 16:43 | Last updated: April 5 2011 16:43
These days, when the governor of China Development Bank travels abroad, he is treated almost like a head of state.
Chen Yuan is not only the most senior official at China’s biggest “policy” lender, but also a “princeling”, the son of a founding leader of the Chinese Communist party, which means he wields enormous political clout in Beijing.
In recent years, China’s government has rapidly ramped up its decade-old policy of encouraging domestic companies to “go global”, especially through international mergers and acquisitions. The country’s outbound foreign direct investment reached a total of $220bn in 2006-10, according to government figures. That is close to 10 times the total cumulative $26bn that Chinese companies had invested in 150 countries at any time up to the end of 2005.
Most of the investments abroad have been made by companies owned or controlled by the state, and almost without exception these deals are at least partially funded by generous, low-interest loans from the country’s state banks.
CDB, with Mr Chen at the helm, has been one of the leading providers of loans for companies such as Huawei, PetroChina, Chinalco and many others as they seek to acquire overseas assets.
But China’s largest banks, all of which are supposed to have been “commercialised” and have sold shares to public investors in Shanghai and Hong Kong, are also eager to provide financing for offshore expansion on what bankers say are remarkably easy terms.
For example, when Chinalco, the state-owned Chinese aluminium giant, wanted to double its stake in Rio Tinto, the Anglo-Australian miner, it turned to the state banks and received $21bn in long-term, low-interest loans to pay for its $19.5bn acquisition plan.
The deal ultimately fell through amid stiff public and political opposition in Australia. Concerns about the aims of the Chinese government, and the level to which Beijing was co-ordinating the Rio Tinto purchase for its own strategic reasons, were heightened by the terms of the loans being offered by CDB, the Export-Import Bank of China, Agricultural Bank of China and Bank of China.
Under the terms of the 15-year loans, Chinalco would have been required to pay just 90 basis points, or less than 1 percentage point, above the benchmark six-month Libor, the London interbank lending rate.
Around the same time, BHP Billiton, another Anglo-Australian miner, with a much bigger balance sheet than Chinalco and a market value at the time of about $125bn, was only able to secure a 390-basis-point spread over Libor on a 10-year bond.
The extremely favourable loan terms that Chinese state banks can offer state companies to help them with their offshore acquisitions have become a sore point for many of the international companies trying to compete for those deals. State bank financing flows especially freely to companies – particularly state-owned “national champions” – that are buying overseas companies in the high-tech, energy, mining and environmental protection sectors.
In their annual press conference in early March, top officials from China’s central bank said the bank was “reinforcing credit policy guidance to support balanced regional economic development and [the] ‘going global’ strategy of enterprises”.
In other words, the country’s central bank wields its considerable influence over China’s commercial lenders to force them to provide very cheap financing for state companies scouring the world for acquisition targets to expand the Chinese economic empire.
While the bulk of the country’s nearly $3,000bn in foreign exchange reserves is held in low-yielding US government bonds, Beijing has also been looking at ways of diversifying these reserves and spending more on buying real assets abroad. This could provide a pool of cheap finance far larger than that which the state banks have been able to offer until now.
China Development Bank rarely releases any figures publicly, but some foreign analysts believe it has served as a conduit for some of the foreign exchange reserves to be lent out to state companies expanding abroad.
CDB and the Export-Import Bank of China have, between them, lent more money to developing countries over the past two years than the World Bank, according to Financial Times research.
The two “policy” banks signed loans of at least $110bn to other developing-country governments and companies in 2009-10, compared with the $100.3bn lent by the equivalent arms of the World Bank from mid-2008 to mid-2010.
Many of the agreements include large loan-for-oil deals with countries such as Russia, Venezuela, Brazil and Kazakhstan, and many of the loans are for overseas companies or governments to buy Chinese equipment and products.
CDB has also made numerous loans similar to the $30bn it extended to state-owned China National Petroleum Corp to help it with its buying spree of overseas energy resources.
The Chinese government has increased its support for private companies looking for overseas acquisitions as well, and has promoted the idea of state enterprises teaming up with them to help overcome political opposition in some countries.
“The number of overseas acquisitions by China’s private sector is increasing,” Chen Zongsheng, deputy secretary-general of the government of the northern Chinese city of Tianjin, told a conference last November. “Compared with state-owned enterprises, private companies are more likely to succeed in acquiring foreign assets in some politically sensitive areas.”
But private Chinese companies still have a much harder time securing bank lending or foreign exchange quotas, and often turn to equity or bond markets in places such as Hong Kong, New York or London to raise the money they need to make offshore acquisitions.
They are increasingly also turning to China’s burgeoning private equity industry for funds to help them expand beyond the country’s borders.
It just so happens that CDB has already positioned itself to take advantage of this new trend by establishing a fund of private equity funds that is in the process of raising Rmb60bn ($9bn).
Chen Yuan is not only the most senior official at China’s biggest “policy” lender, but also a “princeling”, the son of a founding leader of the Chinese Communist party, which means he wields enormous political clout in Beijing.
His bank’s role as a substantial source of cheap financing for domestic companies looking to invest overseas makes him a very important man outside the country as well as at home.
Most of the investments abroad have been made by companies owned or controlled by the state, and almost without exception these deals are at least partially funded by generous, low-interest loans from the country’s state banks.
CDB, with Mr Chen at the helm, has been one of the leading providers of loans for companies such as Huawei, PetroChina, Chinalco and many others as they seek to acquire overseas assets.
But China’s largest banks, all of which are supposed to have been “commercialised” and have sold shares to public investors in Shanghai and Hong Kong, are also eager to provide financing for offshore expansion on what bankers say are remarkably easy terms.
For example, when Chinalco, the state-owned Chinese aluminium giant, wanted to double its stake in Rio Tinto, the Anglo-Australian miner, it turned to the state banks and received $21bn in long-term, low-interest loans to pay for its $19.5bn acquisition plan.
The deal ultimately fell through amid stiff public and political opposition in Australia. Concerns about the aims of the Chinese government, and the level to which Beijing was co-ordinating the Rio Tinto purchase for its own strategic reasons, were heightened by the terms of the loans being offered by CDB, the Export-Import Bank of China, Agricultural Bank of China and Bank of China.
Under the terms of the 15-year loans, Chinalco would have been required to pay just 90 basis points, or less than 1 percentage point, above the benchmark six-month Libor, the London interbank lending rate.
Around the same time, BHP Billiton, another Anglo-Australian miner, with a much bigger balance sheet than Chinalco and a market value at the time of about $125bn, was only able to secure a 390-basis-point spread over Libor on a 10-year bond.
The extremely favourable loan terms that Chinese state banks can offer state companies to help them with their offshore acquisitions have become a sore point for many of the international companies trying to compete for those deals. State bank financing flows especially freely to companies – particularly state-owned “national champions” – that are buying overseas companies in the high-tech, energy, mining and environmental protection sectors.
In their annual press conference in early March, top officials from China’s central bank said the bank was “reinforcing credit policy guidance to support balanced regional economic development and [the] ‘going global’ strategy of enterprises”.
In other words, the country’s central bank wields its considerable influence over China’s commercial lenders to force them to provide very cheap financing for state companies scouring the world for acquisition targets to expand the Chinese economic empire.
While the bulk of the country’s nearly $3,000bn in foreign exchange reserves is held in low-yielding US government bonds, Beijing has also been looking at ways of diversifying these reserves and spending more on buying real assets abroad. This could provide a pool of cheap finance far larger than that which the state banks have been able to offer until now.
China Development Bank rarely releases any figures publicly, but some foreign analysts believe it has served as a conduit for some of the foreign exchange reserves to be lent out to state companies expanding abroad.
CDB and the Export-Import Bank of China have, between them, lent more money to developing countries over the past two years than the World Bank, according to Financial Times research.
The two “policy” banks signed loans of at least $110bn to other developing-country governments and companies in 2009-10, compared with the $100.3bn lent by the equivalent arms of the World Bank from mid-2008 to mid-2010.
Many of the agreements include large loan-for-oil deals with countries such as Russia, Venezuela, Brazil and Kazakhstan, and many of the loans are for overseas companies or governments to buy Chinese equipment and products.
CDB has also made numerous loans similar to the $30bn it extended to state-owned China National Petroleum Corp to help it with its buying spree of overseas energy resources.
The Chinese government has increased its support for private companies looking for overseas acquisitions as well, and has promoted the idea of state enterprises teaming up with them to help overcome political opposition in some countries.
“The number of overseas acquisitions by China’s private sector is increasing,” Chen Zongsheng, deputy secretary-general of the government of the northern Chinese city of Tianjin, told a conference last November. “Compared with state-owned enterprises, private companies are more likely to succeed in acquiring foreign assets in some politically sensitive areas.”
But private Chinese companies still have a much harder time securing bank lending or foreign exchange quotas, and often turn to equity or bond markets in places such as Hong Kong, New York or London to raise the money they need to make offshore acquisitions.
They are increasingly also turning to China’s burgeoning private equity industry for funds to help them expand beyond the country’s borders.
It just so happens that CDB has already positioned itself to take advantage of this new trend by establishing a fund of private equity funds that is in the process of raising Rmb60bn ($9bn).
Copyright The Financial Times Limited 2011
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