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Thursday, January 03, 2008

China's SWF Act Again

News about SWFs just don't go away. This time is about CIC's $20 billion capital injection into China's own: China Development Bank (CDB). Another $45 billion is expected to given to Agricultural Bank of China, the weakest among all big state banks. China's ultimate goal is put all these banks onto IPO track. But without clean break from state control and fundamental change of corporate management, these banks are destined to be bailed out again in the future.
 

China Taps Its Cash Hoard To Beef Up Another Bank


Source: WSJ

An injection of $20 billion by China's sovereign-wealth fund into policy lender China Development Bank is the latest example of how the country is using its surplus of cash to beef up the balance sheets of local banks.

The newly formed fund, China Investment Corp., or CIC, has attracted much attention overseas for its high-profile purchase of stakes in U.S. private-equity firm Blackstone Group LP and, two weeks ago, Wall Street firm Morgan Stanley. But the fund, formed from $200 billion of foreign-exchange reserves, has set aside as much money for recapitalizing domestic financial institutions as for overseas investment.

China Development Bank, known as CDB, has also cut a global profile recently. Earlier in 2007, it invested $3 billion in Barclays PLC to help support the British bank's ultimately unsuccessful bid for ABN Amro Holding NV. It has specialized in lending to domestic infrastructure projects and has been a pioneer in developing China's nascent bond markets.

[Balancing Act chart]

Plans for the capital injection into CDB had been in the works since at least last January. Beijing had already dipped into its bulging foreign-exchange reserves, now topping $1.4 trillion, to shore up the books of the country's three biggest listed banks ahead of their initial public offerings. Capital injections into those banks from Central Huijin Investment Co., a government agency that has been incorporated into CIC, totaled about $60 billion.

Now those formerly insolvent state-owned lenders, led by Industrial & Commercial Bank of China Ltd., rank among the world's biggest banks. They have begun to use the massive sums raised by their initial public offerings to expand globally.

Next in line for a huge pre-IPO infusion will be Agricultural Bank of China. CIC is expected to inject about $45 billion to rehabilitate the sprawling state bank and prepare it for an IPO.

China's central bank announced the CDB capital injection in a statement posted Monday on its Web site, saying the infusion will "increase China Development Bank's capital-adequacy ratio, strengthen its ability to prevent risk, and help its bank move toward completely commercialized operations." The move appears timed to ensure CDB can count the fresh capital on its 2007 books.

Formed in 1994, CDB is in some ways a World Bank with Chinese characteristics. It has been molded by the leadership of Chen Yuan, a former central-bank vice governor and son of Chen Yun, who was one of the architects of China's economic overhauls. He has looked to outsiders like former U.S. Federal Reserve Chairman Paul Volcker for advice and asked international auditors to check his bank's books. At the same time he used his bank's money to back major government initiatives like the Three Gorges Dam -- a project the World Bank decided against funding. The bank has been active in lending to Chinese projects abroad, including through a fund it set up to focus on Africa, and in supporting Chinese companies looking to expand overseas.

CDB's capital base has been pinched by continued lending growth without an increase in equity. It doesn't get its funding from deposits by China's 1.3 billion people, instead relying for most of its capital on bond sales -- which have totaled more than two trillion yuan ($274 billion) since its founding.

The bonds represent about one-fifth of the debt securities outstanding on China's financial markets. Internationally, CDB has issued more bonds than any other Chinese institution.

At the end of 2006, the bank said its capital-adequacy ratio slipped by one percentage point to just above 8%, the lowest level Chinese regulators consider safe.

As most of CDB's lending is to government agencies, or projects backed by Beijing, loan losses have tended to be low. Of the 576 billion yuan in loans it disbursed in 2006, nearly 20% went to each of three sectors: power, road and public facilities.

A CDB spokeswoman said the bank had no comment on the injection beyond the central bank's statement.