Under development

What does it mean for CDB’s Chen?

Almost a hundred years ago the Qing Dynasty collapsed and hereditary rule was supposedly consigned to the dustbin of Chinese history.

But fast forward a century and parental and Party connections still seem very important in the path to power. One of the bankers with a claim to the best Party pedigree is Chen Yuan, governor of China Development Bank (CDB) and son of the late Chen Yun, one of the ‘Eight Immortals’ of the Communist Party.

Chen Junior is now in the spotlight since he is tasked with transforming one of the country’s main policy banks – CDB – into a financial powerhouse.

The first step in September 2009 was to establish CDB Finance as the division that will be in charge of direct investments. The next move is the setting up of a securities business through the acquisition of Stockfly Securities, a medium size brokerage in Beijing.

Both these developments follow a couple of significant deals in 2007: the buying of a 3% stake in Barclays Bank and the allocating of $1 billion to launch a China-Africa Development fund.

All this seems a little distant from the bank’s original mandate: CDB was established in 1994 to finance government projects of national significance. But although it remains very much involved in funding things like infrastructure projects, the bank’s aims have now broadened into becoming a diversified financial institution.

The commercialisation of CDB will be somewhat different to similar processes already undertaken by banking peers like Bank of China and ICBC.

Its branch network is tiny compared to its better-known competitors – only 36 outlets, compared to ICBC’s 18,000, for instance – so it will be unlikely to compete for retail banking customers.

Instead, CDB is more likely to focus on underwriting bonds, putting it more into competition with investment banks like CICC (which just happens to be run by another banker of good birth: Levin Zhu, the son of former premier Zhu Rongji).

This could be a profitable strategy. For a start, underwriting fees were a major source of revenue for firms like CICC and Citic Securities last year, as the bond market proved particularly buoyant. There could be good years ahead, too. Bonds are expected to become an increasingly important source of capital for Chinese corporates.

CDB is also well placed to win market share. But a wider participation in the bond market does create some challenges. As part of restructuring the bank into a commercial enterprise, CDB bonds will no longer be guaranteed by the state. That means some credit agencies will consider the bank’s bonds as commercial paper, which will in turn increase its cost of funding, says the Economic Observer.

(And since the market value of CDB’s debt in circulation – Rmb3.2 trillion or $468 billion – accounts for a quarter of the entire bond market, this could hit the value of a much wider swathe of bonds in issuance.)

From Chen’s perspective, commercialising CDB has another downside, albeit a bureaucratic one. In its old guise, the policy bank reported directly to the State Council and operated in a unique space in which it wasn’t really regulated by the central bank or the CBRC. That’s because Chen’s rank – in bureaucratic terms – was on a par with the head of the CBRC (the banking regulator) and the central bank governor.

However, under the reform plan, the commercialised CDB will slip a notch and lose its unique position: it will be regulated by the CBRC and no longer report directly to the State Council. Some wonder if this is a calculated move designed to erode Chen’s clout.

Indeed, if CDB’s status once looked impregnable within China’s institutional hierarchy, that impression has also taken a bit of a knock. Chen’s protégé and former CDB vice president Wang Yi was jailed last year for corruption; and just a couple of months later a CDB deputy department chief, Hu Hancheng, was sentenced to life imprisonment for receiving bribes from loan applicants.

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