event
12 Apr 2015: State Council approves plans to clarify the business scope of the three policy banks: China Development Bank (CDB), Export-Import Bank of China (Exim) and Agricultural Development Bank of China (ADBC). Policy banks can continue to offer cheaper financing for public welfare and national interest projects whilst competing commercially for all other loans.
significance
- reform of policy bank lending practice signals further tightening of SOE access to cheap money
- simultaneously unlocks money for SME investment
intention
- channelling credit to key national priorities overlooked by commercial banks, including supporting SMEs, agricultural modernisation, shantytown renovation, new urbanisation and Belt and Road projects
- policy banks can earn some profit and invest in commercial ventures under same terms as commercial banks; preferential lending rights are only for state policy initiatives
- policy banks to be subject to similar capital adequacy constraints and external supervision as commercial banks
- policy banks to manage policy and commercial loans separately to improve asset-liability management, internal governance and risk compensation mechanisms
- a basis for updating policy bank constitutions and introducing new legislation for policy banks
- state to stop directing commercial bank investment; banks are to operate as independent market actors
outlook
- policy bank performance may be difficult to assess if there is a lack of clarity between policy and commercial lending. Road and rail, for example, could fall under both
- policy banks are under greater pressure than commercial banks; a 10.5 percent capital adequacy ratio could be unrealistic
- banks need mechanisms to evaluate Chinese firms' capacity to offer a return on ‘going global’ investment—particularly along the Belt and Road—before approving funding
- calls for a housing policy bank will strengthen as interest rate liberalisation progresses
context
22 Feb 2015: Hu Xiaolian 胡晓炼 former PBoC deputy governor appointed Exim chair. Hu’s expertise in foreign exchange management to assist firms ‘going global’.
16 Mar 2015: NDRC and CDB Notice tasks CDB with encouraging non-state capital to sign PPP agreements by offering low interest rate loans, 30-year terms, and fast-track approvals.
17 mar 2015: Li Keqiang 李克强 announces increased Pledged-Supplementary Lending (PSL). As a targeted easing tool, PSL encourages the CDB to increase lending for key national projects such as infrastructure, public goods provision and shantytown renovation.
19 Apr 2015: PBoC cuts the reserve requirement ratio to spur bank lending and release liquidity.
20 Apr 2015: Caixin reports PBoC will draw on foreign exchange reserves to inject US$32 bn into CBD and US$30 bn into Exim Bank by converting entrusted loans into equity. PBoC will now be CDB’s second-largest shareholder and Exim’s largest. MoF will provide additional capital to ADBC.
roundtable
SASAC and CDB team up to promote PPP given a success rate of less than 20 percent
Du Tao 杜涛 | Economic Observer
Low returns and long investment periods are the core reasons few PPP projects have been signed, argues Chen Jingdong 陈敬东 Xiangfan Construction Investment Company. Returns of less than 12 percent will not attract investors who have to take out loans with a 5-7 percent interest rate. While the 16 March Opinions offering cheap CDB loans is a positive move, Chen worries that apart from shantytown renovation, safe drinking water and other public projects, few PPP ventures will enjoy these preferential conditions.
capital injection for policy banks a bigger stimulus than the RRR cut
Yang Chang 杨玚 | Tencent
While converting loans into equity stakes is an innovative way to activate forex reserves and inject capital into policy banks, the move is unprecedented, warns Xu Hongcai 徐洪才 China Centre for International Economic Exchanges. The PBoC has no experience with shareholding—it normally injects money via loans rather than buying equity—and holding stakes in CDB and Exim is uncharted water with uncertain outcomes.
disagreement over housing policy bank; too many interests involved experts claim
Xu Hao 徐豪 | China Economic Weekly
Now is the time to set up a housing policy bank, states Zhang Qiguang 张其光 MOHURD Housing Provident Fund Supervision Department director. Following skyrocketing prices in recent years, the housing provident fund has not adapted to practical needs. A national housing bank, based logistically on the provident system, would help stoke demand, stabilise the market, and drive growth. Interest groups may be a hurdle: China Construction Bank currently manages the fund, pocketing investment returns, and MOHURD supervises.
China Development Bank
The largest of the three policy banks, CDB provides medium to long-term financing at cheaper rates than the commercial banks to support local and regional development. Infrastructure development along the Belt and Road is a current key priority. From July 2014, the new Housing Finance division has also issued loans for about fifty percent of current shantytown renovation projects. Unlike Exim and ADBC, which focus on investment to support policy, CDB's mandate is more commercially oriented.
Export-Import Bank of China
Set up in 1994 along with the other two policy lenders, Exim prioritises funding business to go global. Major investments include supporting foreign expansion for Chery Automobile (C¥10 bn), Geely (C¥20 bn), and COSCO (US$1.75 bn). Exim is positioned to play a key role in the Belt and Road initiative: the bank holds a 15 percent share in the Silk Road Fund, and has set up an expert leading group and evaluation mechanism. Hu Xiaolian’s appointment as chair this year comes amidst discipline investigations into several officials; that her first meeting was on Party discipline and anti-corruption is a sign of tougher governance.
Agricultural Development Bank of China
The new plan re-positions ADBC to provide medium-to-long term loans for agricultural development and rural infrastructure. While all three plans were released collectively, ADBC's was the first to be completed (Dec 2014) and the only one to explicitly mention separating policy and commercial accounts. ADBC will also play a key role in the 2015 agenda to expand access to rural credit and strengthen rural financial services along with three other banks—CDB, Postal Savings Bank of China, and Agricultural Bank of China. It is required to provide loans for infrastructure projects such as water utilities, roads in impoverished regions and remains cautious about commercial investment.