China Banks Lend More Than World Bank – Report

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    Two Chinese state-controlled banks have lent more to developing countries than the World Bank, according to a report. The China Development Bank and the China Export Import Bank offered loans of at least US$110bn (£69.2bn) to governments and firms in developing countries in 2009 and 2010.
    The research was undertaken by the Financial Times newspaper. Between mid-2008 and mid-2010, the World Bank’s lending arm issued loans of just over US$100 billion (£63bn).
    The two Chinese banks do not publish a detailed breakdown of their overseas loans; so this research is based on public announcements about specific deals from them, their borrowers or the Chinese government.
    This means the figure arrived at for the amount of Chinese lending is more likely an underestimate than an overestimate because some – more sensitive loans will not have been made public. The Chinese lenders are so-called policy banks they have a mandate to further whatever Beijing sees as its national interest.
    One of China Development Bank’s specific tasks is to try to alleviate, and where possible eliminate, bottlenecks in supplies of raw materials or land for China’s economy. It also tries to open up foreign markets for Chinese companies.
    The period looked at by the researchers included the worst of the global financial crisis. Chinese banks were offering loans to producers of raw materials at a time when it was hard for them to attract financing from elsewhere.
    That helped secure long-term energy deals, including oil supplies from Russia, Venezuela and Brazil.
    The Chinese government, which is sitting on US$2 trillion (£1.26 trillion) of foreign exchange reserves, has ample amounts of cash to fund loans which help promote its strategic objectives.
    But what is interesting is that in the private sector, it is a different story. Outward Foreign Direct Investment (FDI) by Chinese companies (not including banks) was around US$50bn (£31.5bn) last year around half the FDI that flowed from foreign companies into China.
    This is the world’s second-largest economy, but its outward flow of FDI is only the fifth-largest in the world. That suggests that Chinese companies still do not have the confidence to make big acquisitions overseas in order to grow or, of course, that they are unable to.
    What does not help is the sometimes murky relationship between the government and some of the country’s biggest firms, which can make the targets of such acquistions or potential merger partners nervous about doing deals with the Chinese.
    In a related development, China attracted a record level of inward investment in 2010, sharply recovering from the previous year. The country attracted US$106bn of foreign direct investment which excludes investments in financial instruments such as shares up 17.4% from 2009, according to the Ministry of Commerce.
    That was enough to more than reverse the 2.3% fall seen during the previous year and caused by the global recession. Over a fifth of the money went into China’s property sector. The Chinese authorities have been trying with limited success – to head off a perceived bubble in property prices.
    Rural interior
    “The improvement in the investment environment has become a new driving force of China’s [foreign direct investment]”, said Yao Jian, a ministry spokesman. He said that investment was particularly strong in China’s poorer and less developed interior and western regions, where the cost of labour is much lower.
    “Chinese banks were offering loans to producers of raw materials at a time when it was hard for them to attract financing from elsewhere”
    Over half of the investment came from Hong Kong, while nearby countries such as Taiwan, Singapore, Japan and Korea were also major sources of capital.
    As was the case in 2009, December proved particularly strong, seeing US$14bn of inflows a record for a single month. Meanwhile, the ministry also reported a big rise in China’s investment in the rest of the world.
    Outward investment rose 36.3% in 2010 – although, at US$59bn, the level remains only slightly more than half of the total for inward investment into China.
    Mergers and acquisitions accounted for about 40% of the total, as Chinese companies chose to buy up ready-made businesses as well as investing in new projects and start-ups, or providing loans.