A Lesson from China Development Bank

Photo by Antara News Agency

JAKARTA (TheInsiderStories) – Chinese Development Bank (CDB) is today known as one of the largest financial institutions in the world, as reflected in its rank as 57th in the The Fortune Global 500 company list. Founded in 1994, CDB has surpassed the World Bank as the biggest lender, with outstanding loans in 2015 of RMB9.21 trillion or US$1.41 trillion.

How can CDB transform into such a giant bank with total assets standing at more than $2 trillion? And what can Indonesia learn from it, related to President Jokowi’s ambition to build massive infrastructure projects similar to the way China did a decade ago? And then, what about infrastructure financing models in other countries?

A turning point in CDB occurred in 1998 when Chen Yuan, former Executive Deputy Governor of The People’s Bank of China, replaced Zhu Rongji as President, to extract CDB from its ‘debt trap’ as a result of bad loans it had made. Previously, CDB simply followed government orders to give out loans as a ‘free lunch’ until Chen imposed discipline, launching a transformation program in CDB that forced it to abide by financial rules conforming to international standards.

All CDB shares are owned by the Government of China, or companies related to the government. China’s Ministry of Finance owns 36.54 percent, while Central Huijin Investment Ltd. owns 34.68 percent, Buttonwood Investment Holding Co, Ltd owns 27.19 percent, and the National Council for Social Security Fund owns 1.59 percent. Full ownership in the bank gives the government control, enabling it to set the infrastructure sector as a main priority for funding from the bank.

CDB provides medium-to-long term financing that serves China’s major long-term economic and social development strategies. Until 2015, most of the outstanding loans of CDB were allocated to the infrastructure sector, such as railways ($110 billion), public highways ($240 billion), electrical grid ($120 billion), water resources ($48 billion), and public infrastructure ($180 billion),  However, the Bank also disburses loan to other sectors, like petroleum and petrochemicals ($90 billion), industrial restructuring and upgrading ($122 billion), and small & medium enterprises ($170 million).

How does the bank obtain its funding? CDB sources money via bond issuance, that has reached RMB7.3 trillion ($1.12 trillion) outstanding. In 2015, the bank issued RMB1.18 trillion ($180 billion), with details of short-term bonds or under 1 year ($24 billion or 13.64 percent), medium-term bonds or 1 to 5 years ($68 billion or 38.97 percent), long-term bonds or 5 to 10 years ($81 billion or 46.47 percent), and super long-term bonds with a tenure over 10 years ($1.6 billion or 0.92 percent). With the same rating as the Government of China, namely, Aa3, and a ‘stable’ outlook from Moody’s and AA-, along with a ‘stable’ outlook from Standard & Poor’s, CDB has become the second-largest bond issuer in the country, after China’s Ministry of Finance.

CDB is a key player, not only in the Chinese economy, but also for other developing countries covered in One Belt and Road Initiative strategy: Brazil, Venezuela, and Russia hold 14 percent of total CDB’s outstanding loans. In 2015, CDB disbursed loans of $276 billion, plus RMB69 billion to a number of countries, such as Sri Lanka, Sudan, South Africa, and Kyrgyzstan, to infrastructure ranging from upgrading container terminals to oil refinery construction.

In Indonesia, CDB has engaged in projects since beginning in 2007, when a consortium consisting of the China National Machinery Industry Corporation, the China National Electric Equipment Corporation, and PT Penta Adi Samudera went looking for $696.73 million plus Rp1.5 trillion to build a power plant. CDB, along with other commercial banks, signed a $592 million deal that carries a tenor of 13-years with a three-year grace period. Recently, CDB also committed itself to financing Jakarta-Bandung high-speed railway, which will cost up to $4.5 billion.

While CDB is the best example of how a local bank can fill the gap for infrastructure investment needs, other banks in several countries support the infrastructure sector. Banco Nacional de Desenvolvimento Economico e Social (BNDES) in Brazil, for instance. Formed in 1952, the bank specializes in financing infrastructure projects, especially in energy and transportation.

BNDES reported $282 billion assets in 2016. Like CDB, most of BNDES’ outstanding loans are spread into infrastructure (45 percent) apart from trade and services (20 percent) and industry (35 percent). The largest source of BNDES funding is the Brazilian government (52.6 percent), which issues medium-to-long term maturity bonds. In addition, BNDES also secures funding from worker saving funds and multinational agencies.

In Indonesia domestic bank unfortunately suffer from limited funding to allocate to infrastructure project despite the government’s need for huge investments. In fact, banking has contributed up to 70 percent of total infrastructure investment. In 2015, banking loans to the infrastructure sector reached Rp522 trillion, while the Indonesian government estimated infrastructure investment in Indonesia will require around Rp5,500 trillion ($41.3 billion) up to 2019.

The problem lies in the lack of funding sources to match medium-to-long term infrastructure funding needs. The four largest banks in Indonesia, namely, PT Bank Rakyat Indonesia (IDX: BBRI), PT Bank Mandiri (IDX: BMRI), PT Bank Central Asia (IDX: BBCA), and PT Bank Negara Indonesia (IDX: BBNI) each have an asset value below Rp1,000 trillion or $75 billion.

In addition, banks in Indonesia also obtain short-to-medium term financing, mostly from savings and deposits, while bond issuance has five years or fewer maturity. The local financial market is swallows and financial inclusion is also still low. A channeling funding scheme for Rp40 trillion ($3 billion) from international banks such as CDB was chosen by three banks, namely BBRI, Bank Mandiri, and BBNI, despite only half of the funds being flowed to the infrastructure sector.

Indonesia’s Financial Service Authority Deputy Banking Commissioner Heru Kristiyana commented that it is not possible to depend only on banks to fund infrastructure projects. He said that banks have a legal lending limit to certain areas, beside limited funds with a loan-to-deposit ratio above 90 percent. Therefore, the agency encourages funding from other sources, such as the financial markets.

Meanwhile, the transformation of PT Sarana Multi Infrastruktur (SMI) into an infrastructure bank is still unclear. SMI only has assets of Rp47 trillion ($353 million) while the Indonesian government faces limited funds to inject into it. Currently, SMI seeks funds from short-to-medium term bonds and external commercial borrowing, such as Korea Development Bank, Japan Bank for International Corporation, World Bank, and Asia Development Bank.

*1 RMB = 0.15 USD
*1 USD = RP13,200

Writing by Rahmat Fiansyah, Email: rahmat.fiansyah@gmail.com