CDB – A vital financial force to China’s reform and development

The surest path towards the achievement of the Chinese Dream lies through reform and the policy of ‘opening‑up’. The same holds true for the success of an institution such as the China Development Bank (CDB) – development is not possible without reform and opening‑up. Founded in 1994, the CDB is a product of China’s reform of the socialist market economy, and the deepening reform of the investment and finance system. Since inception, the bank has focused on the crux of China’s economic reform – relations between the government and the market. Thus, the CDB has been constantly exploring, moving forward and ultimately embarking on the road of development finance with Chinese characteristics, and has become a financial pillar to the country’s economic and social development.

Reform and opening‑up hold the key to the operation of the CDB. Continual exploration and experimentation has been an arduous process; every step has been like “crossing the river by feeling the stones”¹ – trying to solve the problems that restrict development and so enhance our own efficiency and vitality. Each exploration aims to broaden the bank’s knowledge and calculate a path better suited to the Chinese social context and more supportive of economic and social development.

In its early years, the CDB raised funds and targeted them to key projects such as infrastructure, basic industries and pillar industries, in accordance with the orientation and operational requirements of the policy banks. This contributed a great deal to national economic growth and alleviated many financial bottlenecks. However, because of various contemporaneous factors – chiefly the government-directed operational method – it also accumulated many risks, with the non-performing loan ratio reaching as high as 42.7%. 

When the Asian financial crisis broke out in 1998, large amounts of non-performing loans caused the struggling CDB to totter. In line with the central authorities’ principle of “supporting economic development while guarding against financial risks”, the CDB proposed that banks be set up under a market environment subject to bank regulations to achieve the government’s development goals. The bank began to position itself as a development finance institution that pursued economically viable projects in line with its policy goals.

In 2008, the CDB was repositioned as a commercial bank and thus came under the strictures of commercial reform. However, the CDB’s role in serving national strategy was disrupted by uncertainties around its institutional positioning, credit support and sources of funding. 

A three-step strategy

After the 18th National Congress of the Communist Party of China (CPC), and conforming with the central authorities’ general attitude towards financial reform, the CDB proposed a ‘three-step’ strategy to deepen reform and eradicate the problems affecting its own development and its ability to serve the national strategy – namely, securing permanent sovereign credit support for CDB bonds with zero risk weights, shaping up a group governance structure, and obtaining an official mandate for CDB as a development finance institution. In November 2015, the State Council of the People’s Republic of China approved the plan for continuing reform of the bank and clarified the status of the CDB as a development finance institution. The approval of the new Articles of the China Development Bank in 2016 and the successful implementation of the three-step strategy have made the CDB reforms integral to those of China’s entire financial system. Development finance has also become a crucial component of China’s financial system since the 18th CPC National Congress.

In the process of continuing reform, the CDB matched the pace of China’s opening‑up to the outside world, expanded its international perspectives and boosted the wider and deeper embracement of development finance. Each year, the international advisory board, set up by the CDB in 1999, invites international financial and political leaders to offer suggestions on the development of the bank and the Chinese economy. In 2001, in the face of the opportunities and challenges created by China’s admission to the World Trade Organization, the CDB took the initiative of following international standards and setting the goal of building itself into a world-class bank. In 2005, in accordance with China’s Go Out policy, the CDB for the first time dispatched overseas country teams to work closely with its clients and manage its projects to better serve the international operation of Chinese enterprises. 

Since 2013, in response to the Belt and Road Initiative (BRI), the CDB has improved its international business management system and further optimised overseas operations. To date, it covers 197 countries and regions in the world and has developed into the largest Chinese bank for outbound investment and financing. The CDB has also actively participated in global financial governance, advanced multilateral and bilateral financial co-operation, and expanded its circle of influence by promoting the establishment of multilateral financial co-operation platforms such as the Shanghai Cooperation Organisation Interbank Association, the China-Association of Southeast Asian Nations Interbank Association, the Brics [Brazil, Russia, India, China, South Africa] Interbank Cooperation Mechanism and the China Central and Eastern Europe Interbank Association.

The development of the CDB mirrors that of China’s financial system reform and the opening‑up of Chinese finance – in the past 20 years, the CDB has changed from policy bank to commercial bank to development finance institution, from getting to grips with international standards to expanding international investment. In the history of China’s financial development, these 20 years are the blink of an eye; however, they have reworked the pattern of China’s financial sector, forcing development finance to step onto the historical stage as an independent financial ecosystem. This act represents a turning point in the vicissitudes of China’s history, embodying a pioneer spirit of innovation by emancipating the old Chinese mind-set and breaking with conventional doctrine. Practice has shown that reform and opening‑up are fundamental to the development and growth of the CDB – and are also a source of strength to enable the bank to play a greater role.

Economic and social development and the CDB

The CDB has also played an important role in China’s economic and social development. The truth can only be tested in practice; only facts tell us whether the exploration of development finance is correct and how well it is performing. Over the years, the CDB has fulfilled its historic mission of “strengthening China’s competitiveness”, made important contributions to boosting China’s economic and social development, and enhanced national strength and international competitiveness. 

From its beginnings, the CDB has assumed the task of controlling and adjusting the sources of funds and the total amount and structure of fixed-asset investments. It has focused on building infrastructure, basic industries and pillar industries – more than 90% of loans are invested in key areas such as coal, electricity, oil and transportation. It has also provided support to major projects of national importance to the economy and the people’s livelihoods, such as the Three Gorges Dam Project and the Beijing–Kowloon Railway, and solidified the foundation for national economic development. Since 1998, the CDB has cracked down on financing problems in urban infrastructure construction and helped accelerate the urbanisation process through bank-government co-operation and the joint establishment of financing platforms. It has actively sought to improve people’s livelihoods, expanded the scope of international co-operation and vigorously supported areas in urgent need of development. 

After the onset of the international financial crisis in 2008, the CDB responded enthusiastically by taking the initiative to co-operate with central authorities in implementing those measures with the aim of “maintaining growth, expanding domestic demand, adjusting structure, promoting reform and benefiting people” and playing an active role in putting the Chinese economy back on track.

Since the 18th CPC National Congress, the CDB has actively adapted to the ‘new normal’, reinforced supply-side structural reform and has strived to cut overcapacity, reduce excess inventory, deleverage, lower costs and strengthen areas of weakness. The bank provided a total of RMB16.5 trillion of financing to the real economy and reduced the financing cost of enterprises by nearly RMB200 billion; the capital invested in the real economy accounted for more than 80% of the bank’s total assets. The CDB’s poverty alleviation and relocation loans were a top priority. more than 9 million low-income farmers have benefited, and student loans have helped more than 10 million students from economically disadvantaged families complete their studies. The bank has supported the construction of affordable housing, and loans to rebuild and regenerate pockets of extreme poverty have aided in the relocation of more than 20 million people to safer and more comfortable housing. The CDB has supported the construction of major transport infrastructure – 16,000km of highways and more than 10,000km of high-speed railways. The bank also helped initiate the establishment of a national integrated circuit industry investment fund, aiding technological innovation and cultivating new economic growth points by linking investment and loans. Loans to countries along the Silk Road Economic Belt exceeded US$185 billion to achieve mutual benefits and win-win results.

Conforming to the national strategy has seen the CDB itself make steady progress. As of year-end 2017, total assets exceeded RMB15.6 trillion. The non-performing loan ratio remained within 1% for 51 consecutive quarters, the provision coverage ratio was greater than 530% and the capital adequacy ratio surpassed 11.4%. The capabilities of risk prevention and sustainable development also continued to grow.

A new chapter in development finance

The CDB remains committed to advocating development financing in reform and opening‑up, which, along with innovation and development, are in the DNA of the bank. Development finance is not only the road to the future, but also a road of reform and continuous self-improvement. Through exploration, the CDB maintains its pursuit to deepen its understanding of Chinese national conditions and the law of economic and financial development, accumulating valuable experience while constantly absorbing advanced financial principles both at home and overseas. These learned experiences include the following: 

• Upholding a strong party leadership and ensuring that national strategy is fully and absolutely implemented.
• Persistence in reform and opening‑up, and constantly increasing the momentum of development is imperative.
• Market-oriented adherence to the national strategy will help fully develop the CDB’s role in connecting the government and the market.
• Innovation to better meet the diverse financing needs of economic and social development must be insisted upon.
• Implementing risk prevention and control will realise sustainable development.

The task of reform and opening‑up is a never-ending one. Currently, China stands at a promising historic juncture. This is a period of opportunity for steady progress, high-quality development, innovation, and building the BRI and a shared community – a community with a shared vision for the future of mankind. Of course, a new stage of development will bring about new contradictions, but what can be done to meet the growing need of the people for a better life? What is the solution to the problem of insufficient and imbalanced development? And what should the CDB do to promote such high-quality development? 

Under new development requirements, the need for reform and opening‑up will never cease. Guided by Xi Jinping Thought on socialism with Chinese characteristics for a new era, the CDB must keep abreast of current trends, respond to the requirements of the era, listen to the general tone of seeking progress while maintaining stability, and continuously advance its own reform and opening‑up. Following these principles, the CDB can explore new forms of financial services more suitable for China’s economic and social development between the government and the market, help win the battle of major risk prevention and settlement, alleviate poverty, prevent and control pollution, deepen supply-side structural reform, support the construction of a modern economic system, improve people’s livelihoods, fuel the new forms of opening‑up and write a more exciting chapter of development finance in the ‘new era’ of Chinese politics and power.

Notes

^{1. An expression popularised by Deng Xiaoping.}

This article is part of The IFF China Report 2018, which draws mainly on content provided by China-headquartered think tank, the International Finance Forum, and is published in association with Central Banking.