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China’s lenders can aid regional growth
From the Financial Times of Tue, 23 Dec 2014 19:31:26 GMT

When, in years gone by, the head of China Development Bank, Chen Yuan, went abroad, his hosts literally rolled out the red carpet. A banker, after all, is a more useful visitor than an emperor, as bankers give out more money. And when the visiting banker is Chinese, the terms are likely to be more generous, too.

Mr Chen advanced billions of dollars to countries from Angola to Venezuela – and to companies from Brazil’s Petrobras to Anil Ambani’s Reliance Communications in India. These borrowers then gave orders to many Chinese companies, paid for with CDB’s capital: groups such as Huawei, China Metallurgical Group, China State Construction and Engineering and the state-owned enterprises in natural resources. This lending was all about vendor financing. In essence, it was no different to what many countries do to support their local champions and domestic jobs. It was just the scale that was extraordinary.

Now, Chen Yuan has retired from CDB and the bank is more focused on the domestic front, financing affordable housing. In its place, however, a new generation of financial institutions have been established in a flurry of recent initiatives: the Asia Infrastructure Investment Bank (AIIB), the Brics New Development Bank, and the Silk Road Plan. Combined, they have almost $100bn of committed capital from Beijing (and counting).

These schemes are symbolic of a transition in China’s development, as outbound flows of direct investment have overtaken inflows. They also support China’s exports of both goods and services, helping the country find outlets for its excess productive capacity in sectors that have the most need of outlets – for example, cement and steel.

But the setting up of institutions has also been accompanied by shrill doubts over China’s ability to adhere to best practice when it comes to financing infrastructure.

In addition, there have been concerns about what might be seen as a challenge to existing multilateral institutions – such as the World Bank or the Asian Development Bank (which is dominated by the Japanese, but has members who feel the US has disproportionate influence).

This may not be fair, though. All the evidence suggests that Beijing recognises it is part of the world. Its AIIB will issue bonds in global capital markets, and the Brics bank plans to lend in dollars. Also, the likely head of the AIIB is Jin Liqun, a widely respected senior official at the ADB, as well as at the Chinese sovereign wealth fund CIC, while an Indian will run the Brics Bank.

If there is an element of self-interest on the part of the Chinese, it does not necessarily mean these institutions cannot be a force for good in the world — especially a world in which there is a lot of capital, but much of it seems to gravitate to less productive uses. There appears to be little interest elsewhere in financing infrastructure — even though it is desperately needed to put growth on a firmer foundation almost everywhere in the world (with the possible exception of Japan, where a proposed new fast train will be built almost entirely underground).

International banks that used to finance infrastructure no longer have the desire to do so, since new Basel rules make it more costly and harder to manage the risk. Pension funds and sovereign wealth funds still profess some interest in infrastructure investment – and, given their long investment horizons, they are the most appropriate sources of capital. However, they often don’t have the skill set necessary. Other development institutions simply do not have enough capital to meet Asia’s infrastructure needs, which amount to $8tn before 2020. Nor do they always have the best record.

China’s links with the rest of Asia through its new financing institutions is therefore likely to benefit Chinese infrastructure companies such as China State Construction and Engineering. Already, Chinese contractors have become the largest globally, accounting for half of the top-10 building groups in the world, according to International Construction Magazine.

There is no starker demonstration of the need for them than the roads on either side of the contested Himalayan border between China and India. On the Indian side, in the states of Uttarakhand and Himachal Pradesh, the roads wash out with each monsoon and are prone to rock slides. Infrastructure deficiencies are the single biggest constraint on growth on the subcontinent – and it remains a problem in many other countries including Indonesia.

Years ago, war was one way for a country to eliminate excess capacity. Helping others fix their infrastructure seems a far more productive way to do so.

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