SOUTH AFRICA: CHINA DEVELOPMENT BANK OUTLINES AFRICA

UNCLAS SECTION 01 OF 02 JOHANNESBURG 000311 SIPDIS SIPDIS E.O. 12958: N/A TAGS: EFIN EAGR ECON EINV SF CH SUBJECT: SOUTH AFRICA: CHINA DEVELOPMENT BANK OUTLINES AFRICA STRATEGY JOHANNESBU 00000311 001.2 OF 002 ¶1. Summary: At an October 31 seminar on emerging powers and their impact on global economic governance hosted by the South African Institute for International Affairs (SAIIA),the international advisor of the China Development Bank (CDB) provided a readout of the CDB's strategy and strengths in making loans to African nations. Dr. Gu Yang noted the importance of mining and energy to China, but reserved her greatest enthusiasm for loans in assisting agriculture. Professor Li Anshan, of Peking University, defended China's "no-strings attached" policy on aid and loans at the same conference. End Summary. China Development Bank History and Structure -------------- -------------- ¶2. Dr. Gu Yang, the International Advisor to the China Development Bank (CDB),outlined its history, goals and strategy at an October 30 seminar on the impact of emerging powers on global economic governance hosted by SAIIA. Created in 1994, the CDB is one of three policy lending banks created after a financial crisis in the early 90's caused by high rates of non-performing loans within the Chinese banking system, which Dr. Gu ascribed to the mingling of politically-driven with commercial lending. It is 100 percent owned by the Ministry of Finance and legally reports directly to the State Council. The CDB is used to finance strategic infrastructure projects and projects to support government objectives. She described the CDB as primarily focused on domestic development needs. ¶3. According to Dr. Gu, the CBD finances its operations from liquidity provided by the government and from capital raised in domestic and international markets, based on its Moody's credit rating of A minus. At the end of 2006, the bank had $252.2 billion in loans outstanding, primarily in mining, oil, infrastructure, and urbanization. Its priority areas within China are power, public facilities, and telecoms and transport, with 52 percent of loans going to the eastern part and 17 percent to the western part of China. More than 50 percent of its loans were medium and long-term loans. International Loan Portfolio -------------- ¶4. Of the CDB loan portfolio, 92 percent was domestic and just over 7 percent was foreign lending. Dr. Gu listed the CDB's rating criteria for its overseas operations, which included both standard criteria such as the borrowing history and "other relevant factors" that were not further specified. In 2006, the bank's operating capital was $289 billion which produced a $3.5 billion profit. By end 2006, the CDB has $33.29 billion in foreign loans, of which 70 percent were long-term loans. Of its foreign loans, 71 percent were in energy and mining. The CDB has seven working teams in Africa, including in Egypt, Nigeria, South Africa, Uganda, Zimbabwe, and the DRC. Dr. Gu said the bank would be increasing the number of working teams soon, and was also approached on a regular basis to increase its cooperation with African financial institutions. The CBD loan terms were six months LIBOR rate plus a margin. She noted the close cooperation of the CDB with the African Development Bank, with a first conference between the two institutions held in Shanghai this year. ¶5. Dr. Gu also commented on the Africa Development Fund, which had $5 billion in financing available for loans up to 50 years, in the areas of energy, mining and agriculture. The fund was there to support Chinese companies investing in Africa, but joint ventures could also apply for support. She noted that funding through the Africa Development Fund was flexible throughout the timeline and value-chain of a project. Dr. Gu noted that there had been some confusion among African countries about the CDB's function and aid, which was managed by the Ministry of Commerce. CDB Priorities in Africa -------------- ¶6. Dr. Gu said that improving infrastructure was the key to Africa's development and would allow the continent to lift itself from poverty. She said that the CDB offered project finance, information sharing and staff exchanges in this as in other areas. She said she had been impressed by the EU/NEPAD blueprint which took a holistic approach to the continent, and would promote internal trade among African countries. She had had several conversations with EU and Commission leaders, and with the European Investment Bank, on priorities and coordination of an infrastructure plan. A steering committee had been set up, and a budget process. She noted that one of the strengths of the CDB in providing finance for projects was that it came with "no strings attached" and through an open JOHANNESBU 00000311 002.2 OF 002 bidding process. This did not mean that China would disrespect labor or environmental laws since these concerns could be built into the contract, according to Dr. Gu. ¶7. She noted that China has low cost labor and capacity with very relevant experience and appropriate technology for African infrastructure projects. An engineer working on an African hydropower station had recently been in charge of the Three Gorges Dam project, while the UK had completed its underground system 130 years ago. To achieve the Millennium Goals would require an annual investment of around $40 billion in Africa each year until 2015. Transport costs were three times production costs for agricultural commodities in landlocked African countries. Infrastructure investment would also provide spin-offs of electricity for schools and hospitals, creating a win-win situation. ¶8. The CDB's experience in the west of China, according to Dr. Gu, had given it skills relevant to working in Africa. Among the skill sets transferred was in assessing the credibility of borrowers who had no credit history and were in poverty. While this experience was not entirely transferable, Dr. Gu nevertheless though it was helpful. The bank's value-added also included being the experts in infrastructure. She described Africa today as being where China had been 20 years ago. The CDB had direct relevant experience. Moreover, in cases where China had need of minerals and energy, deals to exchange these commodities for infrastructure construction did not have to involve any loans at all. Dr. Gu said such deals would prevent the Dutch disease and resource curse. She also noted that China and the CDB were committed to a long-term timetable; 80-90 percent of the bank's 7 percent foreign lending was committed to 5-20 year terms. She said this was an expression of the CDB's confidence and sincerity in African development. ¶9. Agriculture was another priority area, Dr. Gu noted, especially given that both African countries and China were dependent on food imports. She noted that although China had a population of 1.4 billion, only 16 percent of its land was arable, while Africa had much unused arable land. The bank had "many good ideas" on how to help African countries set up food production to feed their own populations and then export the surplus to China. She enthusiastically described this as a deal that would benefit both sides. Gu emphasized that the CDB was committed to long-term projects and would be establishing technical demonstration centers under a program run by the Ministry of Agriculture. These had started to experiment with labor intensive tropical crops that had a high value added. She was working on a strategy to develop capacity and competitiveness in food supply and food export for the CDB. (Comment: Dr. Gu was much more enthusiastic and emotionally engaged in describing plans for lending in agriculture than any other sector. She was passionate about this topic and its potential benefits to China. End Comment.) Defense of Unconditional Lending -------------- ¶10. Professor Li Anshan of Peking University defended China's willingness to lend without conditions at the seminar and in private conversations. According to a German contact who had attended the closed session the previous day, Professor Li rejected any linkage for Darfur and said that China had a human rights problem but everyone still wanted to trade with and invest in China, so why should the Chinese apply pressure? In a conversation on the margins of the seminar, Professor Li advocated in favor of "no strings attached" lending, noting Africa's history of colonialism made it especially sensitive to pressure. He agreed that China was becoming more vulnerable to grass-roots pressures, and noted that the Ministry of Foreign Affairs had established an office dealing with NGOs. Li also said that China did offer advice quietly, but reiterated that it would resist any changes to its "no-strings-attached" lending policies. COFFMAN