3 GLOBALIZING LATE DEVELOPMENT

Tax Revenue

China’s central government offers foreign assistance in three forms: grants, interest-free loans, and concessional loans (zhengfu youhui daikuan), which have interest rates significantly lower than the benchmark interest rate set by China’s central bank. Tax revenue alone directly supports grants and interest-free loans; it subsidizes the interest rates of concessional loans, which are capitalized and disbursed by the China Exim.

Unlike most donors from the Organization for Economic Cooperation and Development (OECD), the Chinese government does not publish detailed, official foreign-assistance data; in fact, it only releases foreign assistance white papers from time to time.⁶ The calculation of the volumes and conditions of China’s foreign assistance are thus only an approximation based on various data sources.⁷ For example, data from China’s Ministry of Finance show that the government’s annual spending on foreign assistance (including subsidy for concessional loans) grew from ¥1.85 billion in 1993 to ¥21.5 billion in 2019 (figure 3.1). According to China’s 2021 white paper on international development cooperation, between 2013 and 2018, China disbursed ¥127.8 billion in grants (47 percent), ¥11.3 billion in interest-free loans (4 percent), and ¥131.1 billion in concessional loans (49 percent) (figure 3.2).⁸ Concessional loans usually have an interest rate of 2 percent to 3 percent and a tenor of 15 to 20 years (including a grace period of 5 to 7 years), according to China’s 2011 foreign assistance white paper.⁹

Multiple government organs play roles in China’s foreign assistance. The National Health Commission coordinates China’s overseas medical team; the Ministry of Education allocates government scholarships; the Ministry of Technology coordinates foreign technical assistance; the Ministry of Foreign Affairs leads humanitarian assistance; the Ministry of Finance and the central bank make donations to multilateral financial institutions; and the National Development and Reform Commission coordinates climate cooperation. The Department of Foreign Assistance within the Ministry of Commerce (MOFCOM) was the core government organ in charge of coordinating and distributing foreign aid until 2018.¹⁰

Because of MOFCOM’s control, China’s foreign assistance has demonstrated a mercantilist character. To use the OECD’s terminology, Chinese grants and aid loans are a hundred percent tied to Chinese firms, as only legal entities founded in China and owned exclusively by Chinese shareholders are eligible to become contractors, suppliers, consultants, and other service providers for overseas development projects financed by China’s foreign assistance.¹¹ In practice, foreign-assistance capital is channeled directly to these firms from MOFCOM and the other credit disbursing agency, the China Exim. The bidding processes of foreign-assistance projects are organized by the Chinese government and not project owners in host countries. Existing research has pointed out that in this mercantilist means of disbursing foreign aid, China has emulated Japan, which provided tied yen loans to China.¹²

In 2018, MOFCOM’s Department of Foreign Assistance was incorporated into the newly established China International Development Cooperation Agency (CIDCA). The new agency is mandated to serve a pivotal role in coordinating China’s international development cooperation and formulating development policies. In April 2021, former vice foreign minister Luo Zhaohui was appointed to serve as CIDCA’s new governor.¹³ The appointment indicates that CIDCA may become less business oriented and more foreign-policy oriented.

The Policy Banks

China’s two policy banks, the CDB and the China Exim, are the largest financiers of China’s overseas development finance projects. Both were established in 1994. The CDB was created to finance infrastructure and industrial projects, and the China Exim was created to facilitate Chinese firms’ exports. Both offer large-scale, long-term loans to “policy-oriented” projects, both lend to Chinese firms in key industries, and both receive the state’s sovereign guarantee in fundraising. However, their lending rationales and modus operandi differ slightly.

The China Exim functions as both a foreign aid agency and an export credit agency. While over 90 percent of China Exim loans are non-concessional, its government concessional loans, a kind of foreign assistance, are the only fiscally subsidized bank loans in China and hence the cheapest. Borrowers from low-income countries often seek to obtain this kind of loan to finance their projects. In addition to government concessional loans, which are denominated in renminbi, the China Exim also offers preferential buyers’ credits (youhui maifang xindai), which are U.S. dollar-denominated loans issued directly to foreign borrowers. Preferential buyers’ credits are also concessional in terms of their conditions, but they are not subsidized by the Chinese government’s tax revenue. The two types of concessional credits combined are referred as liangyou loans, literally meaning “two concessional” loans, and they are managed by the bank’s Sovereign Business Loan Department.¹⁴

In theory, China Exim’s cheap liangyou loans must be requested by the government of the host country where the project being financed will take place, and they must be approved by the Chinese government. But in practice, Chinese firms exploring business opportunities overseas often initiate the process of loan application, recommending to public borrowers in host countries that they apply for liangyou loans from the China Exim so that their infrastructure projects can be funded with the cheapest possible credits. The China Exim has a significant advantage over other banks, foreign and domestic, as the only Chinese bank that can issue government-subsidized loans in financing the least developed regions.

The CDB has to bear financial gains and losses all by itself. It is therefore, generally speaking, more commercially oriented than the China Exim.¹⁵ As chapter 2 described, the CDB started financing domestic infrastructure and industrial projects in the 1990s and has served as an alternative financial channel to China’s state-dominated fiscal system. One of the most important functions of the bank was to explore “marketized means” to capitalize projects that Chinese central and local governments’ fiscal revenue could not fund alone. The bank therefore has never rejected the option of adopting and employing market instruments. It also seeks to undertake commercially viable or profitable projects to enhance its overall economic performance. The CDB has even created CDB Capital (an equity investment subsidiary), CDB Leasing, and CDB Securities, all commercially oriented subsidiaries designed to better serve its clients’ business needs. In other words, the kind of projects the bank undertakes—projects facilitating infrastructure and industrial development—reflect the development aspect of the bank, but the financial tools it employs are highly commercial.

As discussed in chapter 2, the CDB used bundled loans to finance domestic industrial parks as well as their related infrastructure works. The underlying rationale is that industrial production would generate profits and cover the financial losses of infrastructure projects that are financially nonviable, while the infrastructure works would facilitate the process of industrial production and the distribution of industrial products. Such loans have empowered China’s rapid urbanization and industrialization. Similarly, in the overseas markets of developing countries, the CDB practices both industrial financing and infrastructure financing, as many of the underdeveloped regions are not equipped with infrastructure that could allow industrial production to take place. In China’s banking sector, the CDB has a good reputation for picking industrial projects. Informants from the CDB and from Chinese commercial banks and enterprises told me that the CDB has the expertise and vision that other banks do not have in selecting industrial projects that could profit in the long run. The CDB’s consent to finance a project signals that the project is likely to work, and other banks may follow the CDB to finance either the project or the firm that conducts the project. This is why, as I will describe below, the CDB was the first bank providing large-scale wholesale loans to finance Tsingshan Iron & Steel Corporation’s industrial park in Indonesia, which included both infrastructure and production facilities; the loans allowed the company to become a world-class steel producer.

“When negotiating with the project owners in the host countries with regard to the financial resource we could possibly bring to the project, I would explain the distinct advantages of different Chinese lenders,” said an expatriate manager of a Chinese state-owned construction company. “CDB loans are large; China Exim’s liangyou loans are cheap; Chinese commercial-bank loans are flexible and fast in processing.”¹⁶

Commercial Banks and the Insurance Company

Counterintuitively, neither CDB loans nor the China Exim’s non-liangyou loans have a significant advantage over commercial bank loans in term of their cost of capital. The cost of their funding restrains the conditions of their lending. As discussed in chapter 1, policy banks raise the majority of their funds through bond issuance, which has yields normally above 3 percent. To break even, both CDB and China Exim must set the average interest rates of policy-bank loans (excluding liangyou loans) above this level. Thus, Chinese commercial banks that raise funds through savings can sometimes offer lower-cost loans than policy banks do.

Most Chinese commercial banks are state-owned, including the largest four, which are also the world’s largest four: the Industrial and Commercial Bank of China (ICBC), Bank of China (BOC), the China Construction Bank (CCB), and the Agricultural Bank of China.¹⁷ The bulky volume of their total assets is primarily a result of the Big Four’s domestic businesses. At home, the Big Four are the largest buyers of policy-bank bonds and the main collaborators of policy-bank financed projects.¹⁸ In overseas financing, these banks do not offer as much long-term lending as the policy banks do, but they are increasingly becoming important players. According to official statistics, ICBC, BOC, and CCB dominate medium- and long-term international lending by Chinese commercial banks (figure 3.3).

While conventional wisdom suggests that long-term credit agencies such a national development banks and export credit agencies have an advantage in offering low-cost loans due to state subsidization, China’s case shows something different. On an aggregated level, the policy banks have an advantage in low-cost financing because their bonds are backed by the state’s credibility (see chapter 1). But on single projects, commercial banks may be able to offer rather cheap loans. According to an analysis based on a hundred samples of Chinese banks’ contracts with developing countries, the interest rate of China Exim’s buyer credits is the London Interbank Offered Rate (LIBOR) plus 3–4 percent; the interest rate of the CDB is LIBOR plus 2–3 percent; and that of Chinese commercial banks is LIBOR plus 1–4 percent.¹⁹ This implies commercial banks offer flexible terms. An informant who had worked on international financing at CDB acknowledged that commercial banks are able to give better rates than the CDB does for promising projects. In such cases, the informant said, the CDB’s advantage is scale. “Often times commercial banks are not able to offer loans as large as ours. Hence, they have to form a syndicate with us if the project requires a huge amount of capital.”²⁰

Given that infrastructure and industrial projects usually require long-term, large-volume financing, policy banks and commercial banks, or their respective branches, often form syndicates to cofinance projects. A syndicate can be initiated and led either by a policy bank or a commercial bank. For example, in 2019, a syndicate consisting of multiple banks offered a ¥6.88 billion loan to a stainless-steel smelting project in Indonesia. The BOC Xiamen Branch and the CDB Xiamen Branch co-led the group, which included four other financial institutions—Tai Fund Bank of Macau, BOC Jakarta Branch, BOC Singapore Branch, and Bank ICBC Indonesia.²¹

In addition to banks, another important player in China’s overseas development finance is the China Export & Credit Insurance Corporation (Sinosure), which is China’s only policy-oriented insurance company.²² Founded in December 2001, Sinosure was mandated to support the export and overseas business of Chinese firms after the country’s entry into the World Trade Organization. Firms borrowing from Chinese banks may purchase insurance from Sinosure. The fact that Sinosure is an official agency, not a commercial insurer, implies that the Chinese government is supposed to compensate the purchaser for losses if a project covered by Sinosure fails as a result of commercial or political risks.

Sinosure provides several types of insurance and guarantees, including short-term export credit insurance (with tenor of less than 2 years), medium- and long-term export credit insurance (2–15 years), overseas investment insurance (up to 20 years), domestic trade insurance, and guarantees. As figure 3.4 shows, Sinosure covers hundreds of billions of dollars in trade business every year, of which roughly 80 percent is short-term export credit insurance. Depending on product type, Sinosure’s insurance/guarantees protect firms from commercial and political risks. Commercial risks include debtor’s bankruptcy, dissolution, or defaulting on payment of principal or interest; political risks include expropriation, currency exchange restrictions, wars, or political riots in host countries.²³

In many OECD countries, obtaining coverage from an official export/investment insurer is a way for firms to lower the cost of financing as an alternative to directly borrowing a cheap loan from an export-import bank. Commercial banks will offer more favorable terms and conditions when lending to projects covered by official insurers because these projects are considered less risky. But in China, there is no significant price difference between loans covered by Sinosure and loans that are not. More often, firms obtain Sinosure coverage in order to make commercially nonviable projects viable. “Sinosure does not determine how cheaply you can do a project, but whether you can do the project,” explained a loan manager at a Chinese commercial bank.²⁴ This is why many projects financed by policy banks are at the same time double-insured by Sinosure.

To briefly summarize the analysis, Chinese financiers are quite commercially oriented. Even the most statist kind of credits—the government’s foreign assistance—is licensed to Chinese service providers only. Financiers that offer the largest amount of loans to China’s overseas development projects are policy banks. Most of the policy-bank loans are capitalized by the banks’ own funding. Government revenue subsidizes only a small portion of the China Exim’s loans, and apart from that small portion—the liangyou loans—policy banks do not offer loans that are significantly lower in cost than Chinese commercial bank loans, especially when financing profit-generating projects, but they have an advantage in offering large-scale loans. This differentiates China’s overseas development finance substantially from what previous East Asian catch-up economies have offered, in which state-subsidized low-cost funding played a key role in facilitating industrial development and export.

Regulation and Coordination

The National Development and Reform Commission (NDRC) and MOFCOM are the two main government ministries directly regulating and coordinating China’s overseas economic activities. Through their involvement in the project selection of Chinese firms that are the clients of the Chinese banks, the two ministries affect bank lending. The NDRC, formerly the State Planning Commission, makes China’s national economic development plans. One of its primary responsibilities is to formulate industrial policies and incentivize firms to conduct businesses in strategic sectors. Yet the NDRC does not directly tell firms which projects to undertake. In overseas development finance, firms have a lot of autonomy to explore business opportunities and select projects, and the NDRC regulates Chinese firms by “blacklisting” a series of projects. The NDRC monitors Chinese firms’ outward foreign direct investment to ensure it does not invest in blacklisted projects. For example, if a firm seeks to acquire full or partial ownership of a power plant in a foreign country, it has to file documents with and obtain approval from the NDRC. According to the NDRC’s policy document on “Measures for Administering the Overseas Investment of Enterprises,” the ministry must approve firms’ engagement in sensitive projects, such as those taking place in countries that have not established official diplomatic relations with China or in countries experiencing civil war or domestic vicissitudes, as well as projects involving the production of weapons or the development of cross-border water resources. Nonsensitive projects (those not particularly blacklisted) only need to be documented at the ministry. Firms must also report to the NDRC if a project causes severe casualties of expatriates, large losses of overseas assets, or negative impacts on China’s diplomatic relations with host countries.²⁷ This regulatory mechanism empowers the NDRC to certify firms’ international investment and also holds the ministry accountable for the projects that it approves.

MOFCOM certifies Chinese firms’ international contracting businesses. If a Chinese firm intends to become a contractor for a bridge construction project in a foreign country, for example, it has to file documents with and acquire a certificate of approval from MOFCOM. Without such an approval, the firm cannot obtain financial support from Chinese banks and insurance companies, which would be penalized by China’s financial regulatory bodies if they provide such support.²⁸ MOFCOM also regulates firms through the Economic and Commercial Office (ECO) of the Chinese embassies. These overseas government offices are mandated to facilitate international economic cooperation. Chinese contractors undertaking projects abroad need to acquire a letter of support from the ECO in their respective host country, without which Chinese financial agencies would not lend. The ECOs also serve as a network hub in host countries. Chinese firms doing business in a foreign country could approach the local ECO to be connected with financial agencies and other potential collaborators. The ECOs are sometimes mistakenly seen as a part of China’s Ministry of Foreign Affairs (MOFA) because they are offices of the Chinese embassies, but in fact they are the overseas extensions of MOFCOM and staffed by MOFCOM’s expatriate public servants.

MOFA plays a relatively indirect role in regulating overseas development finance, challenging the perception of mass media and policymakers that the BRI is a national “foreign-policy strategy.” Unlike the NDRC or MOFCOM, MOFA does not certify projects. Indeed, it has no direct instrument to exercise power in the process of project selection. It does affect development cooperation through scheduling and facilitating diplomatic visits (gaofang) by top-ranking Chinese officials, such as the president, the prime minister, or government ministers. In such trips, Chinese government officials usually sign economic-cooperation announcements, agreements, or memorandums of understanding with the host country, which are seen as achievements of the visits. Thus, MOFA would solicit potential projects in advance of a diplomatic visit that will then be officially signed as gaofang projects endorsed by the Chinese government. These projects are therefore more likely to secure funding from Chinese financiers.

Yet two factors limit the importance of MOFA-facilitated endorsement. First, in most cases, MOFA-selected projects are not new projects created from scratch by the government. As the cases below will show, project negotiation initiated by Chinese firms often precede intergovernmental high-level visits. That is to say, a government-led gaofang reinforces rather than kicks off business cooperation. Second, such projects are not always implemented as planned, as full implementation requires the involvement of banks and the firms, not the government ministries themselves.²⁹ Indeed, some government-supported projects have not met bank standards of financial appraisal. For example, in 2015, China won Indonesia’s Jakarta-Bandung High-Speed Railway project after fierce competition with Japan. Governments of both East Asian countries supported the competition, which the mass media depicted as a showdown for national reputation. To win the project, China offered a low interest rate of only 2 percent—much lower than the average funding cost of the CDB, the main financier of the project.³⁰ The construction of the railway started in January 2016, and was expected to be completed by the end of 2018, according to an official government report.³¹ Yet, construction took more than seven years, into September 2023.³² A major cause of this delay was land acquisition. Much of the land along the planned railway route was privately owned, and the Indonesian project owner and Chinese contractors had to negotiate with landowners on the price of compensation. The CDB, which was supposed to provide 75 percent of the project’s total funding, refused to disburse any credits before the completion of land acquisition.³³

As highlighted in chapter 1, the fact that policy banks are not safeguarded by fiscal revenue means that the state will not pay for the banks’ financial losses if projects fail. The minimally subsidized fundraising mechanism of the banks prevents them from providing large volumes of cheap loans to support projects that could not pass the banks’ financial appraisal. In very rare cases, policy banks may be “requested” by the government to do projects that are politically important but financially nonviable. In those cases, the policy banks would seek government endorsement, in one form or another, in order to be exempted from responsibility if the project runs into financial problems. For example, the banks may request that MOFA provides a letter of support, confirming that a project is indeed of foreign-policy significance. Such a letter essentially transfers part of the bank’s responsibility to MOFA, though the ministry is not going to bail out the project in the event of default.

To briefly summarize, government ministries, especially the NDRC and MOFCOM, play important roles in regulating and coordinating Chinese firms’ international business activities. This aspect of China’s development finance to a large extent resembles that of other East Asian developmental states, where an elite bureaucracy makes rational plans and regulates industrial development. Compared with the NDRC and MOFCOM, MOFA’s role in coordinating overseas development finance is relatively minor because it lacks authority and resources that could directly alter firms’ behaviors. Thus development finance credits cannot be deemed tools of the state to achieve foreign-policy goals.

Personnel Appointment

The CPC appoints top-level officials at the policy banks. As table 3.1 below, in the 1990s, all had served in economic government ministries before becoming heads of the CDB or the China Exim. But since the late 1990s, these top-level officials have come from the financial sector, either the central bank (People’s Bank of China) or major state-owned commercial banks. Thus, they are technocrats with expertise in finance rather than government officials from ministries.

TABLE 3.1 Highest-ranking officials of policy banks

A comparison between the personnel appointment of China’s policy banks (especially after the 1990s) and that of Japan’s public financial agencies shows a major difference between the Chinese developmental state and the prototypical developmental state derived from the East Asian experience. Japanese public financial agencies had been popular destinations of amakudari, which translates to “descent from heaven,” referring to the postretirement employment of senior bureaucrats in lower-level agencies, such as financial agencies and corporations. Japan International Corporation Agency, the country’s official aid agency, had long been an amakudari destination of bureaucrats from Japan’s Ministry of Foreign Affairs. It was not until 2003 that the agency had its first governor not from the ministry. Similarly, the head of the Japan Bank for International Cooperation, Japan’s export-import bank, for a long time had come from the Ministry of Finance. The head of Nippon Export and Investment Insurance, Japan’s official export and investment insurer, usually comes from the Ministry of Trade, Economy, and Industry. In existing scholarly discussion of Japanese political economy, amakudari is characterized as a means through which the government and the business sector share information and build connections with one another.³⁴ At the same time, amakudari is a channel for the state to exercise its power over banks and firms. Public financial agencies were and still are, to some extent, perceived in Japan’s economic policymaking as the “territories” of their respective government ministries. An informal hierarchical relation exists between the two.³⁵

The relationship between government ministries and policy banks in China are less hierarchical in two ways. First, the fact that the heads of the policy banks in China are technocrats from the financial sector sharply limits the ability of Chinese economic government ministries such as NDRC or MOFCOM to exercise their power over the banks. Second, the policy banks are rather powerful state agencies themselves. In China’s administrative ranking system, government ministries are at the level of ministerial (bu ji) organs, while a public organ directly under the administration of a government ministry would be of departmental level (siju ji). Policy banks fall in between, as vice-ministerial organs (fubu ji). The heads of the policy banks have the accordant status as a result. The CDB had once been a “ministerial” organ informally, since Chen Yuan—a princeling and the most influential president in the bank’s history—was a ministerial-level official during his office (1998–2013). In his last year at the CDB, Chen ascended even higher and became a vice chair of the National Committee of the Chinese People’s Political Consultative Conference, a position even higher than that of a minister. This status allowed the bank to confront powerful government ministries and pushed forward marketization through institutional restructurings during Chen’s office (see chapters 1 and 2 for more details). Chen’s successors, nonetheless, have the level of vice ministers.

Starting in 2016, government ministries began to interact with the policy banks through a different institutionalized channel—namely, serving as bank directors.³⁶ According to the banks’ official annual reports, the CDB’s board of directors consists of 13 members. Three are the executives in charge of managing the bank, and six are equity directors from the CDB’s direct shareholding agencies. The directors of the NDRC, the MOF, MOFCOM, and the central bank, officially titled “government-ministry directors” (bu wei dongshi), comprise the other four. The China Exim’s board of directors has a similar composition, except that it has only 12 members (having only two executive directors), and the State Administration of Foreign Exchange rather than the central bank has a presence.

The policy banks’ government-ministry directors are government officials at respective ministries and hold part-time positions at the banks. As directors, they vote on important decisions such as the annual business plan and annual financial budget plan. In 2019, for example, the CDB’s board of directors held six directors’ meetings and reviewed and voted on 50 proposals, including the 2019 business plan, the 2019 financial budget, the 2018 final financial accounting report, a resolution to establish the international financial business department, and a three-year plan for preventing and resolving major risks.³⁷ The board also approves projects with volumes that exceed certain amounts. But a policy-bank official told me that directors from government ministries do not normally exert their power to turn down proposals. If there is disagreement between directors, they would discuss the issue outside the meeting and reach a consensus in advance. The board thus serves as a platform for the bank to interact with the regulatory government ministries but does not give those ministries significant power.³⁸

Shareholding

The six equity directors on each bank’s boards of directors give state organs some influence on the policy banks’ lending practices. Equity directors are sent directly from the banks’ shareholding state agencies and represent the shareholders’ interests, which are aimed at increasing the value of the state-owned assets.³⁹ They vote the same way as government-ministry directors except that they work full-time in the policy banks and are more familiar with the banks’ daily operations.

Shareholders may function on behalf of the state, but this does not mean that they advance foreign-policy or geopolitical goals. Indeed, the evidence suggests quite the contrary. As discussed in chapters 1 and 2, China’s economic reforms since the late 1970s started with a centrally planned system without “market actors”—namely, firms or banks. Major industries were controlled by industrial government ministries, the predecessors of central SOEs, and the Ministry of Finance (MOF) coordinated the allocation of credits because “banks” did not quite exist. Therefore, the emergence of state-owned enterprises and state-owned banks in the 1980s, as well as their multiple rounds of organizational restructure since the 1990s, reflected a transformation of state organs into market actors.⁴⁰ State ownership is usually seen as an indicator of state control, and yet in the Chinese context, it reflects a more nuanced state-market relation. Scholars have conceptualized such processes of corporatization and financialization as the emergence of a shareholding state—that is, “the introduction of shareholder values by the state to managing its asset, the expansion of state asset management bodies, and the provision of structured investment vehicles by these institutions to fund fixed asset investment.”⁴¹

Both the CDB and the China Exim are wholly state-owned, and both have more than one shareholding state organs. As of 2019, four state organs owned the CDB: the MOF (36.54 percent share), the sovereign wealth fund Central Huijin Investment Ltd. (34.68 percent), a company owned by China’s State Administration of Foreign Exchange known as the Buttonwood Investment Holding Company Ltd. (27.19 percent),⁴² and the National Council for Social Security Fund (1.59 percent). Buttonwood Investment owned most of the China Exim (89.26 percent), and the MOF owned the rest (10.74 percent).⁴³

The current ownership structure of the policy banks is a result of several rounds of capital injection since their establishment in 1994. The CDB had an initial registered capital of ¥50 billion, all provided by the MOF.⁴⁴ In 2008, as a part of the CDB’s ownership restructure from a wholly state-owned bank to a joint-stock company, Central Huijin injected capital to fund CDB, making its registered capital ¥300 billion.⁴⁵ In 2011, the National Council for Social Security Fund injected another ¥10 billion.⁴⁶ The China Exim started with a much smaller size, having an initial registered capital of ¥3.38 billion in 1994, which was expanded to ¥5 billion by the MOF in 2000.⁴⁷ In 2015, the state injected US$48 billion to the CDB and $45 billion to the China Exim from the foreign currency reserve through Buttonwood Investment. Consequently, the CDB’s registered capital increased from ¥306.7 billion to ¥421.2 billion, and the China Exim’s registered capital increased from ¥5 billion to ¥150 billion.⁴⁸

For policy banks, capital injections raise their capital adequacy ratio and allow them to issue larger quantities of loans. For the shareholders, shares of the policy banks are relatively safe, long-term assets worth holding. In fact, Central Huijin, Buttonwood Investment, and the National Council for Social Security Fund are not financial vehicles created to capitalize the policy banks alone. They have been the shareholders of major Chinese banks, insurance companies, securities companies, and asset management companies, among others. For example, by the end of 2020, Central Huijin held shares in 17 financial institutions (table 3.2).

The process by which the “shareholding state” came into being also demonstrates state fragmentation, as different state organs—specifically, the MOF and the central bank—competed with each other to represent the state in shareholding the financial institutions. Central Huijin was first created by the central bank in 2003; then, in 2007 the China Investment Corporation, a sovereign wealth fund created by the MOF, acquired it.⁴⁹ However, the intragovernmental rivalry does not diminish the fact that the state has been creating financial vehicles to control its assets and incentivizing those financial agencies to pursue profitability. Through such a shareholding relation, the preferences of the state and the banks as well as SOEs converge: all are incentivized to raise the value of state assets.

To summarize, the relationship between China’s state organs and the policy banks to a large extent resemble what existing scholarly studies of the East Asian developmental states have captured: the state regulates and coordinates the overseas business activities of public financial agencies and firms and sends top-level personnel to exercise power; ministries in charge of economic development and trade play a more direct role than the foreign ministry. Yet the Chinese state has significant differences. In a prototypical developmental state model, financiers subsidized by the state may need to sacrifice their short-term profitability in order to pursue long-term, industrial goals of the national economy. The “shareholding state” of China captures a mutually reinforcing state-market relation not present in the developmental state: when policy banks profit, the state, like any shareholder, does as well. This incentivizes the policy banks to pursue profitability while fulfilling national development goals. The combination of a developmental state and shareholding state leads to a peculiar relation between policy banks and firms. Like their counterparts in other East Asian economies during their catch-up stage, China’s policy banks support the overseas market expansion and business development of national firms. Nevertheless, the kind of advantage they provide to the Chinese firms is unique.

TABLE 3.2   A list of financial institutions/corporations held by Central Huijin

Nurturing Industrial Champions

The story of Tsingshan Iron & Steel, one of the world’s top stainless-steel producers, shows how Chinese state banks, especially the CDB, nurture national champions. Tsingshan is a private company founded in east China’s Zhejiang Province. Seeking low-cost ferronickel for steel production, Tsingshan started its global journey in Indonesia, the world’s largest nickel-producing country. In 2009, Tsingshan cofounded a joint venture, Sulawesi Mining Investment (SMI), with Bintang Delapan Group, a local Indonesian company led by ethnic Chinese. The joint venture was located in the Morowali Regency of Central Sulawesi Province, a region with rich nickel laterite.

Rather than extracting nickel ores and shipping them back to China, Tsingshan had a long-term vision to expand its production chain in Indonesia. Wang Haijun, president of Shanghai Decent Investment Group, Tsingshan’s overseas investment subsidiary, explained in a media interview why this was practical: “The nickel content of laterite ore is usually around 1.8 percent. If ten tons of laterite ores are shipped back to China, perhaps only a ton of nickel could be produced, and the remaining nine tons are wasted. To reduce cost, it is better to build factories directly on the mines.”⁵⁰ However, Indonesia’s lack of power plants, power grids, water supply, and drainage posed a significant barrier to the effective operation of factories. The company had to build everything from scratch, which required large-scale, long-term capital input.

Timing was another major concern in addition to lack of infrastructure. In order to develop a domestic nickel production chain, the Indonesian government had made a plan to ban raw nickel ore export starting in 2014. What this meant for the Chinese company was that if it were able to make a fast move, building ferronickel processing facilities before the ban, it would gain access to Indonesia’s abundant resources, whereas other foreign steel producers that did not have their production factories within the Indonesian border would lose a cheap source. Facing the approaching deadline, Decent Investment co-established the Indonesia Morowali Industrial Park (IMIP) with Bintang Delapan in July 2013, and the SMI would be undertaking the park’s first project, which was expected to have an annual nickel production of 300,000 tons.

To capitalize this project, Tsingshan reached out to multiple Chinese financial institutions in Indonesia. “We talked to several banks and were impressed by the CDB,” recalled Huang Weifeng, chair of the board of Decent Investment. “The first time I met with their Indonesia team, they brought a file of documents in Chinese, English, and Indonesian languages, explaining to me the kind of paperwork Tsingshan needed to complete in order to advance the project. I immediately noticed that they were pros, more professional than I was.” Huang noted, however, that “it was not easy to get their loans,” as the CDB had rigid standards on borrower’s financial capability as well as the domestic parent company’s ability to guarantee. The CDB also required that Decent Investment’s own funds sustaining the project’s first-year operation be ready before the CDB disbursed its loans. “From a firm’s perspective, the CDB’s financial option was not the most ideal. Holding too many assets on one project would slow us down from doing other projects. But I understood the bank’s caution and prudence, as it incentivized us to pursue profitability,” said Huang.⁵¹

When raising funds for its first project, Tsingshan also approached Sinosure, China’s official insurance company. For many firms borrowing from banks to undertake overseas projects, buying insurance is a better option than collateralizing assets because the former does not affect a firm’s future cash flow. Yet Tsingshan did not end up working with Sinosure on its first IMIP project. “Their project appraisal takes an entire year, and we cannot afford to wait that long,” said Huang.

The CDB provided US$384 million for the first IMIP project, representing about 61 percent of the needed funding—enough to attract the rest. “The CDB has vision and foresight, and its project appraisal result is authoritative in the field,” Huang explained. “After the CDB expressed its willingness to finance our project, many other Chinese banks approached us, making the financing of our following projects much easier,” said Huang. Construction began in mid-July 2013. It was the beginning of a pattern, and Tsingshan collaborated with the China Exim and the Industrial and Commercial Bank of China on its second IMIP project and the CDB again on the third project in the ensuing years.

Tsingshan’s overseas business ascended to a higher level after Xi Jinping’s visit to Southeast Asia, where he delivered a famous speech to the Indonesian parliament in October 2013. In this speech, President Xi brought forward the notion of a Maritime Silk Road of the Twenty-First Century and called for further cooperation between China and the Association of Southeast Asian Nations (ASEAN) in the current era.⁵² The speech is generally considered the beginning of the Belt and Road Initiative. As is customary when a high-level Chinese official makes a diplomatic visit, Chinese government ministries solicited potential economic projects in Indonesia to be signed during Xi’s visit, and Tsingshan’s project was among them. On the same day that Xi delivered his speech, Decent Investment and Bintang Delapan officially signed an agreement on the first IMIP project, and the signing ceremony took place as part of the business luncheon that Xi and Indonesia President Susilo Bambang Yudhoyono attended.⁵³

Labeled as a company performing one of the BRI’s flagship projects in Indonesia, Tsingshan gained more reputation as well as accessibility to loans. In 2014, the company surpassed all its competitors and became the world’s top producer in the stainless-steel industry. Its business expanded to India, Singapore, Zimbabwe, and the United States.⁵⁴ Challenges it encountered raising funds in the early 2010s, when it just started doing business in Indonesia, no longer arise.

When asked about his opinion on the relationship between firms and financial institutions, Huang described reciprocity rather than reliance: “Firms are indeed the ones that need money, but they are also providing banks the opportunities to profit. Banks should help firms advance business, so that the two can have a long-term, mutually beneficial relationship.” He saw the CDB and the China Exim as catalysts rather than direct driving forces of project development: “Before we approached the financial agencies to raise funds for our first project, we were already determined to move forward, despite all difficulties, and had prepared for the worst scenario that we failed to obtain any of their financial support and had to rely completely on our own funding,” said Huang. “Market opportunities do not wait. We are a fast-moving train. If the banks catch us, then great. If not, we will be running forward regardless.”⁵⁵

Throughout the process of Tsingshan’s overseas business expansion, Chinese government ministries played a role in providing networks. The ECO of the Embassy of China in Indonesia, an overseas office of MOFCOM, assisted the firm by connecting it with Indonesian companies as well as Chinese financial agencies. A direct positive outcome of collaborating with Bintang Delapan is that the local partner is familiar with Indonesia’s domestic situation and takes charge of networking with the Indonesian government. Despite the fact that it made the IMIP’s first project a gaofang project, China’s Ministry of Foreign Affairs played an indirect role in advancing Tsingshan’s business. “Our first IMIP project was already in negotiation before the high-level visit. That it became a gaofang project has made our company famous but also brought us more responsibility—if we don’t do it well, we will be harming [China’s] national reputation,” said Huang.⁵⁶

Not all Chinese firms conducting business in developing countries are like Tsingshan, which is privately owned and profit-driven. Among the large number of firms that policy banks have financed, Tsingshan perhaps is among those that are the most market-oriented. The state banks benefited it a good deal, and yet the company might have succeeded in its aims to some degree without these banks. Plenty of Chinese firms, on the other hand, are state-owned and more reliant on policy-bank loans, and they might not succeed overseas to any degree without such support.

Supporting International Contractors

A major category of Chinese firms that have benefited significantly from policy banks’ financing are international contractors—that is, construction companies that build infrastructure works overseas. According to data gathered by Engineering News-Record, a U.S. magazine that ranks the world’s top firms in engineering and construction, six of the top-20 international contractors in 2020 were Chinese, more than from any other country.

These firms obtain overseas business opportunities thanks to policy-bank loans, but not necessarily through direct borrowing. Contractors receive their pay from project owners (also called sponsors) and are not responsible for the profitability of projects. As long as they are paid on time, the source of the funding has no impact on them. Owners of infrastructure projects are often government organs of the country where the project takes place. If they do not have sufficient fiscal revenue to fund their projects, they may choose to borrow from external sources such as multilateral development finance institutions, foreign aid agencies, or banks.

TABLE 3.3    Chinese contractors on the top-20 ENR international contractor 2020 list

If a project owner has already raised sufficient funds, it would normally select contractors based on their speed, quality, and price of services. But if a project owner is still seeking capital to fund its project, which is quite common in the infrastructure markets of underdeveloped regions, contractors that bring “self-prepared” financial resources have a huge advantage in obtaining the project. Thus, construction companies conducting business in less developed regions often coordinate with their home country’s banks or official aid agencies before bids. The company will provide engineering, procurement, and construction services, and the financial agency will provide loans. In some cases, companies may choose to become temporary or semi-project owners and practice the “BOT” (build-operate-transfer) or “BOOT” (build-own-operate-transfer) model—in other words, building, owning, and operating the project, then transferring it back to the original project owner after a period of operation. But doing so requires more capital, time, and effort, and it also increases potential risks. A company would only choose this option if it had sufficient capital and expected the project to profit during the period for which it would be an owner or operator.

Policy banks offer longer-term and larger-scale loans than commercial banks do, and of course the China Exim’s concessional loans with subsidized interest rates are particularly attractive. Chinese contractors thus often seek the assistance of the policy banks in order to obtain contracts in developing countries. The Hambantota Port project in Sri Lanka reflects this situation. It has often been cited as a typical example of China practicing “debt-trap diplomacy” after the Sri Lankan government leased the port to a Chinese port-operating company for 99 years.⁵⁷ However, the policy banks’ involvement in the project in fact demonstrates how they supported Chinese contractors seeking business opportunities in the country.

The Sri Lankan government’s intention to raise capital from international creditors to develop Hambantota can be traced back to the early 2000s. According to an article in The Atlantic, the Canadian International Development Agency financed the first feasibility study on the Hambantota Port project, which was conducted by Canada’s leading engineering and construction firm, SNC-Lavalin, in 2003. The feasibility report recommended that Sri Lanka Ports Authority and a private consortium build the port jointly, but the project did not move forward because Canada had concerns with the vicissitudes of Sri Lanka’s domestic politics.⁵⁸ In November 2005, roughly a year after the Indian Ocean tsunami devastated Sri Lanka, Mahinda Rajapaksa, a politician born and raised in Hambantota, was elected president. He sought external capital sources to fulfill a promise he made to restore his hometown’s economy. In 2006, Ramboll, a Danish consulting firm, completed a second feasibility study. It reached a positive conclusion that the port would handle nearly 20 million twenty-foot equivalent units by 2040.⁵⁹ With this feasibility report, the Rajapaksa government approached India and the United States for loans, but both countries declined.⁶⁰ It then turned to China.

Chinese contractors and banks had entered the Sri Lankan market years before. One of the first Chinese companies involved in projects in Hambantota, the China Huanqiu Contracting & Engineering Corporation, started its journey in Sri Lanka in 1997. The company is a subsidiary of China National Petroleum Corporation, China’s state energy giant. To expand its contracting business in Sri Lanka, Huanqiu took advantage of the large-scale lending of Chinese banks. In 2001, Huanqiu was selected the prime contractor of the Muthurajawela Oil Tank Storage Project in Colombo. The China Exim provided 90 percent of the needed funding, approximately US$72 million, and Sri Lanka’s Ceylon Petroleum Corporation provided 10 percent.⁶¹ In a 2014 interview with Xinhua News, Huanqiu highlighted that it was the company that helped its Sri Lankan project owner acquire a mixed-credit loan from China, a combination of commercial loans, concessional loans, and grants.⁶²

High-level visits between Chinese and Sri Lankan officials reinforced Huanqiu’s infrastructure business. During his official visit to Sri Lanka in April 2005, a few months after the tsunami, Chinese prime minister Wen Jiabao met with Chandrika Kumaratunga, then the president of Sri Lanka, and Mahinda Rajapaksa, then the prime minister. The two governments signed a joint agreement, which included a clause stating that both sides would support and facilitate Chinese companies’ participation in Hambantota’s refueling facilities and oil tank farm project. Huanqiu was the contractor for the project.⁶³

Half a year after Wen’s visit, Rajapaksa was elected president, and the new government accelerated Sri Lanka’s economic cooperation with China, especially on projects in Hambantota. In July 2006, Sri Lanka’s foreign minister Mangala Samaraweera visited Beijing officially and met with Li Ruogu, the president of the China Exim. The joint government announcement released after Samaraweera’s visit stated that both sides would support Chinese companies’ participation in Sri Lanka’s infrastructure projects and encourage the application of concessional conditions to the financing of these projects. Prioritized projects, according to the announcement, included port and oil tank farm projects in Hambantota. In February 2007, President Rajapaksa visited China himself. The visit resulted in China’s consent to finance Hambantota’s development. Three months after Rajapaksa’s trip, the China Exim sent a team to Hambantota to investigate the feasibility of the port project and discuss possible financial options.⁶⁴ In October of the same year, Li Ruogu flew to Sri Lanka to meet with Rajapaksa and signed an agreement with Sri Lanka’s finance minister. In the agreement, the China Exim committed to offer a commercial loan for the first phase of the Hambantota Port.⁶⁵ According to Xinhua News, the interest rate of the commercial loan was 6.3 percent; the Sri Lankan government had asked for a lower rate, but the quota of China’s preferential loans to Sri Lanka that year had been exhausted.⁶⁶

China Harbor Engineering Company played an important role throughout the process of nailing down the Hambantota deal. This construction company is a subsidiary of China Communications Construction Group, the world’s fourth largest international contractor (see table 3.3). Like Huanqiu, China Harbor started its business in Sri Lanka in the late 1990s. In its first few years in the country, the newcomer worked as a subcontractor for other major contractors. Seeking opportunities to advance its infrastructure business in Sri Lanka, China Harbor lobbied hard to become the contractor of Hambantota Port’s phase I project.⁶⁷ During the negotiation of the project in 2007, China recommended China Harbor to construct the project, and Sri Lanka accepted.⁶⁸ With the willingness and effort of all stakeholders—the governments of both China and Sri Lanka, the financier, and the firm—the two countries reached an agreement: the China Exim signed to offer Sri Lanka buyer’s credits of $360 million to finance the project, and China Harbor served as a main contractor.⁶⁹ The deal was important for China Harbor’s business expansion in Sri Lanka. In the ensuing years, it also served as the contractor during later phases of the Hambantota Port project. In an official corporate report, the 2008–2010 period was described as the “rapid growth period” for China Harbor in Sri Lanka; phase I of the Hambantota Port project was a breakthrough, which made the company a leading contractor in the Sri Lankan infrastructure market.⁷⁰ The construction conglomerate’s business has continued to grow in the years since. The parent company even launched a huge project—Port City Colombo—to develop a new city along the coastline that would become Colombo’s central business district.

The Hambantota Port exemplifies how policy banks supported Chinese companies in obtaining construction contracts in developing countries, where the host government lacks sufficient capital. This form of financial support differs from the typical means of industrial finance in which late-developed economies provided state-subsidized preferential credits that gave national firms a price advantage over their foreign counterparts. The disparity is mainly reflected in two aspects. First, in some cases, no competition with foreign rivals exists. As described above, China was the only country that did not turn down Sri Lanka’s request to help finance and build the Hambantota Port. Second, the policy-bank loans do not necessarily create a price advantage for Chinese contractors. As the case above shows, even for the government-supported Hambantota project in post-tsunami Sri Lanka, the China Exim did not offer its most concessional loans. Moreover, Chinese contractors are well known in the international infrastructure market for offering cheap construction packages, owing to the low cost of labor and equipment.⁷¹ In other words, they already have a price advantage even without the financial support from the policy banks. Instead, the contractors benefited from the policy banks’ capitalization of host countries’ project owners, which jump-started the projects in the first place. This is, in fact, commonly observed in China’s overseas business. Chinese contractors have shown greater market shares in developing regions such as Africa, the Middle East, and Asia, whereas Western contractors focus on markets such as Europe and North America (figure 3.5).

Financializing the State

A question then arises: If policy-bank loans are not always concessional, and project owners in underdeveloped regions do not always demonstrate strong financial capacity, how could the borrowers afford to repay these relatively high-interest rate loans? Of course, it would be ideal if all the projects that the banks finance generate sufficient cash flow for loan repayment, but obviously this has not been the case. So what does China do with insolvent projects? For Chinese banks, the decision to cancel debts is difficult to make because it would mean increasing the amount of nonperforming loans on their balance sheets. China’s Ministry of Finance is not willing to bail out these projects with tax revenue either, because the ministry is not accountable for the banks’ financial losses. A commercially oriented rationale underlying China’s solution to the seemingly defaulting projects, as the analysis below will show, is to financialize the “state.”

For instance, China practiced new equity investment rather than debt reduction when it became clear that the Hambantota Port project was not financially sustainable. After Chinese construction companies completed the first phase of the project in 2010, the Sri Lanka Ports Authority operated the port for a few years. However, the port was not generating sufficient revenue for loan repayment and had an accumulated loss of approximately $304 million by the end of 2016, according to a report by the Belt & Road Hong Kong Centre.⁷² In 2017, Sri Lanka reached a deal with China Merchants Port Holdings: The company would acquire 85 percent of shares of the Hambantota International Port Group and would operate the port for 99 years.⁷³ In this process, the Sri Lankan government’s equity shares over the port were financialized as tradable assets. The deal has often been depicted as a state-led geopolitical move whereby China made Sri Lanka hand over a port, but in fact, the new equity investment brought in $1.12 billion in cash, which bolstered Sri Lanka’s foreign reserves and allowed the government to repay debts to non-Chinese creditors.⁷⁴

Moreover, the commercial incentives for China Merchants Port Holdings readily explain the decision. The company is a subsidiary of the China Merchants Group. This parent company, headquartered in Hong Kong, is China’s largest central SOE by total assets. Founded in 1872, the group has developed a wide range of businesses and a large network of subsidiaries, including its own bank (the China Merchants Bank), a securities trading company (China Merchants Securities Company), and an insurance company (the Ping An Insurance). The China Merchants Group has been an experienced port operator and is well known for practicing a “Port-Park-City model” (qian’gang-zhongqu-houcheng), also sometimes referred as the “Shekou model,” which emerged in the late 1970s with the onset of China’s Reform and Opening Up era. The China Merchants Group’s experience developing Shekou, a small fish village at the Shenzhen Bay, exemplifies how infrastructure facilitates industrialization and urbanization. In 1979, the company founded the Shekou Industrial Park, China’s first industrial park open to foreign investment. China Merchants made Shekou into a modern port city of economic dynamism by (1) developing the industrial park to generate production, (2) building a port on the water accessible to the village to transport goods and products, and (3) constructing urban facilities for residence. With an ambition to replicate this Port-Park-City model abroad, the company has been investing in and building ports around the globe. In an interview with 21st Century Business Herald in December 2017, Hu Jianhua, then president of the China Merchants Group, said that he believed Hambantota could be the Shekou of Sri Lanka.⁷⁵ In other words, China Merchants considered Hambantota to be a project with long-term commercial potential and a worthy investment.

In fact, before it got involved in the Hambantota Port project, China Merchants Holdings (then named China Merchants Holdings International) had already collaborated with Sri Lanka in 2011 on a $500 million BOT project to construct and operate the Colombo International Container Terminal.⁷⁶ Its use of the BOT approach implied that the company was sufficiently rich that it was able to “operate” projects rather than simply “build” them like most contractors do. A strong capital position allowed the company to assist the debt restructuring of the policy-bank financed Hambantota Port project. Nonetheless, not all Chinese companies doing business in the developing world are as wealthy as the China Merchants Group, and they often have to rely on policy banks to revolve their financial issues.

When appraising public borrowers that have relatively weak fiscal capacity, policy banks usually financialize host countries’ state-owned or state-coordinated revenues to enhance projects’ creditworthiness—what the CDB calls “credit enhancement” (zeng xin)—so that the project will meet the banks’ lending requirements. The most common practice is to request sovereign guarantees from host countries’ government. This essentially financializes public borrowers’ future fiscal revenue. Yet, this practice is not always available because the total amount of sovereign guarantees a government can offer is limited. When public borrowers cannot offer sufficient fiscal guarantees, policy banks may choose to financialize other revenues of the host countries, such as export revenue. More specifically, they may request that host governments use their future commodity export revenue earned from Chinese companies to repay their loans (see figure 3.6). For example, in the early 2000s, the China Exim offered oil-backed loans to Angola. The Angolan government sold oil to Chinese petroleum companies to repay its debts to the China Exim and contracted its infrastructure projects to Chinese construction companies. This mechanism is termed the “Angola Mode” in a World Bank Report and sometimes also dubbed the infrastructure-for-oil model.⁷⁷

The China Exim and the CDB have practiced commodity-backed financing in multiple developing countries, including Republic of the Congo, Democratic Republic of the Congo, Guinea, Ethiopia, Sudan, Ecuador, Brazil, and Venezuela. In addition to oil, raw materials such as chromium, copper, iron ore, bauxite, and grains such as cocoa and peanut oil have been collateralized.⁷⁸ The Chinese did not invent commodity-backed financing. For decades, public borrowers in Africa and Latin America have collateralized their “future receivables”—fiscal revenues, export revenues, and other future incomes—to borrow from Western private investors, official export credit agencies, and multilateral financial institutions.⁷⁹ The Angolan government under José Eduardo dos Santos, for example, began using oil revenue to borrow internationally long before the China Exim entered the market in the early 2000s.⁸⁰ It was actually the Angolan government that suggested the use of oil-backed loans to the Chinese in 2003, according to the autobiography of Wei Jianguo, then China’s vice minister of commerce, when it failed to acquire loans from Western countries for Angola’s post–civil war reconstruction.⁸¹ In fact, China itself was a borrower of commodity-backed loans in the late 1970s, when it borrowed from Japan to finance its Daqing oil field, and the loans were repaid with oil.⁸² In commercial financing, it is common for borrowers to collateralize their future revenues of various forms to obtain loans from banks. In the case of infrastructure financing, however, revenues could be state-owned and borrowers could be public entities, and the financialization of these public revenue flows implies that the state is taking extra risks from the market in order for projects to take place. This means of state participation jump-starts projects but also leads to controversy.

One of the perhaps most controversial cases is the CDB’s infrastructure-for-oil loans to Venezuela, which has drawn much scholarly and media attention.⁸³ In 2007, the two countries co-established a China–Venezuela Joint Fund, to which the CDB lent $4 billion and Venezuela’s national development bank, the Venezuelan Economic and Social Development Bank, invested $2 billion. The joint fund aimed to offer capital to support infrastructure projects in Venezuela, which would be contracted to Chinese companies. According to the CDB’s design of the lending arrangement, loans would be repaid with Venezuela’s future oil export revenues. More specifically, Petróleos de Venezuela, S.A. (PDVSA), a Venezuelan state-owned company, would sell oil to Chinese SOEs, the Chinese SOEs then paid for the oil using an escrow account at the CDB, and their payments were used to repay loans owed by Venezuela to the bank. The way the CDB financed the Venezuelan projects reflect the same undergirding lending rationale of the bank—employing market instruments to finance development projects. Like its lending to Tsingshan’s first industrial park project, the CDB made loans to Venezuela that were backed by collateral, which in this case were state-coordinated revenue flows rather than private assets owned by corporations. “The [Hugo] Chavez administration was powerful, and we were able to request multiple collaterals from it,” a former senior CDB official recalled.⁸⁴

Chinese official media at first described the CDB’s oil-backed lending to Venezuela in positive terms, calling it a “multiple win” because it supported Chinese firms’ global business, secured resources overseas, and facilitated international cooperation.⁸⁵ Financially, the lending arrangement avoided potential risks caused by foreign-currency exchange fluctuation because Chinese oil companies that imported oil from Venezuela would repay the CDB directly with renminbi. But what seemed like a safe arrangement became far less so when oil prices dropped sharply after the global financial crisis, Hugo Chavez died in office, and Venezuela faced long-lasting political and economic crises.

Not only did the CDB fail to receive the agreed amount of repayment, but Chinese firms—both commodity traders and construction companies—experienced economic losses from participating in the projects. The China National Petroleum Corporation, China’s oil and gas conglomerate and a central SOE, claimed that the oil it had bought from PDVSA was low quality, containing excessive water levels that can cause problems for refineries.⁸⁶ Sinopec USA, a subsidiary of another Chinese oil giant, sued PDVSA in 2017 for not making full payment and using a sham company to perpetrate fraud against Sinopec.⁸⁷

Chinese construction companies building infrastructure works in Venezuela were not fully paid for their construction services, if at all. What is more, they had to compete with one another in order to be paid. According to an expatriate employee of a Chinese SOE, the China–Venezuela Joint Fund ranked the China-contracted projects according to importance and set their payment schedule. “Some companies ranked at the bottom of the list could not get paid even after they completed constructing the entire project,” the employee said.⁸⁸ Even the China Railway Engineering Corporation, China’s largest railway conglomerate, which contracted for a flagship Sino–Venezuelan project worthy of US$7.5 billion—the Tinaco–Anaco Railway—could not continue with the project because of Venezuela’s domestic vicissitudes and lack of funding. According to a 2021 report by Dialogo Chino, less than a third of the originally planned railway was built; the project was “intermittently paralyzed and reactivated” between 2011 and 2014, and the camps were looted.⁸⁹

Unlike global private capital, which would exit a market if it failed to profit, Chinese capital did not exit Venezuela entirely. Chavez’s successor, Nicholas Maduro, visited China multiple times since he took office in 2013, seeking further financial support to deal with the country’s economic turmoil, and the Chinese government has committed several times to continue financing projects in Venezuela. The CDB continued to be Venezuela’s main financier. According to data gathered by The Inter-American Dialogue, a U.S.-based think tank, the bank loaned US$16.9 billion between 2013 and 2016 to finance projects in Venezuela, and added a US$ 5 billion loan in 2018 to support a project of oil sector development.⁹⁰ In fact, the CDB has had difficulty withdrawing from the country. If it were to give up on the loans, the nonperforming loan rate of the bank would increase immediately, which is something the bank has been assiduously avoiding for decades. Thus, the only option for the CDB is to refinance and restructure its loans in Venezuela, just as it has been doing with loans owned by Chinese subnational governments (see chapter 2). As Stephen Kaplan and Michael Penfold put it in a Wilson Center report, “China was ensnarled by a creditor trap in Venezuela, much more than Venezuela was caught in a debt trap by China.”⁹¹