VZCZCXRO6585
PP RUEHBZ RUEHDU RUEHMR RUEHRN
DE RUEHJO #0311/01 3061407
ZNR UUUUU ZZH
P R 021407Z NOV 07
FM AMCONSUL JOHANNESBURG
TO RUEHC/SECSTATE WASHDC PRIORITY 6027
INFO RUCNSAD/SADC COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0044
RUEHBS/USEU BRUSSELS 0001
RUEHDS/AMEMBASSY ADDIS ABABA 0017
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHJO/AMCONSUL JOHANNESBURG 2778
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