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Chapter 1:
The LGFV model developed by CDB and local governments in China is the secret sauce of the rapid growth in the past 20 years in the country. LGFVs are essentially companies set up by local governments whose sole purpose is to finance the infrastructure and property projects such as bullet trains, development zone, malls and sport complex. LGFVs are generally largely supported by huge long-term line of credit from CDB. The collaterals of such credit are typically the sales of nearby land instead of the operating cash flow from the projects simply because the prices of nearby land would typically increase rapidly due to the “synergy” of such infrastructure projects. And sometimes even the collaterals are not required by CDB like in Loudi case as long as the projects are considered as “good” by CDB.
CDB normally raises fund by bond issuances and most of its bonds would be underwritten by the commercial banks, as Chinese called them, including CCB, BOC, ICBC and ABC. Since supported by central government, the bonds are usually considered to have the same rating with sovereign fund of China. The funds are then bridged to LGFVs to invest in long-term projects which would otherwise be difficult to get financed. By doing this, the logic of CDB is essentially similar with that of policies during the culture revolution period, which is best described as “Concentrate resources and Do big things”(集中力量辦大事).
The development models selected in different places may be slightly different. In Wuhu model, land are acquired from rural farmers with deep discount and small compensations while in Chongqing model, the SOEs which have land in the central area in the city were encouraged to relocate to the suburb in order to leave the land to develop property markets, booming the land prices eventually.
In China, policy banks such as CDB Eximbank and ADB differ from commercial banks such as CCB and BOC primarily in that policy banks take protecting “national and social interests” as their essential responsibility while commercial banks are for profits. And this is essentially the reason why commercial banks such as CCB would not directly involve in LGFV models since the investment horizons of the projects are too long in the eyes of commercial banks thus quite risky for them.
Though a great economic success the LFGV model turns out to be, some critics argue the CDB is the origin of the ever-increasing wealth gap in China since the model mainly benefits high-end group while weakening the low-income group such as farmers. And this is in line with the saying that “Let some people get rich first”, which is one of the logic of the reform in the past 30 years in China
Chapter 3:
CDB has no competitive advantages in closing deals in Africa, nor in South America, since those African countries are eager to do business with China, or CDB primarily because the interest rates of Chinese loans are low. Do you think it is a kind of competitive advantage?
An advantage is competitive critically because it is hard, if possible, to copy. Cost-leadership strategy with lowest interest rates of the loans to African countries such as Ghana, is extremely easy to copy. Therefore, it is reasonably foreseen that the countries will rush to a second country to close deals, perhaps India, provided that country could provide more economic rates than China.
CDB’s adventures in Africa are not purely driven by political reasons, though political reasons cannot be ignored. It is believed that economic reasons are playing an increasingly important role. For instance, Ethiopia is rich in supply of high-valued cows and sheep and labor, which is perfect for leather industry with a 12% cost advantage compared with that in Vietnam, China’s most nearby neighbor.
CDB does faces considerable potential threats in Africa, though the officials are positive with one voice. In addition to the biggest political stability threat and default history in the continent, the misuse of the capital borrowed from China is also worth noting. A third threat is the increasing hatred towards China in the country since increasing number of people argue that China is the “new colonialist” in the world because China is exporting its industrial products to Africa while importing merely resources and limiting the technology export to the continent.
It is believed that Africa and China are more and more closely tied with each other with increasing investments from China in Africa. CDB, however, should always bear in mind that Africa is perhaps more complex than imagined since western countries and local powers, together with rising countries like China, are playing a “Three Nation” game in the continent.
Chapter 5:
Yingli is one of the biggest beneficiary of CDB in the polar industry with more than 7 billion USD loans in the past 5 years. The credit helped the company recovered from the price collapse of the PV cells in 2010, which is its core products and investors gain confidence from the credit as well. These loans allowed Yingli to increase its production capacity and drive down costs, which gives its products a significant cost advantage in the market. In addition, Yingli can always go to CDB when the market is bad to get credit to live through, which essentially eliminates the failing risk of the firm.
While clean energy is also encouraged by the Obama and US government, the government found US companies difficult to compete with Chinese Polar companies such as Yingli simply because there is no such policy banks like CDB standing to provide loans to companies to develop globally. Therefore, CDB’s support actually helped the companies wipe out competitors in the market for Yingli.
Without the pressure to survive, Yingli may eventually find itself becoming more and more uncompetitive. With huge loans interests, CDB may have to take over the company to manage and nationalize it, which normally means a bad asset and financial burden to the balance sheet of CDB.