China's easy money flows abroad as credit squeeze hurts at home

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Chinese and Venezuelan construction workers build an elevated platform at China Railway Engineering Corporation's (CREC) Tinaco-Anaco railway project in Los Dos Caminos, Venezuela. Photo: Bloomberg

As China's cash squeeze claims victims across the nation -- from a bailout-seeking shipyard to a solar-panel maker missing a bond payment -- there are places where Chinese money remains cheap and plentiful. Like Nigeria.

China Development Bank Corp. and Export-Import Bank of China are lending billions of yuan to some of the world's riskiest regimes at interest rates hundreds of basis points below the cheapest commercial loans available at home. That lending in turn generates overseas contracts to build airports, roads and shopping malls for state-owned Chinese companies that are mired in debt.

"As opportunities go down and risks go up at home, these policy banks have gained a lot of power and they want to sustain themselves," Kevin Gallagher, author of the 2010 book "The Dragon in the Room" about Chinese investment in Latin America, said in a telephone interview. "The majority of the countries that are getting the finance are countries with bond spreads that are through the roof."

CDB, with a loan book more than three times the size of theWorld Bank's, and China Eximbank are wholly owned by the state with a mandate to support Chinese foreign policy. Officials from the lenders accompany the nation's leaders across the globe dispensing funds to forge ties from Costa Rica to Russia, helping secure supplies of oil, gas and minerals and creating work for some of China's biggest state-owned enterprises.

Mexican credit

Last month in Latin America, President Xi Jinping pledged to lend $3 billion to 10 Caribbean nations, CDB offered a $900 million loan to build a refinery in Costa Rica, and Mexican oil company Petroleos Mexicanos received a $1 billion line of credit from China Eximbank. Separately, China Development Bank made a $4.02 billion loan to Venezuela's state-owned oil producer.

In the four weeks since China's seven-day repurchase rate, a gauge of interbank funding availability, rose to the highest level since 2003, the two Beijing-based banks financed a $700 million airport and retail complex in Khartoum, Sudan; loanedRussian oil producer OAO Rosneft $2 billion; provided $334 million in funds for a Balkan highway; and gave a $100 million line of credit to a Nigerian bank and another $500 million to build four airport terminals in the west African nation.

Hua Chunying, a spokeswoman for China's foreign ministry, declined to comment on China's international lending by policy banks. Calls to the policy banks' press offices were unanswered.

Building bridges

In many cases China is seeking to secure energy supplies. In Venezuela, Brazil, Ecuador and Russia, China Development Bank loans are paid for with oil shipments to China.

In other cases, the loans bring business for Chinese companies. Nigerian trade and investment minister Olusegun Aganga, speaking to reporters on July 12 in Beijing, said China Eximbank's loan to build the airport terminals was given at concessionary rates to create contracts for Chinese companies.

The loan has a 2 percent interest rate and a 22-year repayment period, Nigerian Aviation Minister Stella Oduah said in Abuja on July 3. "It's almost free money," she said.

Even China Eximbank itself, which is financed by bonds, can't borrow money that cheaply. This month it sold 26 billion yuan in bonds carrying interest rates ranging from 4 percent to 4.15 percent, according to company documents.

While Aganga and Nigerian President Goodluck Jonathan were in Beijing, they signed an agreement with Power Construction Corp. of China that may lead within a year to a $20 billion project for 20,000 megawatts of electricity capacity in Nigeria, with the Chinese company recouping the investment by selling power to the grid, Aganga said.

Making friends

"It's not about aid anymore," Aganga said. "Nigeria is one country everyone wants to be friends with today."

Things are less friendly in Ordos in Inner Mongolia, where mile after mile of vacant or unfinished apartment blocks stretch across the city. Erdos Dongsheng City Construction Development & Investment Group Co., owned by the local government, racked up 10.5 billion yuan in total debt by the end of 2010, a more than 15-fold rise in two years, according to its bond prospectus. Municipal revenue fell 15.8 percent in Jan.-May from a year earlier, according to official statistics.

China Rongsheng Heavy Industries Group Holdings Co., owner of the nation's biggest shipyard outside state control, said on July 5 it was seeking financial help from the government after orders plunged. China Rongsheng hasn't sold bonds.

Solar-panel maker LDK Solar Co. in Xinyu said in April it was unable to fully pay $23.8 million of dollar-denominated convertible bonds. Last month LDK said it would restructure another $240 million in debt owed to lenders including CDB and China Construction Bank Corp. (939) LDK's shares plunged 66 percent last year amid a global glut in solar panel capacity.

Policy bonds

In the middle of this squeeze, the policy banks remain unscathed. On July 9, China Development Bank sold nine-month bonds at 4.37 percent -- 163 basis points below the central bank's one-year bank lending rate. A basis point is one-hundredth of a percentage point.

"Policy banks are essentially buying business for Chinese construction firms overseas by effectively subsidizing the substantial political risk in those countries," said Patrick Chovanec, New York-based chief strategist at Silvercrest Asset Management Group LLC and a former Tsinghua University professor. "The immediate effect doesn't conflict with efforts to rein in domestic credit, so maybe that's why you see overseas lending going full speed ahead."

The state-owned companies that are CDB and Eximbank's global partners also can tap bond markets at low interest rates. Shandong Hi-Speed Group Co., which is helping build the Balkan highway from Belgrade to Montenegro, sold 2.5 billion yuan in two-year bonds in May with a 4.95 percent coupon.

First step

Shandong Hi-Speed, originally set up to lace the home province of philosopher Confucius with expressways, has projects in East Timor, the Bahamas, Sudan, Iraq, Vietnam, Chad, Pakistan and the Congo, according to its website. The company's profit fell and total liabilities surged by a third last year to 160.7 billion yuan.

It's the same story for the state-owned Chinese company building Khartoum's airport with help from an Eximbank loan. Its parent, China Communications Construction Co. (1800), with bank and bond debt of 102.8 billion yuan at the end of March, sold 2 billion yuan in bonds in May at a 3.85 percent coupon.

At the end of last year, the company had yet to tap 515.8 billion yuan in lines of credit offered by four Chinese commercial banks. The company's cash on hand fell by 12.7 billion yuan in the first three months of the year, according to its May bond prospectus.

While Moody's Investors Service Inc. and Standard & Poor's give China the fourth-highest investment grade, Nigeria, Serbia and Venezuela all have junk ratings. Sudan, wracked by decades of civil war that resulted in the secession of South Sudan in 2011, has no rating.

Overseas advantage

"The recent spate of overseas deals by China Eximbank and China Development Bank are consistent with both banks' missions to facilitate the international expansion of Chinese companies," Erica Downs, a fellow at the Brookings Institution in Washington who studies China's energy and foreign policies, wrote in an e-mail.

The press offices of China Communications Construction and Shandong Hi-Speed didn't answer calls seeking comment.

China's total outbound investment during 2011-2015 may be worth $550 billion, Xinhua News Agency reported on July 12, citing Huo Jianguo, director of the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce.

China's cheap money also buys friends, with loans and aid from the state banks helping cement political ties. Venezuela has taken in more than $40 billion in loans from China since 2008, most from China Development Bank, that it pays back with oil shipments. Earlier this year Venezuelan President Nicolas Maduro pledged 100 years of friendship with China to visiting Chinese officials attending the funeral of President Hugo Chavez, who died in March.

"Building political goodwill probably is not the primary purpose of the loans but may very well be a secondary one," said Downs at the Brookings Institution. "After all, supporting China's diplomacy is part of both banks' mandates."

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