What to expect from the new reforms of Chinese policy banks？
This year Chinese financial authorities set in motion a new round of reform on policy banks: China Development Bank (CDB), Export-Import Bank of China (Ex-Im Bank) and Agricultural Development Bank of China (ADBC). The primary role of this policy banks in China is to support, through their loans, the fulfillment of China’s national development policies.
All three policy banks were founded in 1994, with the principal objective to address the mismatched division of financial functions in China. During this process, concerns and criticism were raised within China over policy banks’ involvement in businesses unrelated to development policies, which has contributed to an unfair and harmful competition between policy and commercial banks. The criticism lies mainly in the fact that policy banks enjoy sovereign credit rating and thus lower cost of funds that allows them to provide loans with lower interest rates. This lack of clarity in the role and function of policy banks affects Chinese commercial banks, such as the Industrial and Commercial Bank of China (ICBC) and the Bank of China (both banks have made few loans in Latin America, but some of them are significant because of the amount or type of project they finance), whose main goal is to make capital gain without worrying too much about China’s development policies.
Two out of the three policy banks, CDB and Ex-Im Bank, are among the largest bilateral creditors in Latin America and in many other countries of the developing world. Thus, the impacts of this reform will reach far beyond China’s borders and are concerning to all of us. Then it is worth asking what implications this reform will have in the region if the goal of this reform is to limit the participation of policy banks in commercial loans. Will CDB and Ex-Im Bank stop providing corporate loans and other types of non-sovereign loans to LAC countries? Will there be more room for the growth of Chinese commercial banks such as the ICBC and the Bank of China in the region? What kinds of projects will Chinese commercial banks support? And, will Chinese commercial banks have better or worse environmental and social risk management?
In early July, China’s Financial Stability and Development Committee (FSDC) outlined a reform program for policy banks that did include other key aspects such as compliance, transparency, accountability, and risk management (although it was unclear whether environmental and social risks are included). These are areas in which Chinese banks, both policy and commercial banks, require urgent and vigorous reform. One proof of this is that the CDB, the largest Chinese creditor in Latin America, does not have a framework of environmental and social safeguards, or the most basic standards of transparency and accountability to the public. Certainly, it is a positive sign that some of these aspects are included in the reform program, but at the same time it is fairly clear that the focus of the reform is to reorganize the priorities and roles of policy banks, in order to improve its economic performance and reduce the risks of its loans.
Unfortunately, little attention is paid to environmental and social governance in the reform, a fundamental aspect to achieve the Sustainable Development Goals to which the Chinese government has committed. For Latin America, the lacking of environmental and social safeguards, and of a culture of transparency and participation in Chinese banks, is of great concern, since many of the projects financed by China are located in socially and ecologically sensitive habitats, and a large number of them have contracts of several decades that can be renewed. In this respect, this round of reforms is less likely to address what concerns us most about Chinese financing in LAC. However, it would be reasonable to expect that the recent tightening of regulations on Chinese banks will have positive implications for creating a culture of responsibility and transparency; and, hopefully, this would help to improve their long-term socio-environmental performance.
Consultant at Latinoamérica Sustentable (LAS)
Picture taken from SIS International Research
图片来源 SIS International Research
2021 年 8 月 25 日