China Development Bank’s Oil Loans: Pursuing Policy and Profit

Editor’s Note: The following article originally appeared in China Economic Quarterly, a publication by Dragonomics Research and Advisory.

Since 2009, China Development Bank (CDB) has extended lines of credit totaling almost US$75 bn to national energy companies and government entities in Brazil, Ecuador, Russia, Turkmenistan and Venezuela. The loans are secured by revenue earned from the sale of oil to China’s national oil companies (NOCs), except in the case of Turkmenistan, which is delivering natural gas. These energy-backed loans are distinguished by their large size (up to US$21 bn), long terms (up to 20 years), the relatively short period of time in which they were made (less than two years), and their initial availability during the global financial crisis, when virtually no other financial institutions were willing to lend such large amounts of capital for such long periods of time.

Many outside observers explicitly or implicitly assumed that these deals are the work of China Inc: China’s government, state-owned banks and NOCs operating as a coherent entity on a global pursuit of energy. In this view, CDB and the NOCs are merely arms of state policy, implementing a strategy devised by Beijing to secure oil and natural gas around the world.

To be sure, CDB, the Chinese government and the NOCs worked closely together to structure and execute these transactions. But this coordination between Beijing and Chinese enterprises must be understood in the context of two important caveats. First, each of the participants had its own objectives, including profitability. Second, coordination is not synonymous with top-down decision making. Cross-border deals, even ones that advance the strategic goals of the Chinese government, can originate with different actors. As a result, CDB’s energy-backed loans are better understood as the result of a converging flow of interests rather than as the execution of a state master plan.

China’s Global Bank

CDB is a wholly state-owned bank which aims to support and profit from government policy objectives at home and abroad, including securing energy to fuel China’s economic rise. CDB was established in 1994 to finance domestic infrastructure and strategic industries, with the aim of breaking the bottlenecks in energy, natural resources and transportation created by rapid economic growth. After 2000, Beijing’s concerns about shortages of commodities such as oil and iron ore, and its “going out” policy of encouraging enterprises to secure energy, build national champions and acquire advanced technology abroad, paved the way for CDB to internationalize its operations. CDB has bankrolled the overseas investments of China’s energy and mining firms, and financed the construction of oil and natural gas pipelines from Central Asia, Russia and Myanmar to China. It also provided credit to foreign energy and mining companies, especially those which offered Chinese firms long-term supply agreements, upstream equity positions or equipment manufacturing contracts.