Hugo’s Banker

Hugo Chávez, resplendent in crisply pressed fatigues and paratrooper boots with red shoelaces, had a very special guest. Meeting him that day in mid-September 2011 in Caracas was the world’s most powerful banker, who had lent Chávez’s government at least $40 billion over the four years from 2008 to 2012, or about $1,400 for every man, woman, and child in Venezuela.

The guest, stooped and looking older than his 66 years, drank chrysanthemum tea, staring across the table at Chávez, bald from his chemotherapy treatments. He handed the Venezuelan president a 600-page book filled with recommendations on how Chávez should run, manage, and build ports, roads, and railroads.

What bank in this day and age can lend so much money to one of the world’s riskiest regimes, a country with two centuries of credit defaults, and then tell its debtor how to spend the proceeds of the loan?

Not Goldman Sachs. Chávez’s banker had governmental ties that the legendary New York firm, incubator to former U.S. Treasury secretaries Hank Paulson and Robert Rubin, could only dream of. The man sitting across from Chávez was the Chinese equivalent of royalty. His father was one of the founding fathers of the People’s Republic of China.

Not the World Bank. That Washington-based product of Pax Americana had a loan book only a fraction of the size of this man’s company, the world’s biggest policy bank. Chávez’s Chinese bank had bragging rights over the World Bank as well, having helped craft the biggest and arguably most successful poverty-reduction program in history, which saw hundreds of millions of Chinese peasants become middle-class city dwellers. The bank has funneled billions of dollars into Africa, stoking Ethiopian exports and reviving Ghana’s railroad network after decades of neglect.

Not the Fed. The U.S. Federal Reserve might have trillions of dollars at its disposal, and it might have staved off a depression in the wake of the 2008 financial meltdown. But when it comes to results, Chávez’s bank arguably had an even more impressive record: It devised a system to fund local infrastructure projects that helped China sail through the global financial crisis while the United States and Europe stumbled.

Chávez’s guest was Chen Yuan, chairman of China Development Bank (CDB) and the world’s most powerful banker. You can’t buy shares in CDB; it is wholly owned by the Chinese government. But it would be a mistake to call it a government bureaucracy that is at the state’s beck and call. It is a bank, claiming the lowest nonperforming-loan rate of any major Chinese lender and having a reputation for hardball negotiations with both domestic and foreign clients. While other low- to middle-income countries have development banks that help fund their national companies and bolster economic growth to catch up to more advanced powers, the scale of CDB and the amount it can lend make it a different animal.

But the world’s most powerful bank? Yes. Let us count the ways.

Exhibit 1: China. CDB wrote the manual for the biggest economic and urbanization boom in history, pioneering a system of lending to local government-backed companies that funneled more than $2 trillion across China to build roads, bridges, subways, and stadiums. The turnkey financing system it set up, beginning in 1998 in Anhui province, meant that Chinese growth barely hiccupped while the United States went into the deepest economic crisis since the Great Depression. CDB’s recently retired vice governor, Gao Jian, is regarded as the father of China’s bond market, now Asia’s largest and a growing source of funding for Chinese companies. CDB in one year sold more bonds than China’s Finance Ministry, an indication of how easy it is for the bank to access large sums of money in China’s financial system.

Exhibit 2: Africa. China has lent more to Africa since 2001 than the World Bank, and CDB’s lending is focused on building industry and infrastructure for the next stage of Africa’s growth and harnessing its biggest clients, China’s elite state-owned companies, to do much of the work. While much of Chinese lending in Africa focuses on the extraction of oil and metals to fuel China’s insatiable thirst for raw materials (driven in part by the bank’s funding of China’s urbanization), that is only part of the story. The bank’s private-equity arm, the China-Africa Development Fund, is spurring the continent’s manufacturing as labor costs rise at home, helping transform Ethiopia into an exporter of leather and helping Chinese companies such as Chery Automobile open factories. In Ghana, CDB provided a $3 billion loan — that country’s largest ever — to finance roads, railroads, and an oil terminal and pipeline network. The loan mandates that 60 percent of the money must go to Chinese companies in the form of contracts, guaranteeing Chinese companies will be the big winners.

Exhibit 3: Latin America. CDB’s massive, unprecedented lending to Chávez’s government has helped secure access for its state-owned oil companies to long-term supply in the competitive global oil market as China’s demand continues to rise. CDB client Citic Group, China’s largest state-owned investment company, has provided railroads and housing complexes; its client Sinohydro Group, the state-owned hydropower behemoth, has built power stations.

It has also been good business for a host of Chinese companies. Chen’s point man for Venezuela is a rail-thin man named Liu Kegu, with the buzz cut and booming voice of a Marine Corps gunnery sergeant. Chávez affectionately called him "brother." A decade ago, Li worked under Bo Xilai, the disgraced former Chongqing Communist Party boss who is now awaiting trial for his role in his wife’s murder of a British businessman. The Venezuelan opposition frets that Chinese influence is eroding the country’s sovereignty and drawing it into a risky alliance of dependence. U.S. companies such as ExxonMobil played the role of bogeymen of 20th-century Yanqui imperialism; CDB might take that role for China.

Exhibit 4: Clean energy and telecommunications. CDB has funneled more than $92.4 billion of credit to China’s leading wind, solar, and telecommunications companies, which have used the cash to overwhelm global competitors, securing loans because lenders know the companies have the backing of the world’s most powerful bank. Huawei, the Chinese company that is the world’s largest telecommunications equipment-maker, is also the biggest single recipient of these credit lines — to the tune of $30 billion. It has used CDB credit to help its vendors in Latin America, Africa, Asia, and Europe buy its gear. In 2009, Mexico City-based América Móvil, Latin America’s largest mobile-phone carrier, was seeking $1 billion to upgrade its mobile network — and chose CDB. Chinese solar-energy companies continue to ramp up production even as losses mount, backed by CDB lines of credit that dwarf the U.S. government’s loans to the now-bankrupt Solyndra. The CDB loans are helping to cement Chinese domination in an industry of the future and helping to drive U.S. and European companies to insolvency. Many Chinese companies have debt loads and quarterly losses that should have driven them to bankruptcy as well, but for the CDB loans.

The danger for China? Local resentment over Chinese loans, such as in a post-Chávez Venezuela, will lead to demands for renegotiation or even default. If that happens, it will be an expensive lesson for a rising financial power.