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1 Talking Point 7 Week in 60 Seconds 8 Economy Week in China 10 Property 11 Energy and Resources 13 China Consumer 14 Banking and Finance 19 April 2013 15 Society and Culture Issue 189 19 And Finally www.weekinchina.com 20 The Back Page Time to reform Chen’s bank? m o c . n i e t s p e a t i n e b . w w w An unexpected development? China’s most powerful banker is replaced in a top level reshuffle Brought to you by Week in China Talking Point 19 April 2013 The bank that Chen built Control of the most powerful fiefdom in Chinese finance has just changed End of an era: the 68 year-old Chen is stepping down as head of China Development Bank. Is he happy about it? n the Beijing headquarters of forms (Chen preferred tighter cen - Henry Sanderson and Michael ICDB Capital, the private equity tral control and refused to visit the Forsyth. That’s because China De - arm of China Development Bank, experimental city of Shenzhen, velopment Bank (CDB) is run by the there are three busts in the lobby. such was its symbolism as the ac - deceased politician’s son, Chen One commemorates Mao Zedong, celerator pedal of the opening up Yuan. founder of the People’s Republic. era). He summed up his own view in Or rather, CDB was run by him at Another is of Deng Xiaoping, the a famous bird cage analogy. The the time Sanderson and Forsyth architect of China’s reform era. economy, he said, “is like a bird. You published China’s Superbank, their But readers of WiC will be less fa - can’t hold it in your hand, but you must-read book on the bank. That miliar with the third bronze, that have to let it fly. But it might fly changed this week when Xinhua re - of Chen Yun. away, and that is why you need a ported that Chen Yuan is stepping Who was he? Chen was another cage to control it.” down, a personnel move that marks prominent Party member in the Vogel writes that Chen’s policy a seismic shift in China’s bureau - founding of modern China in 1949. clashes with Deng, meant they were cratic landscape. Chen has run CDB Historian Ezra Vogel calls him the akin to “two tigers on the moun - since 1998, shaping it according to “father of Chinese economic plan - taintop”. But the rivalry did nothing his vision and having a profound ning” and notes that Mao once to lessen Chen’s prestige. “Although impact on the nation’s economy, as asked why only Chen seemed to be some considered him too conserva - well as those overseas. able to make the economy run suc - tive and cautious, he was generally Sanderson and Forsyth call Chen cessfully. respected for his political judge - “the world’s most powerful banker” Like many of Mao’s lieutenants ment, his independent analytical and CDB “the world’s most power - Chen faced a period as an outcast abilities and his principled dedica - ful bank”. during the chaos of the sixties and tion to the Party,” Vogel surmises. “China’s rise as a global economic P h o t o seventies but he made a comeback All great achievements, of course, superpower and the success of its S o u r c in the eighties, enjoying a position but the main reason that Chen’s top companies is intricately tied to e : I m a of near primacy with Deng. Today bust enjoys pride of place in the CDB,” they write. “Understand CDB g i n e C he is best remembered for opposing CDB Capital lobby is perhaps more and you understand the core of h i n a the rapid pace of Deng’s market re - filial, according to the authors China’s state capitalism.” 1 Week in China Talking Point 19 April 2013 Much of that is down to Chen - ATM of government.” himself, the authors add: “You can - Over the next decade his unique not understand the rise of combination of connections, JPMorgan in the nineteenth century willpower and vision would trans - without understanding the life of form CDB from a weak policy lender its eponymous namesake. Likewise, into a banking powerhouse. By 2012 the history of CDB’s emergence as the bank reported assets of Rmb7.37 the world’s most influential bank is trillion ($1.19 trillion), says 21CN closely linked with its longtime Business Herald. (To put that in per - leader, Chen Yuan.” spective, that’s more than double those of the World Bank.) The rise of Chen… Unlike his predecessor, Chen Chen Yuan was born in the revolu - sought to make CDB better resem - tionary capital of Yan’an in 1945 ble a well-functioning international (the Chinese Communist Party bank. He brought on board a new in - equivalent to being born in Buck - ternational advisory committee in - ingham Palace). The family’s elite cluding the likes of Henry Kissinger, position was secured as early as Zhu: gave Chen top CDB job and instigated new credit controls 1933 when Chen senior joined the and personnel policies (to weed out Politburo Standing Committee. vice-governor of the central bank. the incompetent). His father’s status was further Over the next decade his new role As one former staffer recalls: “He consolidated when he conquered would give him a new opportunity had influence. People respected the scourge of inflation in 1952, a to understand the workings of the him and feared him, so people feat that had eluded Chinese Chinese economy, as well as to gain started to work hard to evaluate the rulers for decades. an unrivalled international perspec - process rather than just issue loans Chen junior entered Tsinghua tive by travelling abroad and hob - to everyone.” University in 1965, where he studied nobbing with officials from Amazingly, by 2002 the NPL ratio engineering, specialising in au - multilateral agencies and other cen - was down to 1.78% and by 2006 tomation in particular. Like many of tral banks. Chen told a foreign visitor that CDB his generation, his career path was Many foreign observers thought had no bad loans at all. This was thrown off track by the Cultural that Chen would be promoted to achieved in two ways. Much of the Revolution. head the central bank, but in 1997 heavy lifting came from the central On graduation he worked at a fac - the then premier Zhu Rongji asked government, which shifted Rmb100 tory in Hunan, before returning to him to take over CDB instead. billion of toxic lending into a new Beijing in 1973 and getting a job as a asset management company. researcher at the Aerospace Min - What did he inherit? For the remainder Chen devised istry. It was at this point that he CDB was created in 1994 from an as - new ways to bring the NPL rate began to emulate his father’s inter - sortment of Soviet era institutions. down. Uniquely in the Chinese est in economics, studying foreign As that might suggest, it was a fi - banking landscape, he was allowed news sources to get a better sense of nancial basketcase. In 1997 the bank to convert Rmb21.7 billion of debt how the Federal Reserve worked. had a non-performing loan ratio of into equity. He was also very sharp After Mao died and a relative sense 42.7%, and such lax compliance pro - in working out how to work with of normality returned, Chen en - cedures that staff carried suitcases local governments to remedy debt rolled in graduate school, and fur - of cash around the country with positions. For example, in return for ther honed his English skills. them to pay their expenses. a new development loan, he per - With his princeling credentials, a When Chen arrived at the bank suaded the city of Tianjin to clean political career followed, first as a its loan book was a couple of hun - up a CDB bad debt owed by local car Party secretary in Beijing’s Xicheng dred billion yuan and it had just firm Xiali. District. However, in 1987 Chen one branch and a couple of offices. Using similar quid-pro-quo ap - P h o t o failed to get elected to the city’s As he later told the Economic Ob - proaches, Chen had resolved S o u r Party committee. This was a fairly server: “The first objective I set for Rmb90 billion of bad debt by 2003, c e : R e major setback, but in an effort to myself, as well as for CDB, was to according to an interview he gave u t e r s cushion the blow he was made a become a real bank and not just an Xinhua. 2 Week in China Talking Point 19 April 2013 A new banking philosophy? powerbrokers to figure out how key transformed into a thriving me - When Chen took over at CDB he the urbanisation trend would be - tropolis. But the secret sauce for seems to have admired the US fi - come. the transition was perhaps Chen’s nancial system. He also wanted CDB But what marked out Chen’s fi - most incredible invention of all: to be profitable, an unusually com - nancial genius was that he spotted the local government finance vehi - mercial goal for a policy lender. But something nobody else had figured cle (for our first mention of LGFVs, Chen was no more the product of out. He knew that Zhu Rongji’s 1990s see WiC48).

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