China's fragile powerhouse

State-owned China Development Bank created a delicately-balanced financial structure to bankroll its colossal infrastructure development

The Chinese success story is often a potent, and convenient, weapon in the hands of India baiters. Critics of Indian bureaucracy, red tape and corruption often point to China and sing paeans to the utilities of an authoritarian regime, especially how useful it is for getting poor people out of the way of important infrastructure projects. A majority of the whingers are, of course, Indians. They bemoan India's tortuous democratic processes and how progress has been held hostage by the disenfranchised, compared with China, where any property that gets in the way of development is peremptorily razed.

They might have a point and a half. Many large Indian projects, particularly critical highways, are bogged down in property acquisition disputes. Many large steel and mining investments have come short because the government has not been able to deliver the land they need. Landowners are reluctant to give up their only capital asset - which has been in the family for generations - for some quick money and empty promises. The mistake that the government and industry make is that they assume that land is only a capital asset, thereby ignoring the cultural and social links - not to speak of the vital identity links - it provides with the lives of its owners. The results are well documented: clashes in Nandigram (West Bengal) and protests against Vedanta in Odisha are some of the well-known popular upheavals against forcible land acquisition by the government or industry.

In the face of stalled mega-investments and the perceptible economic slowdown in India, the protests against Indian democracy have become shriller. In contrast, China's colossal push for infrastructure development has acquired a respectable sheen and invites envy from Indian fans of authoritarian regimes. That unstinting admiration could do with some educated research.

Here is a book that highlights the driving force - call it the economic raison d'être - behind the breakneck, frenzied and haphazard infrastructure growth in China. The one economic agent behind the hell-for-leather Chinese growth model is China Development Bank (CDB). How can one bank be responsible for the tremendous growth impetus? The authors of the book state, somewhat pithily: "The bank invented the secret sauce." And what is this hush-hush ingredient that has provided the thrust and torque for the Chinese economy over the past 15 years, especially after the Asian financial crisis of 1997? The answer lies in the leveraged, structured finance pyramids stacked up by CDB to finance multiple projects dreamt up by local governments, sometimes even superfluous projects.

Under the benign supervision of CDB, local governments would float local government financing vehicles (LGVFs) - what we in India know as special purpose vehicles - that would issue bonds in the local market. These bonds were backed by a book, which included all the land and property assets, as well as the utilities, of the local government. These bonds would get top-notch ratings by local rating agencies - based on the assumption of an implicit guarantee, owing to the fact that the bonds were issued by local governments and underwritten by CDB. China's commercial banks, repositories of the country's fabled high domestic savings, were the primary subscribers. The proceeds would be used to build infrastructure - roads, high-speed train links, sports stadiums, ports, office districts, and so on.

How did the LGFVs service interest payment on the bonds? Another simple formula dreamt up by CDB: once the infrastructure was built, the surrounding land would appreciate immediately. LGFVs would sell the land to property developers and use the proceeds to meet coupon liabilities. Often, the land did not belong to LGFVs. It was forcibly acquired from farmers at bargain-basement rates and sold to property developers for eight to 10 times the original value.

More than the fragile and delicately balanced financial structure that CDB conjured up, the book is about how CDB is one institution that not only provides a huge push to infrastructure development, and thereby to economic growth, but also pushes China's global dominance of natural resources. In the authors' words: "...it is not a book about a bank. It is a book about China... Understand CDB and you understand the core of China's state capitalism, a system of government-controlled banks and companies that many developing countries see as an alternative to a more free market-focused system."

The book is interesting because it lays bare the faulty plumbing behind the hyperactive growth model. The authors have drilled deep into the blueprint. This is good economic reporting at work. What seems to be lacking, though, is a good editor's hand. Newswire agencies use a certain style that seems to suit that medium well, but not necessarily full-length books. Apart from this minor quibble, this book is required reading for those who constantly compare India with China and forever find fault with the Indian economic and political model.

CHINA'S SUPERBANK
Debt, Oil and Influence: How China Development Bank is Rewriting the

Rules of Finance
Henry Sanderson and Michael Forsythe
Bloomberg Press (an imprint of John Wiley & Sons); 203 pages