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China in Africa: The Real Story

The Untold Story of China Development Bank

Deborah Brautigam

I've just finished reading Erica Downs' excellent monograph: Inside China, Inc.: China Development Bank' Cross-Border Energy Deals (Brookings Institution: March 2011).

Another extremely well-researched and well-written contribution from Erica, this balanced study busts some myths (inter alia, these deals do not mean China is "locking up" sources of energy) and confirms some concerns (China's ability to coordinate -- sometimes -- in financing and supporting a package of deals mean it is going to be hard for US companies to compete).

Although there is very little on China in Africa, this study is well worth reading to get a better handle on how China Development Bank (CDB) works overseas. Between 2006 and 2010, CDB's loan exposure in Africa increased from $1 billion to $10 billion and this is only going to go up.

Moreoever, it is packed with fascinating detail -- almost all of it openly available in Chinese and other media sources -- on how CDB embarks on the major financing deals that have made it stand out as one of China's deepest pockets. The information on the variety of terms (interest rates, maturities) of these deals alone is a major contribution. It confirms what I've seen in Africa: large deals are nearly always structured using variable LIBOR-plus interest rates, and on terms that are often just slightly better than those available from global commercial banks.

The better terms do not reflect direct subsidies, Erica points out, but rather the government backing for CDB, a policy bank. This backing means that CDB has the ability to take more risks and accept a longer term reward than would a purely commercial bank. Still, CDB cares about its profits and its bottom line. As I've also noted, CDB often uses major international law firms like White & Case to help structure these deals.

The multiple media sources Erica relied on also tell me that reporters in other parts of the world (even in China!) are getting much better detail on these deals than reporters are getting in Africa. It also suggests that that there may be no inherent Chinese prohibition on this information. For example, Brazil's Petrobras, the state-owned oil company, has transparently reported on its deals with China in its annual reports. Yet CDB did not grant Erica an interview, which also shows it has a way to go on openness.