Standard & Poor’s Ratings Services has assigned its ‘A-‘ senior unsecured long-term foreign currency ratings to China Development Bank’s (CDB; foreign currency A-/Positive/A-1, local currency A-/Positive/–) proposed US dollar global bonds due 2015.
“Standard & Poor’s issuer credit ratings on CDB are equated to those on China (A-/Positive/A-1), reflecting the expectations of close support from the sovereign and the better-defined policy role for CDB,” says Standard&Poor’s credit analyst Ping Chew.
Based on recent discussions with the government and regulators, Standard&Poor’s believes CDB will remain a key development and public policy institution. The draft legislations for the policy banks, including CDB, when enacted, are likely to clarify the bank’s role, activities, prudential guidelines, and relations with the government. The ratings on CDB also reflect the expectation of strong government incentives to support an institution involved in national economic development.
CDB is the largest of China’s three policy banks, and is the pre-eminent development bank. It provides long-term funding for medium-size and large projects in selected sectors of the economy. However, CDB also offers financial advisory services and competes with commercial banks on banking services. The bank is wholly owned by the government – its only eligible owner by statute – through the ministry of finance. The policy banks are the only financial institutions other than the People’s Bank of China, the central bank, that report directly to the state council, China’s highest executive organ. The state council addresses major strategic issues confronting the bank, and directly approves CDB’s annual working plan.
CDB enjoys unique access to short-term liquidity from the central bank to support debt service payments and to bridge timing differences between the receipt of debenture proceeds and project loan payments. Although not equivalent to a sovereign guarantee on CDB’s debt, the support is stronger and more explicit than that provided to other Chinese financial institutions. The government has supported CDB’s capital requirement “fully paid up – by providing generous tax relief. The bank’s relationship with the government and its operating environment are unlikely to change materially in the coming years.
The bank is one of the few Chinese banks that have its financial statements audited by an international auditor and presented in accordance with international accounting standards. The bank’s asset quality and profitability look better than most in the Chinese banking system, due to the bank’s own tight credit control, preferential funding, and its implicit preferred creditor status with local government.
The outlook is positive, in line with the outlook on the sovereign rating. However, a weakening of CDB’s policy role or in the level of support from the government (both explicit and implicit), or a reduction in the sovereign’s ability to support the bank would weaken the rating on CDB.