Chen Yuan

Editor's Note:

On October 26, China Development Bank (CDB) released its loan data for the first three quarters of 2009. According to the statistics, at the end of September, CDB's non-performing loan ratio was 0.8 percent, and had stayed under 1 percent for 18 consecutive quarters. This success in avoiding bad debt is widely attributed to CDB's governor Chen Yuan's (Chen) policies. The following is an interview by the Beijing-based Economic Observer newspaper (EO) with Chen.

EO: You became CDB's governor in early 1998, the second year of the Asian financial crisis. Were you under heavy pressure?

Chen: Yes, very heavy pressure. At that time, many thought that CDB was China's largest policy-oriented bank, and was like a second finance ministry for the government, offering "free lunches" through its lending policy.

In March 1998, CDB's non-performing loan ratio was as high as 32.6 percent – the figure was a real headache. A bank with a non-performing loan ratio of more than 30 percent is unsustainable. I knew full well that a healthy financial system was of crucial importance for economic and financial development. So on the first day I took office, I was firmly determined to change the situation.

EO: It was reported that CDB had 170 billion yuan ($24.89 billion) of bad assets when you took over, and the debtors were all State-owned enterprises. Was it easy to ask for repayment at that time?

Chen: Asking for repayment was an indispensable step for CDB to optimize assets, but it's better to make debtors repay willingly, since repayment didn't produce new cash flows. If some debtors could not repay, we had to take some effective measures, like canceling debts after verification, or imposing large-scale loan restructuring.

EO: In 1999, the central government set up four asset management companies, gradually eliminating 1.4 trillion yuan ($205.02 billion) of bad loans among the four State-owned commercial banks. Through that opportunity, CDB eliminated 100 billion yuan ($14,64 billion) of bad debt.

Chen: After that, we eliminated bad loans by ourselves. Through one lucky opportunity, we found a method of resolving bad loans through local governments. Tianjin FAW Xiali Automobile Co Ltd had 2 billion yuan ($292.89 million) of bad loan then, and its shrinking sales volume, outdated technology and high costs meant that it was almost bankrupt.

After several discussions with the Tianjin municipal government, we decided to offer 10 billion yuan ($1.5 billion) to aid in Tianjin's ongoing rebuilding of the old parts of the city, while meanwhile the local government helped us with Xiali's bad loan.

After two years of efforts, the Tianjin municipal government mobilized all its resources and finally eliminated Xiali's bad loan. The story stunned some foreign investment banks, but I told them it was possible in China.

EO: Can we say that your initial work at CDB was "changing the rules?"

Chen: Yes. A healthy financial system is of vital importance. In order to be a modernized economy and to financially catch up with developed countries, China needs to change the rules. Only a sound and strong financial system could make the country strong.

Therefore, I asked my staff to list 10 world-class banks as examples for CDB, and employed several top international consulting firms, like Boston Consulting Group and KPMG.

Changing the rules took two to three years. The most important change is that we demanded our clients to follow financial rules. We integrated loan projects with institution-building and credit-building, constructing a four-in-one platform of enterprises, government, banks and the market.

Every CDB loan involves tens of billion of yuan, and we cannot have any of those fail. So we must build a tight credit system to alert the debtors to the importance of financial rules.

We offer huge amounts of money, and demand market-oriented rules in exchange. The rule is helpful for not only CDB, but also local governments, enterprises and the whole society.

EO: CDB adopted business principles before they were widespread in Chinese commercial banks. In particular, you introduced the theory of development financing into China. What is development financing?

Chen: Development financing is a financial method to adjust system backwardness and market failures, aimed at safeguarding national financial security and enhancing economic competitiveness. It is usually government-owned and government–authorized, utilizing State credit.

It achieves the government's development goals through the building systems and market approaches. Its abilities and potentials are greater than policy-oriented finance. The two financial forms complement each other, and can be adopted simultaneously in different areas.

EO: Does CDB's success lie in balancing policies and business principles?

Chen: To be policy-oriented is to achieve government's goals. What we are chasing is not the success of a single project, but the construction of a sound system, which is more important to the country.

In early years, the huge investment of infrastructure was a hard bone for everyone to chew, but now it has become a delicious cake.

Development financing requires persistence. Persistent efforts on system construction will produce repayment. If you only pay attention to single projects and ignore system construction, then when projects fail, you will never see your money again.

EO: Policy-orientated finance is becoming less common worldwide, because marketization is the mainstream trend. Why is China different?

Chen: It's determined by China's national conditions. China will be in a construction stage for a long period of time. Urbanization has become the basic driving force and core feature of China's economic development over the past 20 years, and will remain so for the next 50 to 100 years.

Speeding up urbanization faces many bottlenecks in different fields, like infrastructure construction, basic industries, agriculture, rural areas and farmers, medium and small enterprises, culture and education.

These fields need huge amount of funds, but fiscal investment is limited and commercial finance institutions don't want to get involved.

Development financing bridges the government and market. Whether in developed or developing countries, once there is a development bottleneck, development financing is needed.

By using financing, it integrates the power of the government, the market and finance to improve the construction of markets, micro-systems and financial infrastructure, achieving the government's goals through market-oriented approaches.

More importantly, development financing can counterbalance economic cyclical fluctuation. When the economy grows rapidly, it recedes, making room for commercial funds.

On the contrary, when the economy is suffering, it increases its investment strength in areas that are bottlenecked, pushing stable economic growth with a strong hand.

Therefore, currently development financing is an effective and indispensable approach for China to promote its economic and social development.

EO: What's your opinion about the long-term development of China's financial industry?

Chen: Financial development must be based on national conditions. The primary issue in the stage of construction is to transform deposits into construction funds.

The financial system, in which bank credit financing plays a key role, bears a heavy responsibility.

Especially in the current situation of expanding domestic demand and promoting development, the financial industry needs to actively implement the central government's principles and policies of boosting economy.

Meanwhile, the financial industry should improve its own management ability and competitiveness, undertake the social responsibility of enriching the country and the people, and help government, society and enterprises with their difficulties.

Only by promoting economic and social development can the financial industry achieve its own long-term development.