State Actors, Market Games: Credit Guarantees and the Funding of China Development Bank

This paper explores the role of the state in development by examining the funding mechanism of China Development Bank (CDB), the world's largest development bank. In recent decades, CDB has gained its international reputation by lending massively to infrastructure projects inside and outside China. At first glance, this seems a typical story of state-led development, i.e. the state channels preferential capital to selected projects, thereby allowing policy-oriented investments to take place. But in fact, CDB raises most of its funds from the capital market. How can CDB afford loaning mostly to the usually long-term and low-profit public projects if its funding is directed by profit-driven market incentives? What does CDB's fund-raising mechanism reflect about state-market relations in China and the role of the state in development? The answers, this paper argues, lie in the state's guarantee for CDB bonds. Receiving credit ratings as high as government bonds, CDB supplements fiscal spending and creates a bond market of which the bank itself is a dominant player. Using quantitative data, historical documents and interviews, and comparing CDB to its counterparts in Japan and Germany, this paper characterises a mutually constitutive state-market relation in development finance.