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China’s largest bank faces more difficult times

Financial Events
By Paul Hodges on 01-Sep-2012

CDB Aug12.pngCandide, the classic novel of the great French writer Voltaire, is a satirical description of a young man who has been taught that ‘everything is for the best in the best of all possible worlds’. Voltaire’s modern equivalent might well decide to set his novel in today’s China, and title it China Development Bank (CDB).

As the Financial Times notes, “CDB is at the heart of China’s increasingly powerful global money machine”. Its chairman Chen Yuan is its most important banker, and CDB itself is its most powerful financial institution after the People’s Bank of China, with assets of Rmb 6.25tn ($1tn).

As the FT’s charts show above, its recent growth has been near-perfect:

• Total assets have risen smoothly every year since 2003
• Its loan portfolio is broadly-based, including all major sectors
• Its net profit has also risen smoothly, apart from a hiccup in 2008
• Return on equity is a reasonable 10%
• Best of all, its percentage of non-performing loans continues to reduce

Thus for the optimists, CDB’s results over the past decade typify all that is best about the China story.

Voltaire’s Candide found that the world was, after all, not the perfect place that he had imagined. Similarly, CDB now has to deal with a slowing Chinese economy, as well as a much more difficult external environment for its overseas loans.

It will be interesting to see whether CDB’s experience will mirror Candide’s awakening over the next few years.