Leading While Catching Up?: Emerging Standards for China's Overseas Investments
| Author | Kirk Herbertson |
| Position | Associate at the World Resources Institute ('WRI'), an environmental nonprofit organization based in Washington, DC |
| Pages | 22-26 |
SPRING 2011 22
INTRODUCTION
In February 2011, activists marched across Nairobi, Kenya
to the Chinese embassy waving banners and chanting “haki
yetu!” (our right!).1 They demand ed that the Chinese gov-
ernment end Chinese companies’ involvement in construction
of the Gibe 3 dam, Ethiop ia’s largest ever public infr astructure
project.2 The activists h ad previous ly petitioned the C hinese
government, Chines e companies, the Kenyan government, and
Ethiopian government, but received no respons e.3 The m arch
symbolized people’s frustration in being unable to communicate
with the Chinese companies involved in the project.4
The Gibe 3 dam will span across the Omo River in Ethio-
pia, which flows into Lake Turkana on the southern border with
Kenya.5 When completed in 2012, the dam will reduce the Omo
River’s flow by thirty percent, affecting the 500,000 local people
who depend on the lake and river for their livelihoods.6 The Lake
Turkana regio n is already a landscape in crisis. According to
several independent studies, the reduced water flow could lead
to foo d insecurity, intensif y pre-existing tribal conflicts in the
area, and potentially destabilize the region ne ar the Ethiopian,
Kenyan, and Sudanese borders.7 The Gibe 3 dam is one of five
large hydr opower projec ts underway in Ethiopia.8 More dams
are planned a s the Ethiopian government has decided to export
electricity to neighboring countries (although agreements h ave
not yet been reached with these countries).9 When the dam’s res-
ervoir is filled, over 100,000 people will need to relocate to grow
crops.10 Hundre ds of thousands of others may lose their liveli-
hoods from herding, fishing, and trading.11
Many foreign investors declined to finance the project. I n
2008, JPMorgan Chase decided not to underwrite the project,
and by 2010 the World Bank, African Development Bank, and
European Investment Bank also withdrew funding consider-
ations.12 In July 2010, however, the Indu strial and Commercial
Bank of Ch ina (“ICBC ,” th e world’s larges t bank) agreed to
become the project’s largest lender, granting a loan of $500 mil-
lion to a Chinese company to provide equipment necess ary to
construct the dam.13
The Gibe 3 dam project is one example of how China’s
overseas investments have gained international media atte ntion
in recent years. China’s decades-long growth has made it the sec-
ond largest economy in the world, surpassing Japan in mid-2010
and soon to eclipse the United States.14 As China’s econo my
grows, so does its demand for natural resources and new mar-
kets.15 The Chinese government has shaped its foreign policy to
keep up with demand for energy and resources by encouraging
companies to “go global.”
From a macroeconomic perspective, the results have been
impressive. Overseas investments have tapped natural resources
ranging from minerals and oil in Africa, to hydropower in South-
east Asia.16 New markets have opened f or Chinese g oods and
services.17 Many Chine se companie s have found par ticularly
lucrative opportuni ties in impoverished, resource-rich develop-
ing countries.18 In 2010, China became Africa’s largest trading
partner.19 Yet at the same time, many people have expre ssed
concern about the environmental and human rights footprint of
these investments.20
This art icle provides a br ief overview of effort s underway
to strengthen environmental and social sustainability in China’s
overseas investments. In recent years, the Chinese government
and several companies have recognized the importance of ensur-
ing th at investments are responsible, a nd have begun to adopt
standards that govern overseas investments. The article first pro-
vides a brief overview of China’s approach to overseas invest-
ments, us ing examples from Africa. The article then describes
how Western and multilateral financial instituti ons have tradi-
tionally played a role in promoting environmentally and socially
responsible investments, and considers whet her Chinese finan-
cial instituti ons could play a similar role. This ar ticle will also
examine the environmental and social standards that are emerg-
ing for China’s overseas investments.
CHINA’S APPROACH TO OVERSEAS INVESTMENTS
In 2001, China’s tent h Five-Year P lan21 directed Chinese
companies to “go global,” as a way to gain access to natural
resources, stimulate Chin a’s exports, and build China’s markets
abroad.22 The Chinese government, in turn, provided support
to companies, including access to finance, tax exemptions, and
insurance to lower the costs of doing business.23 As a result of
the “go global” Strategy, China’s foreign direct investment flows
increased from less than one billion dollars in 2000 to an esti-
mated fifty-five billion dollars in the first half of 2010 alone.24
As early as 1954, Chinese premier Zhou Enlai announced
the “Five Principles of Pe aceful Coexistence” that continue to
set the parameters for China’s approach to international develop-
ment: (1) mutual respect for sovereignty and territorial integrity;
(2) mutual non-aggression; (3) non-interference in each other’s
LEADING WHILE CATCHING UP?:
EMERGING STANDARDS FOR CHINA’S OVERSEAS INVESTMENTS
by Kirk Herbertson*
* Kirk Herbertson is an Associate at the World Resources Ins titute (“WRI”),
an environmental nonprofit organization based in Washington, DC. The author
wrote this paper in his personal capacity, and has drawn upon research by WRI
consultant Bruce Jenkins. Please direct comments to kherbertson@wri.org.
SUSTAINABLE DEVELOPMENT LAW & POLICY23
internal affairs; (4) equality and mutual benefit; and (5) peaceful
coexistence.25
Based on these principles, the Chinese government has
branded Chinese overseas investment as a “n ew type” of stra-
tegic partne rship for developing countries that differs fro m
Western aid and investment.26 China’s overseas investments are
closely linked to its development aid—both are important parts
of the loan packages that the Chinese government often negoti-
ates w ith host governm ents. The Chinese government enco ur-
ages “win-win” development, guarantees non-interfer ence in
domestic affairs, and promises no t to con dition the receipt of
aid on governance and democratic reforms.27 Often, Chinese aid
comes in the form of infrastructure projects that are built by Chi-
nese companies.
NATURAL RESOURCE EXTRACTION IN AFRICA
Like many Western investments, a signi ficant por tion of
China’s investments in Africa focus on natural resource extrac-
tion. Over fifty p ercent of a ll foreign direct investment inside
Africa goes towards na tural resource exploitation.28 Over one
quarter o f U.S. and Chinese imports come from major Afric an
oil exporting countries—Nigeria, Angola, and Algeria for the
United States and Angola, Sudan, and Libya for China.29 Since
2000, the number of o il companies operating in Africa (both
private and state-owned) has increased from 250 to over 800.30
Competition to exploit Africa’s natural resources is growing.31
Chinese oil compan ies remain relatively smal l players in
Africa, providing only eight percent o f the combined com mer-
cial value of international oil companies’ investments in Africa.32
Due to intense compe tition, Chinese compan ies have of ten
invested in developing countries with weak governance systems,
political instability, and high levels of cor ruption.33 Many com-
panies—both Western and Chinese—have come under criticism
for their environmental and human rights records in Africa.34 In
this s ense, China’s interest in Africa’s natural resources is not
unique b ut often receives media attention because of its high-
risk approach.
CHALLENGES IN PROTECTING THE ENVIRONMENT AND
HUMAN RIGHTS
While Chinese companies are not unique in their interest
in Africa’s natural re sources, their appro ach often differs from
Western counterparts. This poses distinct challenges in uphold-
ing environmental and human rights protections.
Chinese aid often takes the form of turn-key projects—
financed and built entirely by Chinese companies, and then
turned over to the host government with technic al assistance.
These projec ts focus overwhelmingly (but not always) on con-
crete infrastructure projects such as roads and dams.35 After the
civil war ended in Angola in 2002, for example, China was one
of the fir st countries to provide development assistance.36 With
Chinese support, Ang ola initiated over one hundred projects in
energy, water, health, education, telecommu nications, fisheries,
and public works.37 Many of these projects involved construc-
tion of new infrastructure.
The relationship between China and Angola is complex, but
several elements are revealing about the nature of China’s over-
seas investments:38
• The Chine se gover nment worked directly with Angola’s
president. In 2006, the pr esident described the re lation-
ship as “mutually advantageous,” “pragmatic,” and with
“no political preconditions.”39 Cooperation is characterized
by frequent b ilateral visits of impor tant state officials, and
signing of various agreements. In these high-level negotia-
tions, there was little accountability to the public or efforts
to respond to public concerns.40
• Bilateral trade increased rapidly in a few years time. Crude
oil was the main Angola export to China, and impor ts from
China als o increased—including steel, cement, autos, and
batterie s.41 China was a major source of foreign direct
investment, especially th rough the entry of Chinese con-
struction firms.42
• Although China received the most media attention, it was not
the only actor. Angola also had investment agreements with
India, Brazil, South Africa, and others that have increased in
volume.43 Over time, other donors have expressed a willing-
ness to extend credit lines to Angola.44
• China’s loans to Angola were backed by oil revenue. In 2004,
China Export Import Bank pledged a two billion dollar oil-
backed loan to Angola to fund reconstruction of infrastruc-
ture.45 For each project, the Chinese government proposed a
few Chinese companies.46 Repayment began as soon as the
project was completed.47 Revenue from oil was deposited in
an escrow account, from which the amount for servicing the
debt was dedu cted.48 The Government of Angola was then
free to use the remainder at its own discretion.49 Loans were
provided at a deeply concessional rate (LIBOR +1.5%).50
• Chinese laborers remained separate from the local popu-
lation. Chinese laborers typically stayed in Angola fo r one
or two year contracts, often living in closed compounds
near the constructi on site.51 T here was little contact with
Angolans.52 At the same time, a growing number of Chi-
nese entrepreneurs entered Angola.53 Communication chal-
lenges existed due to cultural differen ces an d lan guage
barriers, and most businesses remained separate from local
communities.54
• Corporate social responsibility was not part of the business
plan. Ch inese companies did not inter act with local com-
munities or civil society organizations, and did not discuss
environmental and human rights concerns openly.55 In gen-
eral, Chinese c ompanies did not keep local communities
informed of operations.56
USING FINANCE TO HOLD COMPANIES
ACCOUNTABLE FOR OVERSEAS IMPACTS
Civil socie ty activists have long struggled to find ways to
hold compan ies accountable for the environmental and human
rights impacts of their overseas operations. Traditionally, the laws
of the United States and other major investor countries do not
apply overseas.57 One important approach, developed over the
SPRING 2011 24
past two decades by activists, has been to follow the money—to
ensure that companies and governments only receive financing
for projects that are environmentally and socially responsible.58
Many, but not all companie s rely on financin g to pursue
large-scale overseas investments. When companies seek financ-
ing from investors, they often must prove that the investment
is likely to generate a retur n. This includes identifyi ng risks to
the project’s success and demonstrating that these risks can be
mitigated.59
Increasingly, companies a cknowledge that environmental
and human rights risks can har m the success of a development
project (see Box 1).60 Harm to communities can lead to protests
that block or delay construction, and can motivate governments
to alter licenses, per mits, and oversight of projects. Local and
international civil society campaigns can also damage the repu-
tations of companies and financial institutions involved, affect-
ing share prices and the implementation of related projects.61
Box 1: Environmental and Social Risks62
When investing in developing countries, companies increas-
ingly consider th e ways th at harm to the environment and
local communities can affect a project. The following are
examples of ris ks that can ar ise out of environ mental and
human rights harms.
Financing risk – Financial institutions and investors may
delay their financing, require more conditions, or decide not
to participate.
Construction risk – The proponent may not be able to com-
plete the project on time or on budget.
Operational risk – The proponent may not be able to access
necessary inputs, produce suf ficient output, or sell at a suf-
ficient price, which can disrupt operations.
Reputational risk – The project may harm the proponent’s or
financial institutions’ brand identity, which can translate into
loss of market value.
Corporate risk – D elays or interruptions to a project may
reduce the proponent’s profitability and asset values, decreas-
ing the proponent’s stock value, lowering its credit rating, and
raising the cost of borrowing.
Host government risk – Th e host government may with-
draw permits and licenses, commence enforcement actions,
impose civil or criminal penalties on the proponent, or tighten
requirements.
Host country political risk – Political forces in the hos t
country may threaten the project.
As a result, managing environmental and human rights risks
is not just goodwill, but good business. Many studies show how
safeguarding against these risks can help to manage the complex
impacts of development projects.63 For example, engaging local
communities in the design of a project can help build community
support for the project and avoid conflict later in the project cycle.64
ENVIRONMENTAL AND SOCIAL STANDARDS OF FINANCIAL
INSTITUTIONS
In response to public criticism of its involvement in contro-
versial projects in the 1980s and 1990s—such as the Narmada
Dam in India, which displaced over 300,000 people—the World
Bank developed “safeguard” policies to help identify, avoid, and
minimize harm to people and the environment.65 These policies
require borrowing governments to follow risk mitigation proce-
dures in order to receive Bank financing.66 Examples of these
procedur es in clude conducting an environmental and social
impact asses sment, consulting with local commu nities, and
restoring the livelihoods of displaced people.67
Since that tim e, other financial institutions have adopted
simil ar polic ies.68 The Inter national Finance Corp oration
(“IFC”)—the private sect or financing arm of the World Bank
Group—developed a detaile d set o f environmental and social
standards in 2006.69 Over sixty private financial institutions have
adopted the IFC’s standards through t he Equator Principles.70
These policies are constantly evolving. In 2011, for example, the
IFC will adopt an updated version of its standards.71
Although these standards are far from perfect and have not
always successfully prevented harmful investments from go ing
forward,72 they have become an important pillar of environmen-
tal and human rights protections in overseas investments.
A ROLE FOR CHINESE BANKS IN
SUSTAINABLE DEVELOPMENT?
Is there a role for Chinese bank s to promote environmen-
tally and socially responsible overseas investments? In the past
few yea rs, both the Chines e government and several Chinese
financial institutions have rec ognized the importanc e of envi -
ronmental and social standards.73 Efforts are now underway to
develop these standards in the Chinese context.74
China’s financial sector has the potential to play an influen-
tial r ole in stren gthening the env ironmental and social perfor-
mance of China’s overseas investments. Because many Chinese
companies do not raise funds in the capital markets, the major-
ity of total capital available t o Chinese industry comes from
financial ins titutions.75 Over the past five years, in response to
concern about the massive pollution that accompanies China’s
rapid growth, the Chinese government has begun to apply “green
credit” policies to domesti c lending.76 C hinese officia ls have
also worked closely with international financial institutions, par-
ticularly the IFC, to build capacity of Chinese financial institu-
tions to manage environmental and social risks.77 While still in
their early years, China’s “green credit” policy has demonstrated
measurable success.78
GOVERNMENT INFLUENCE OVER OVERSEAS INVESTMENTS
While the Chinese government has encouraged Chinese com-
panies to “go global,” these companies are not merely arms of the
central government; many companies are encouraged to act auton-
omously.79 For example, many Chinese national oil companies,
SUSTAINABLE DEVELOPMENT LAW & POLICY25
are partially owned and controlled by the government,80 but have
gained influence due to surging profits, listing on foreign stock
exchanges, and relationships with international investors.81 Sig-
nificant profits from years of high oil prices have also enabled
Chinese oil companies to finance their own investments, rather
than relying solely on Chinese financial institutions.
Nevertheless, the government continues to provide financial
support to these companies to help them compete against established
international oil companies.82 In particular, Chinese banks play a
prominent role in large acquisitions and investments and in negotia-
tions with host governments.83 As many Chinese companies interact
at least to a certain extent with Chinese banks, their influence over
environmental and social standards could continue to grow.
KEY BANKS IN CHINA’S OVERSEAS INVESTMENTS
Although China’s largest private a nd stat e-owned b anks
often invest overseas , China’s state-owned “policy banks” are
the leading financial actors b ehind the “go global” strategy.84
The two primary banks that support overs eas investments are
the Export Import Bank of China (“China ExIm”) and the China
Development Bank (“CDB”).85
Most m ajor econo mies have “ex port credi t agencies ”
that help to finance companies exporting goods and services
abroad.86 China ExIm is one of the largest export credit agencies
in the world.87 In 2009, ExIm and CBD combined approved over
one hundred and ten bi llion dollars in lending.88 Founded as a
policy bank, and now a semi-private bank, China Development
Bank has also been one of the key funders of large infrastructure
and industrial projects overseas.89
As Deborah Brautigam of American University describes:
The importance of policy banks like the ExIm Bank and
China Development Bank in China’s development model
and its international economic relations cannot be empha-
sized too strongly. China . . . is in many ways a typical East
Asian developmental state. It acts to accelerate development
through deliberate use of state policies. The central charac-
teristic of a developmental state is its control over finance.
This control need not be exclusive – but it must be important
at the margin in order to influence the behavior of firms in
directions determined by political leaders. In this regard, Bei-
jing is following directly in the footsteps of the earlier Asian
successes, Japan, Korean, and Taiwan, who all used develop-
ment finance to “pick winners” in the globalization race.90
In the next five years, we can expect these financial institu-
tions to play an increasingly important role in encouraging Chi-
nese companies towards environmentally and socially responsible
investments. In March 2011, the National Peoples’ Congress met
in Beijing to approve the next Five-Year Plan.91 At the core of this
plan are environmental protection and social equity.92
EMERGING STANDARDS IN CHINA’S
OVERSEAS INVESTMENTS
Standards are already emerging that could influence China’s
overseas investments. These include domestic polic ies, volun-
tary cor porate standards, and policies designed speci fically for
overseas investments.
DOMESTIC POLICIES
For several years, Chinese financial instit utions have pur-
sued “green credit” policies in their domestic lending.93 In 2003,
China adopted a stronger environmental impact assessment law
that ensures greater public participati on in project decision-
making.94 In 2007, the State Environmental Protection Agency
(now the Ministry of Environment), Peoples’ Bank of China, and
Central Banking Regulatory Commission issue d a green credit
policy t hat requires all commercial banks to conduct environ-
mental screening of loans, and to rest rict lending to companies
with high energy consumption and pol lution.95 The policy also
established a credit blacklist t hat prohibits banks from lending
to companies that f ail to meet environmental standards. The
Chinese government foll owed the Gre en Credit Policy with a
Green Trade Policy (2007), Green Securities Policy (2008), and
a Green Insurance Policy (2008).96 In 2008, the government took
measures to increase public access to environmental information
from the gover nment and companies.97 These experiences may
help to inform future standards for China’s overseas investments.
VOLUNTARY CORPORATE STANDARDS
In 2008, President Hu Jintao announced that companies
should establish the concept of global responsibility,
include soci al responsibility in their business strategy
on their own, abide by the laws in the count ry where
the enterprises operate and international common busi-
ness practices, improve their management models, and
pursue unity of economic returns and social results.98
Encouraged by the gover nment, some Chinese banks and
companies are taking an interest in cor porate social responsibil-
ity.99 This becomes particularly relevant as Chinese banks and
companies increasingly interact on a global scale, enter foreign
stock exchanges, and market their products abroad.
In 2007, Chi na Constructio n Bank was the first state-
owned Chinese bank to publish a corporate social responsibil-
ity repo rt.100 In the following year, China Development Bank,
ICBC, Agricultural Bank of China, and Bank of China also
released the ir first reports.101 In 2008, Industri al Bank became
the first private Chinese bank to adopt the Equator Principles,102
a global standard for environmentally an d socially responsible
project finance. Although many banks’ voluntary corporate stan-
dards focus on their domestic lending activities, this may soon
expand to overseas lending.
OVERSEAS LENDING
Traditionally, Chinese banks and companies have addressed
environmental and social risks only by complying with host coun-
tries’ laws and regulations. As companies expand their operations
in countries with weak governance and regulatory capacity, and as
other multilateral institutions improve their own standards, Chi-
nese companies appear to be moving in a similar direction.
Slowly but steadily, envi ronmental and social standards
are emerging for financi al institu tions’ ove rseas lendi ng (see
Emerging Standards for Chinese overseas investment Box 2). All
financial institu tions now apply the government’s Green Credit
Policy to domestic lending. In 2004, China Export Import Bank
SPRING 2011 26
developed a short set of environmental guidelines for its over-
seas lending, and publicly disclosed revised, more robust guide-
lines in 2008.103 These guidelines require c lients to conduct an
environmental and social impact assessment.104 China ExIm
monitors the client’s implementation of the assessment.105
In 2009, the Ministry of Environmental Protection’s think
tank, the Chinese Academy for Environmental Planning, along
with the non-gover nmental Global Environmental Institu te and
the University of International Business and Ec onomics, com-
pleted draft e nvi ronmental gui delines for Chinese companies
involved in aid and overseas investment.106 Several Chinese
ministries a nd regulatory bodies are negotiating th e guidelines
and may approve them in the coming months.107 The guidelines
would re quire companies operating ove rseas to conduct envi-
ronmental impact assessments, develop mitigation measures,
compensate people for environmen tal damage, and adhere to
international treaties signed by China and host countries.108 Chi-
nese comp anies would be required to f ollow Chinese environ-
mental standards if they were higher than host countries.109
Box 2: Emerging Standards for Chinese Overseas Investment
Date Description of standards
2004 China Exim Environment Policy110
Three-paragraph policy developed in 2004 but pub-
licly released only in April 2007.
2006 State Council’s Nine Principles on Overseas
Investment111
Developed to “encourage and standardize” compa-
nies’ overseas investment. Requires Chinese com-
panies to comply with local laws, design contract
bidding to be transparent, protect labor rights of local
employees, protect the environment, and implement
corporate responsibilities.
2007 China Export Import Bank’s Environmental
Guidelines112
Publicly released in 2008. Governs investments
overseas. Requires companies to conduct an environ-
mental impact assessment and to compensate com-
munities for environmental damage.
2007 Guide on Sustainable Overseas Silviculture by
Chinese Enterprises113
Governs the overseas practices of Chinese logging
companies. Requires preservation of high value for-
ests and endangered species, monitoring systems,
and consultations with local communities.
2008 SASAC statement on overseas state-owned companies114
The Director of State-owned Assets Supervision and
Administration Commission (which governs state-
owned companies) stated that Chinese companies
going abroad must comply with international rules
and local laws.
2008 State Council regulations on international
contracts115
A State Council regulation allows the government to
fine companies up to RMB one million for undertak-
ing contracts without official approval. This regula-
tion improves government supervision, protects the
rights of Chinese workers, and enhances compliance
with host country laws.
2008 National Audit Office’s new department on over-
seas assets116
The office announced a new department focusing on
state-owned or central-capital controlled companies
and overseas national assets. The department will
seek to uncover any potential misuse of funds, with
special attention to overseas state owned assets.
2009 Draft environmental guidelines for overseas
investment117
The Chinese Academy for Environmental Planning,
in cooperation with the Global Environmental Insti-
tute and the University of International Business and
Economics, completed draft guidelines. The Ministry
of Environmental Protection and China Banking
Regulatory Commission are negotiating the final
guidelines.
CONCLUSION
As Chinese ba nks and companies continue to expand their
overseas fo otprint, they will undert ake more projects in envi-
ronmentally and socially sensitive areas. The Chinese govern-
ment’s current efforts to develop standards are an important first
step, but other changes will need to follow. As Western financial
institutions have experienced, policies on paper are meaningless
unless they change the behavior of companies abroad.
Numerous challenges remain. The implementatio n of any
guidelines will need buy-in and coordination across the numer-
ous Chinese agencies involved in overseas investment. Financial
institutions will also begin to explore ways to enforce and hold
companies a ccountable for their environmental and social per-
formance. Chinese companies have little experience in engaging
directly with local communities and civil society organizations,
even th ough direct engagement is the pillar of environmental
and human rights risk management.
Chinese banks and companies can learn from foreign com-
panies by engaging in dialogue and trading experiences, but this
will not be enough. Ultimately, a uniquely Chinese a pproach
will need to develop t o environ mental and so cial ri sk man-
agement that is approp riate for Chine se culture, bu t also fully
respects th e environment and human rights of local communi-
ties. In this way, the Chinese development model can truly help
to bring “mutual benefit” and “win-win” development to other
developing countries.
Endnotes: Leading While Catching up? on page 41
