By Tariqul Islam



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The Export and Import Bank of China and the China Development Bank: understanding the environmental regulations of China’s overseas development assistance

By Tariqul Islam

PhD Candidate and Researcher | Chinese and Indian Aid | Emerging Economies (BRICS) | 
ActionAid International


Introduction

China, like other emerging economies such as Brazil, India, Mexico and Indonesia, has been increasing development assistance to developing countries in recent years (Woods 2008). Conservative estimates place the value of donor disbursements from such emerging economies at around US$20,8 billion in 2013, with China giving around US$ 3 billion, placing it in the top four donors behind Saudi Arabia, United Arab Emirates and Turkey (OECD 2014).

These countries amongst others are often referred to as “emerging donors” in contrast with traditional “established” donors, including the EU, Japan and USA, who are members of the Organisation for Economic Cooperation and Development’s (OECD) Development Assistance Committee (DAC). The DAC, amongst other functions, coordinates setting up common objectives to govern development aid programmes and issues guidelines on the management of development assistance for member states (OECD 2015). DAC guidelines outline best practice for development aid programmes on issues such as development and gender; promoting pro-poor economic growth; natural resource management and managing environmental impacts of development projects (OECD 2015). Emerging donors like China, not bound by such guidelines, negotiate development assistance for country aid programmes on their own terms, setting their own conditions and standards according to their own national development policies.

China’s development assistance policies with developing countries are developed under the framework of South-South Cooperation (Peoples Republic of China, 2014). Foreign aid disbursements are also guided by the win-win principle: that aid is given only if it contributes to China’s own national interests as well as those of the recipient country (Zimmerman and Smith 2011: 732 in Kobayashi 2013). This aims to ensure mutually beneficial development; combining loans, credits, and debt write-offs with special trade arrangements and commercial investments with terms that also benefit the Chinese economy, whether through secured access to natural resources, energy, markets or trade opportunities (Woods 2008, Kobayashi 2013).

China’s foreign assistance policies stipulate that there is no interference in the “internal affairs of the recipient countries and fully respecting their right to independently choosing their own paths and models of development” (People’s Republic of China, 2014). This means that, unlike traditional donors, while providing development assistance China does not stipulate conditions or standards for governance and accountability mechanisms, including best practice for managing social and environmental risks, leaving it entirely at the country’s discretion to decide how this is done in alignment with its own national policies.

Channels of Chinese development assistance

The foreign assistance budget is put under the unified management of the Ministry of Finance in line with the budget and final accounts system and Chinese foreign development assistance is mainly disbursed in three forms, as grants, interest-free loans and/or concessional loans (Table 1),(People’s Republic of China, 2014). Three policy banks- the China Development Bank, the Agricultural Development Bank of China and the Export-Import Bank of China- are responsible for implementing state policies in industry, foreign trade and economic diplomacy. They are also tasked with providing financial policy support to promote the export of Chinese products and services. In China, policy banks get government subsidies or flexibility in compliance for financing projects overseas.



Type

Conditions of disbursement

Grant

offered to help recipient countries build small or medium-sized social welfare projects, and to fund human resources development cooperation, technical cooperation, material assistance and emergency humanitarian aid

Interest-free loans

used to help recipient countries construct public facilities and launch projects to improve people's livelihood

Concessional loans

used to help recipient countries undertake manufacturing projects and large and medium-sized infrastructure projects with economic and social benefits, or for the supply of complete plants, machinery and electronic products

Table 1. Types of foreign development assistance and conditions of disbursement (People’s Republic of China, 2014)

China Exim Bank and China Development Bank are the main instruments of China’s foreign development assistance in developing markets across Africa and Asia (Moss & Rose, 2006). They finance large-scale infrastructure development projects and do not come with stringent political, environmental, or human rights conditions to manage environmental and social risk. Through these and similar national institutions, China has been the development partner of many African and Asian countries since the late 1950s. The massive Tanzam railway construction project, the largest overseas development assistance in Chinese history demonstrates its political interest in collaborating with postcolonial states in Africa through a non-Western model of development. (Fahimul Quadir, Apr 2013).



Concessional loans are raised by the Export-Import Bank of China (Exim Bank) linking diplomatic, development and business objectives (Kobayashi 2008, People’s Republic of China, 2014). Concessional loans are extended by the China Exim bank, under the designation of the Chinese government, to the borrowing government as official assistance. The objective of these loans is to promote economic development and improve living standards in developing countries, and to boost economic cooperation between developing countries and China. The only condition set around the need to manage environmental or social impacts being that projects need to have ‘good social benefits’ (China Exim Bank 2009b).

The China Development Bank (CDB)/Guójiā Kāifā Yínháng is the world’s largest development financial institution with more assets than the total amount of World Bank, Asian Development Bank, and African Development Bank (CDB Handbook). CDB operates as a commercial bank and invests in large international projects for infrastructure development in various sectors and to assist Chinese enterprises in their endeavours to access new markets (CDB Handbook). The bank states commitment to market practice but does not have stringent requirements for human rights protection or promotion as part of its objectives.

This report seeks to determine to what extent China Exim Bank and China Development Bank are promoting policies that facilitate or control against environmental or land related issues while they are financing corporations or companies. The study will look into the policies and practices as reflected in secondary materials such as media report, official websites, research reports and different online data resources due to the difficulty of accessing official government documents and information from the People’s Republic of China.

Background: the Export and Import Bank of China (China Exim Bank) and China Development Bank (CDB):


  1. The Export-Import Bank of China

The Export-Import Bank of China/Zhōngguó Jìnchūkǒu Yínháng (China Exim Bank) is owned by the Chinese government and was founded in 1994. It operates directly under the leadership of the State Council headquartered in Beijing and has 3 representative offices namely, the Representative Office for Southern and Eastern Africa, Paris Representative Office and St. Petersburg Representative Office. It has more than 20 domestic business branches and has established correspondent banking relationship with more than 1,000 banks.

The main objective of the Bank is to facilitate the export and import of Chinese mechanical and electronic products, equipments, high-tech products, and assist Chinese companies with comparative advantages in their offshore project contracting and outbound investment, and promote international economic cooperation and trade (Exim Bank 2013).

Exim Bank is the sole provider of Chinese government’s concessional loans although it is not limited to concessional funding and also has commercial operations. China Exim bank also offers preferential export credits, which are managed directly by the Exim bank and are not considered as official assistance (China Exim Bank, 2009b). China Exim Bank also provides supplier’s credit in the form of concessional loans what it called as export buyer’s credit. With this supplier’s credit borrowing country receives concessional loans from the Chinese government through the export import bank of China to pay the contracting Chinese agencies which supplies the equipments, goods and technical assistance for the China funded projects.

Projects financed by China’s development assistance are in different categories. Such as:



  • Turnkey Projects (Chinese construction of bridges, stadiums, government run factories, etc.).

  • Technical cooperation projects (Chinese teams provide onsite training, advice and ‘learning by doing’).

  • Training programmes: (short to medium term formal courses).

  • General humanitarian aid: (disaster relief, medical team support).

  • Concessional loan projects: (higher technology exports or construction/ projects developed by Chinese companies and financed through China Exim bank with low, fixed rate loans, supplier’s credit/export buyer’s credit etc.).



  1. China Development Bank (CDB):

The China Development Bank was established in 1994 to provide development oriented finance for government projects of national priority. It is under the direct jurisdiction of the State Council of the Central Government. (CDB, 2013)

CDB is committed to market-based practices; despite the Bank’s importance in Chinese foreign policy implementation, it operates as a commercial bank and does not provide concessional loans. In fact, a recent study found that CDB’s loan rates are generally higher than that of the World Bank (Gallagher et al, 2012).

In 2012, the Bank broadened its collaboration with foreign governments, enterprises and financial institutions, on the basis of equality and mutual benefits. During that year, it made significant progress in cooperation under the frameworks of the Shanghai Organization Interbank Association and China-ASEAN Interbank Association. It further enhanced its alliance with other BRICS countries and established the China-Portuguese Fund. The Bank continued to invest in a number of large international projects for the development of infrastructure, agriculture, energy and social sectors in those countries with which it engaged, and to assist Chinese enterprises in their "Go Global" endeavors. As of December 2012, the Bank had outstanding foreign currency loans of USD 224.5 billion, and an offshore yuan-denominated loan balance of 72.6 billion. It has formal relationships with 638 correspondent banks in 101 countries/regions (CDB, 2013)

The CDB Special Loan for the Development of African SMEs is one of the Eight New Measures of the Chinese government to strengthen China-Africa cooperation under the framework of the Forum on China-Africa Cooperation (FOCAC). CDB is the sole agency responsible for implementing this measure to generate employment; develop local market and economy in African countries. The Special Loan business covers 31 countries including Kenya, Angola, Morocco, South Africa, Nigeria, Ghana, Mozambique and Ethiopia, etc. The projects supported by the loans have directly and indirectly created 11,020 and over 390,000 local job opportunities respectively, promoted China-Africa trade volume over US$ 311 million (CDB 2013).



Key elements in objectives, policy and practice of these two banks:

The primary focus of the China Exim Bank and the CDB is to increase Chinese trade and investment as well as provide support to Chinese companies investing in foreign markets. The objectives of Exim Bank and CDB are aligned with the Eight principles of Chinese development assistance (People’s Republic of China 2014), Box 1).



Key points of the eight principles:

  • Equality and mutual benefit in providing aid to other countries; aid is never regarded as unilateral.

  • Respect the sovereignty of recipient countries with no conditions with respect to governance or accountability attached

  • Economic aid isinterest-free or through low-interest loans,

  • Help recipient countries develop self-reliance and independence through economic development.

  • Help recipient countries to increase their income and accumulate capital.

  • Provides the best-quality equipment and materials manufactured by China at international market prices those are needed for the projects.

  • Technical assistance will help the personnel of the recipient country to fully master the technology.

  • The experts from China will have the same standard of living as the experts of the recipient country.

Summary of the objectives of China Exim Bank and CDB

  • Facilitate the export and import of Chinese mechanical and electronic products, complete sets of equipment and new- and high-tech products,

  • Assist Chinese companies with comparative advantages in their offshore project contracting and outbound investment, and

  • Promote international economic cooperation and trade.

Box 1. Summary of the Eight Principles of development assistance and cooperation of the People’s People’s Republic of China in comparison to the objectives of Exim Bank and CDB

The objectives and principles say that though these two banks are branded as policy bank and have the mandate to facilitate Chinese overseas development finance, they do not have the mandate to call for human rights protection or promotion as part of their objectives. This is supported by the Beijing Declaration of the Forum on China-Africa Cooperation (2000) which states that “[t]he politicization of human rights and the imposition of human rights conditionalities on economic assistance should be vigorously opposed.” (Strange et al., 2013)

The only conditions set by the banks for a country to receive development assistance are the guarantee for payment against their works and the safeguard from the host countries for smooth operation of their works. Any social and environmental consequences of that work are to be dealt with at the discretion of the recipient country. This opens the scope for negative environmental impacts or human rights violations as a result of the financed project, if the country’s national laws on these issues are not strictly implemented. It depends on how the host country

Environmental protection policies of China Exim Bank and CDB for development projects

The Ministry of Commerce of the People’s Republic of China and Ministry of Environmental Protection of the People’s Republic of China issued policies on environmental protection in February 2013 for foreign investment and cooperation. The policies are formulated to regulate environmental protection considerations in foreign investment and cooperation, provide guidance to actively perform social responsibilities of environmental protection, and promote the sustainable development of foreign investment and cooperation by Chinese institutions domestically and abroad. These Guidelines are applicable to all Chinese enterprises engaged in foreign investment and cooperation activities.



In summery the Guidelines for Environmental Protection in Foreign Investment and Cooperation are to:

  • Regularize the environment related behaviors of Chinese companies in foreign investment and cooperation activities (Article 1)

  • Guide for the performance in social responsibilities for environment protection (Article 1)

  • Advocate to respect religious belief, cultural traditions, local customs of the community, safeguard legitimate rights and interest of labours (Article 3)

  • Understand and observe host country’s provisions of law and regulations related to environment protection. (Article 5)

  • Conduct environmental impact assessment, take measures to reduce possible adverse impacts based on impact assessment (Article 8)

  • Develop environmental monitoring and evaluation based on the background situation of project surrounding areas (Article 11)

  • Formulate contingency plans for environmental accidents and other emergencies and set up reporting and communication system for local government, environmental regulatory authority, general public and company headquarters. (Article 14)

  • Post their environmental information on a regular basis, and publish their plans on implementation of laws and regulations on environmental protection, measures taken, and environmental performance achieved (Article 18)

  • Establish communication and dialogue mechanism to strengthen their communications with their communities and relevant social groups, take opinions and suggestions with respect to environmental impacts of their construction projects according to requirements of laws and regulations of the host country. (Article 20)

  • Encourage enterprises to research and learn from the environment protection related principles, standards and practices adopted by international organizations and multilateral financial institutions. (Article 22)

The Chinese government also introduced a "green credit" guideline for commercial lenders in 2012 to facilitate economic restructuring in a manner that's environmentally friendly and saves energy (CBRC 2013). The China Banking Regulatory Commission, the top banking regulator, ordered lenders to cut loans to industries with high-energy consumption and high levels of pollution, and to strengthen financial support for green industries and projects. The CBRC encouraged banks to evaluate, classify and rate the environmental and social risks inherent in their clients' businesses and take the results as a key reference in their ratings and access to credit. In future the CBRC will set up some key indexes to make the guideline more specific and try to include adherence to the plan in the rating system. Lenders also need to improve management of any overseas projects that they support, to ensure that the initiators of those projects comply with local environmental, land, healthcare and security legislation, according to the guideline (China Daily, 2012).

Practices of Exim Bank and CDB:

Even though there are Chinese national policies and regulations governing the lending practices of both banks they may also develop country specific procedures. For example in Bangladesh Exim bank outlined the following seven steps as the process for dealing Chinese development financing (Financial Express 2012):



  1. Selection and communication of the proposed project to the Chinese government

  2. Letter of confirmation by the Chinese government,

  3. Loan applications with reports on feasibility and environmental studies that are sent to the Chinese government,

  4. Selection of contractor by the Chinese government and its communication to the government of Bangladesh.

  5. Negotiation and finalization of commercial contract between the Chinese contractor and the relevant agency of the government,

  6. Signing of commercial contracts, and

  7. Negotiation and signing of financial contracts.

On the other hand there are some requirements which the borrowing country needs to fulfill. The following requirements shall be satisfied when applying for Export Buyer's Credit:

  • The economic and political environment of the borrower's country should be stable;

  • The borrower should demonstrate sound credit standing and good debt servicing capacity;

  • The value of the commercial contract shall exceed USD 2 million, and the export project shall fall into the financing area of this credit;

  • The Chinese content of export products should be no less than 50% of the total contract value. For the overseas contracting projects, no less than 15% of the project shall come from the export of Chinese equipment, construction mechanics, materials, engineering work, technical and managerial expertise, and labor services;

  • The borrower shall provide a repayment guarantee acceptable to the Bank;

  • Export credit insurance shall be sought if required;

  • Other requirements the Bank deems necessary

Outside of environmental feasibility assessments as part of the loan application to Exim Bank, there is no real requirement to have environmental management or social protection plans in place for any development project. These requirements, in relation to the procedures, encourage the contracting agencies to devise their bank financed project as a commercially viable project rather than a socially and environmentally sensitive development project. On the other hand, placing a strong requirement for social development and environmental protection may decrease the future probability of the contracting agencies or governments qualifying for development finance from the banks. This is a particularly huge risk where the host government may have weak regulatory frameworks governing environmental and social protection.

However, it is important to note that the standards applied (or not) in China’s overseas projects are not necessarily out of line with the standards set within China for similar projects (Woods 2008). Furthermore, the fact that there are Chinese policies guiding standards of environmental and social protection for foreign development assistance projects does not necessarily mean they are implemented by the contracting agencies as seen in the Shwe Gas Case study below.



Case Study: The “Shwe” Oil and gas project financed by China Development Bank

This case study is taken from the Shwe Gas Movement website, an NGO comprised of community organizations representing affected peoples throughout Arakan State, that is tracking the environmental and social impacts of the project as it develops.

In September 2009 China Development Bank (CDB) provided a USD 30 billion as loan for five-years to the China National Petroleum Corporation to finance the company’s overseas expansion. After getting the loan from CDB, CNPC invested in the Shwe oil and gas project in Myanmar. . The ‘Shwe' project is for exploitation of the underwater natural gas deposits off the coast of western Burma's Arakan State and dual oil and gas pipelines that will transport this gas along with oil imports from Africa and the Middle East, to southwest China. A consortium of four Indian and South Korean companies led by Korea’s Daewoo International is teaming up to exploit natural gas from two blocks in the Bay of Bengal.  The project comprised of an offshore production platform, an underwater pipeline and an onshore gas terminal in Kyauk Phyu Township on the Arakan coast which will cost an estimated US$ 3.73 billion to develop.  The consortium expects to extract 500 million cubic feet of natural gas per day.  The gas will then be transported through Burma to southwest China (possibly as far as Nanning, capital of Guangxi Province), via a 2,800 km gas pipeline to be built by the China National Petroleum Corporation (CNPC).  The gas will be distributed by CNPC's subsidiary PetroChina. The Burmese government is expecting to get profit at least US$29 billion over 30 years from the revenues. 

However, in this project CDB was unable to ensure the implementation of its own environmental policies as well as China’s new Green Credit Policy Directive. CDB’s environmental policy requires the preparation of an Environmental Impact Assessment (EIA). Chinese law also requires at least summary EIAs to be disclosed and in some cases it needs to be consulted with the affected people. According to the Shwe Movement the EIA for the Shwe Gas project has not been publicly released. The project does not comply with the Green Credit Directive’s requirement for following international best practice, in relation to the impacts on endangered species. The UN Guiding Principles for Business and Human Rights are also not being fully upheld by this project, as one would expect given that CDB and CNPC are both state-owned enterprises.

China National Petroleum Corporation, through its subsidiary the Southeast Asia Pipeline Co. Ltd., is constructing:



  • A deep-sea port and oil storage facilities on Maday Island that will allow oil tankers to offload oil from the Middle East and Africa before further transporting it to China via overland pipelines. According to Oil and Gas Journal, construction on the deep-sea port began in October 2009.

  • Dual trans-border pipelines that will transport the Shwe gas 2,800 km from Arakan State to Nanning in southern China’s Guangxi Province and will carry oil from the deep-sea port 1,100 km to a refinery near Kunming of China’s Yunnan Province. According to CNPC and Caijing Magazine, construction began on the Myanmar (Burma) side in June 2010 and in southern China during September of that same year.



According to the information provided in the Shwe Gas Movement website, Building the pipelines and extracting the gas are fuelling conflicts and human rights abuses: battles between armed groups and the government have broken out near the pipeline route and land confiscation and forced labor has started in project areas.” The movement’s website provides further information as below:

  • Due to this project the displacement of villages along the anticipated pipeline corridor, which in the case of the Yadana/Yetagun pipelines were up to 15 miles on each side of the pipeline,

  • exporting an important energy source in exchange for cash will put further pressure on Burma’s precious rain forest as a source of fuel.

  • The Mangroves along the Arakan coastline are now further threatened by the infrastructure of the Shwe gas project. Already endangered animals such as the Arakan forest turtle are under greater pressure

  • The construction of drilling and production platforms, leakage of chemicals used in the drilling process as well as potential gas blowouts will be detrimental to the Arakan coastal area.

[** Unless otherwise noted, all information is derived from the Shwe Gas Movement’s Sept 2011 report Sold Out: Launch of China pipeline project unleashes abuse across Burma. The organization based its report on field investigations done by local people and desk research. For more information, see Shwe Gas Movement’s website at www.shwe.org]

Conclusion

Traditionally, the role of a policy bank is to supply soft loans. When the CDB became a commercial lender in 2007 the Chinese government required it to cap its outstanding soft loans and focus on commercial lending (Caixin, 2013). In comparison, China Exim Bank does not provide commercial loans but the nature of the concessional loans provided by Exim bank is close to commercial lending, considering the general practice of defining grant elements (interest rate, grace period, maturity period etc.) of the loans it provides. Although both banks operate under the umbrella of foreign development assistance they both place great emphasis on maximizing commercial returns on their investments. Chinese legislation does outline the need for environmental impact assessments of development projects, neither bank stipulates the standards to which environmental and social risks/impacts should be managed once assessed. Rather there is greater emphasis and pressure on the contracting agencies to complete the development projects and to maximize commercial returns on the investment, opening up the scope for environmental and human rights issues in the host countries.



Policy Recommendations:

  • A participatory and externally carried out environmental and consequence assessment need to be incorporated in the financing requirement. This should not be only done by the government department and it should be the basis for financing decision.

  • Host country should be consulted for selecting the contracting agency and suppliers. The credibility rating and performance profile of the contracting agency need to disclose to the host country.

  • For financing government to government project a long term framework need to be developed based on the host country’s national strategy to fulfill the mutual benefit and need based financing policy of Chinese government.

  • Commercial and governmental financing need to be clearly categorized in the host country and make available for disclosing to the public.

  • Should not consider to finance any proposed projects, those are controversial or disputed by the people or people’s movement in the host country.

  • In the environmental protection policy guideline of PRC, there should be provision for punishment for the non-complying companies

  • Host country should have a mechanism for making available the information and people’s report on environmental and rights violation.

  • Host country should have the list of organizations those are black listed in China or have weak performance related to environmental and people’s rights violation.


Bibliography:

  1. CDB (2013) - China Development Bank, http://www.cdb.com.cn/english/index.asp

  2. CDB Handbook. (unpublished) - Brochure on Special Loan for the Development of African SMEs funded by China Development Bank

  3. CBRC. (2013) - China Banking Regulatory Commission official website/ Access 2013

  4. Caixin online (2013) an online media portal - http://english.caixin.com/2013-10-14/100591700.html

  5. China Environmental Regulation by Ministry of Commerce and Ministry of Environmental Protection

  6. China Daily. (2012), “Green-credit guideline for banks issued” - Wang Xiaotian (China Daily, Updated: 2012-02-25)

  7. Exim Bank. (2013). The export import bank of China website, http://english.eximbank.gov.cn/tm/en-TCN/index_617.html

  8. Environmental Policy. Environmental Protection Policy of China, People’s Republic of China

  9. Fahimul Quadir. (2013). Rising Donors and the New Narrative of ‘South–South’ Cooperation: what prospects for changing the landscape of development assistance programmes?

  10. Financial Express. (2013) ‘Govt takes $1.5b hard loans to install five power plants’, Financial Express, Published on Tuesday, 12 February 2013, Reported by FHM Humayan Kabir.

  11. CBRC, Green Credit Policy of China Banking Regulatory Commission (CBRC)

  12. Gallagher, K., Amos, I. and Koleski, K. (2012) “The New Banks in Town: Chinese Finance in Latin America,” Inter-American Dialogue, p. 11.

  13. Kobayashi, T. (2008), “Evolution of China’s Aid Policy” JBICI Working Paper, no. 27

  14. OECD (2014), concessional flow for development from non-DAC providers of development cooperation, table 33a, table 33e; http://www.oecd.org/dac/stats/statisticsonresourceflowstodevelopingcountries.htm, accessed 22/06/2015).

  15. OECD (2015). OECD Development Assistance Committee. http://www.oecd.org/dac/developmentassistancecommitteedac.htm accessed online on 22/06/2015

  16. People’s Republic of China (2014). White Paper on China’s Foreign Aid. Information Office of the State Council of People’s Republic of China. Accessed online at http://www.china.org.cn/government/whitepaper/node_7209074.htm on 20/06/2015)

  17. Sato, J., Shika, H., Kobayashi, T. and Kondoh, H. (2011) “Emerging Donors” from a Recipient Perspective: An Institutional Analysis of Foreign Aid in Cambodia”. World Development Vol. 39, No. 12, pp. 2091–2104, 2011

  18. Shwe Gas Movement. (2011). Sold Out: Launch of China pipeline project unleashes abuse across Burma. Http://www.shwe.org

  19. Strange, A., Parks, B., Tierney, A.F., Dreher, A and Ramachandran, V. (2013) China’s Development Finance to Africa: A media-based approach to data collection. Working Paper 323, April 2013. Center for Global Development. Accesssed online, http://www.cgdev.org/sites/default/files/chinese-development-finance-africa.pdf on 20/06/2015)

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