Greening China’s banks

Budding partnerships between Western financial institutions and Chinese banks must be used to improve the latter’s environmental and social standards – for reasons of self-interest as much as social responsibility, argues Michelle Chan-Fishel

At its current dramatic rates of GDP growth, China is expected to overtake Japan as the world’s third largest economy by 2020. Enthusiasm for the country among Western investors and businesses is at an all-time high, as they scramble for a piece of one of the world’s fastest-growing economies.

But China’s tremendous growth has also created a serious environmental crisis, marked by unchecked industrial pollution and acute public health impacts. China’s own State Environmental Protection Administration maintains that breathing the air in China’s polluted cities is the equivalent of smoking two packets of cigarettes a day and, according to some sources, the water in five of China’s biggest river systems cannot be touched, let alone drunk. And, as China increasingly looks beyond its borders for natural resources, it is also creating environmental impacts globally.

Today, Chinese companies are actively purchasing timber, oil and gas, and mineral assets around the world. But since Western companies have already acquired much of the world’s most lucrative and accessible natural resource concessions, Chinese companies have been forced to seek out riskier opportunities in politically unstable or frontier areas. As a result, Chinese companies and banks are now inordinately involved in developing some of the world’s most environmentally and socially sensitive projects, often located in countries with repressive regimes (eg, Burma) or in conflict or post-conflict areas (eg, the Democratic Republic of Congo).

For example, China National Petroleum Corporation (CNPC) is a key developer of oil fields in Sudan. That country’s oil revenues, which are estimated to generate about $1 million in revenues per day, play a critical role in bankrolling the civil war and genocide that has been wracking the country for more than 20 years. Various Chinese banks provide financial services to CNPC, including Bank of China, in which Royal Bank of Scotland acquired a 5% stake in 2005. Western banks are also financing CNPC directly; for example, recent press reports indicate that several international banks, including ABN Amro and Standard Chartered, are interested in bidding on a CNPC project to manage the company’s overseas capital.

China’s Export-Import Bank (Chexim) has been associated with some of China’s most controversial overseas operations, including the Merowe dam in Sudan and the Nam Mang 3 dam in Laos. Chexim is also a key financier of China Metallurgical Construction Company’s Ramu nickel mine in Papua New Guinea. The Ramu mine, which employs the environmentally destructive practice of submarine tailings disposal (ocean dumping of mine waste), has been described by the New Guinean National Fisheries Authority as an “unsustainable project socially, economically, and environmentally; and cannot be allowed to proceed.” Several Western financiers, including HSBC and BNP Paribas, have helped Chexim underwrite billions of dollars worth of bonds in 2004 and 2005.

China Development Bank (CDB) has also played a key role in financing oil palm plantations in Indonesian Borneo, home to some of the world’s most biologically important tropical moist forests, and the habitat of endangered orangutans. CDB, which has recently raised money through institutions such as Merrill Lynch and Morgan Stanley, is also a key financier of the notorious Three Gorges dam in China. China Construction Bank has also been a major financier of the project, raising some $880 million for the dam. In 2005, Bank of America acquired a 9% stake in China Construction Bank, and its share may increase.

With these ever-growing relationships, it is in the banks’ own self-interest to advocate environmental and social improvement among Chinese banks and clients. Indeed, the controversial activities of Chinese business partners can have clear reputational impacts for Western firms. For example, in 2000 a coalition of public interest organisations waged an unprecedented campaign against Goldman Sachs for underwriting the initial public offering of PetroChina, over social and environmental concerns. The controversy became so heated that, according to press reports, the Japan Ministry of Finance considered black-listing Goldman Sachs from a coveted Japanese telecom privatisation deal because it was “increasingly alarmed about Goldman’s management of some recent international share issues”.

Moreover, China’s practice of financing environmentally and socially egregious projects is undercutting the effectiveness of emerging environmental and social norms such as the Equator Principles, to which Western banks, representing more than 80% of global project finance, have signed up. Educating Chinese clients and partners about international norms and providing capacity-building in this area not only addresses the ‘least common denominator’ problem, but it also provides value added for the client/partner through knowledge transfer. Similarly, bringing Chinese banks up to international environmental standards creates a more even playing field for leadership banks which face Chinese competitors in developing countries.

Finally, Western banks must leverage their relationships with Chinese clients and banks because they have a social responsibility to do so, especially given the fact that Chinese civil society groups have limited ability to hold their governments, corporations and banks accountable. Indeed, the business community has long advocated ‘constructive engagement’ through closer trade and business ties, rather than economic isolation, as a way to promote the principles of human rights, political freedom, and environmental stewardship in China.

As Western financial institutions continue to build relationships with Chinese companies and banks, they must identify ways to constructively engage with these entities, and to measure the success of that engagement. Only when such metrics are developed will international banks be able to identify what works, and also understand the conditions under which engagement ceases to be effective.

Michelle Chan-Fishel is manager of the Green Investments Programme at Friends of the Earth in San Francisco. E-mail: mchan@foe.org