Environmental warnings over new China-dominated investment bank

November 26, 2014 by Yuge Ma

On 24th October 21 Asian countries signed an agreement in Beijing that signalled the launch of the Asian Infrastructure Investment Bank (AIIB), whose main backer is China. The agreement authorized $100bn capital for the new bank, with an initial subscribed capital of around $50bn. But will the new bank be able to implement best practice when it comes to governance and environmental concerns? 

According to Chinese finance minister Lou Jiwei, prospective founding members have agreed that the share allocation among member countries will be based on GDP. China is the single largest shareholder, with a stake of up to 50%. Furthermore, the bank will be headquartered in Beijing. The 21 founding members include Bangladesh, Brunei, Cambodia, China, India, Kazakhstan, Kuwait, Laos, Malaysia, Mongolia, Myanmar, Nepal, Oman, Pakistan, the Philippines, Qatar, Singapore, Sri Lanka, Thailand, Uzbekistan and Vietnam.

AIIB was first proposed by Chinese president Xi Jinping in October 2013 during an official visit to south-east Asia. It is aimed at building a multilateral financial platform suitable for infrastructure development in the region. According to the Asian Development Bank (ADB) -Japan-led and the largest existing multilateral development bank in Asia – between now and 2020 the Asia and Pacific regions will require infrastructure investment of at least $8 trillion. China’s Xinhua news agency commented that the existing international financial system is insufficient to meet this huge demand; this gives China centre-stage to play a crucial role.

Though welcomed by those Asian countries suffering from inadequate infrastructure investment, at least three major regional powers were absent in the Beijing ceremony: Australia, Indonesia and South Korea.The New York Times  suggested that the absence of the three countries, all close American allies in the region, is connected to American pressure.

ANBOUND, a leading Chinese consulting company in a commentary published in the Financial Times (Chinese) argued that the US had persuading its allies to withdraw their participation. The underlying rationale is the fear of China challenging the existing US-led international and regional financial system.

Apart from the fear of losing influence in Asia’s rapid development and the leadership of the US-led international order, there are deeper worries about the potential threats presented by China’s huge capital to established international standards of foreign aid. Takehiko Nakao, the president of ADB crystallised this point when he said: “I hope the new bank will adhere to the international governance, labour and environmental standards.”

According to the New York Times, last year the US government opposed ADB’s proposal to finance coal-fired power plants due to climate change concerns. Washington was also reluctant to support another ADB proposal for dam construction earlier this year. An anonymous ADB official said “Energy is one of the biggest needs of economic growth in Asia, and China will be able to promise projects without these hindrances.”

In By All Means Necessary: how China’s resource quest is changing the world (Oxford University Press, 2014), Elizabeth Economy, senior fellow and director for Asia studies at the Council on Foreign Relations in New York and her colleague Michael Levi argued that the best way to understand the local implications of Chinese overseas investments is to observe how it operates at home, where neither the Chinese government nor companies pay much attention to environmental protection. Despite the fact that China had established a nationwide environmental impact assessment (EIA) system, its actual practice is discredited by widespread data fraud, corruption and political intervention from local officials. Only now is the Chinese government beginning to govern this chaotic field.

The Chinese model of “growth-at-any-cost” is still intensively detrimental to the environment and human health. When Chinese companies go abroad, especially to under-developed countries in Africa and Southeast Asia, they tend to carry this logic of “getting things done” without much concern for the social and environmental impact on the host countries. As the book notes: “Chinese companies – not governed effectively by Beijing either – have too often transformed important dimensions of the countries they invest in for the worse.”

However, the authors have also observed some improvements in Chinese companies’ social and environmental awareness in recent years. The first is “from the top down”: in order to reduce unsustainable development, China’s leadership has been encouraging companies, especially SOEs, to engage in more corporate social responsibility-related international initiatives by launching a set of policy incentives that apply for both domestic and overseas investments.

Second is “from the outside in”. As more Chinese companies are going abroad, they get more exposure to the best practices of their foreign counterparts. In addition, China’s ministry of commerce has encouraged them to be more active in the United Nations Global Compact and other international rating systems to improve their international image. The third, “from the bottom up”, refers to the growing public awareness of the negative environmental and social impact of Chinese investment and active NGO participation to push Chinese companies to change their behaviour.

Yet, none of the above motivations have proved sufficient to change substantially the fundamental logic of growth-at-any-cost. Without strict environmental regulations and effective enforcement from host countries, Chinese corporations still cannot stop using the tried and tested – albeit outdated – methods they have used over decades.

When Chinese energy-related projects have entered more mature markets, such as Australia, Canada and even Poland and Brazil, the host countries’ environmental authorities and vibrant civil society groups have forced them to accept much stricter environmental laws. As a result Chinese investors have had to pay very high fees to learn those lessons, leading to unforeseen loss of profits.

Cai Jinyong, the first Chinese national to become CEO of the International Finance Corporation (IFC) said in a recent interview with Caixin Media, that Chinese overseas investment projects are generally good at construction, but weak at long-term management. Environmental impact is an important component of managing a sustainable project in terms of both financial and social consequences. To put it simply, even though Chinese companies want to improve their environmental practices – not always the case in countries without de facto environmental regulations – the lack of expertise on this front remains a significant obstacle.

Xi Jinping has promised that the principles of AIIB would be Equality, Inclusiveness and Efficiency, while Chinese Finance Minister Lou Jiwei declared that AIIB will learn from the best practice in the world and adopt international standards of environmental protection.

Yet, these infrastructure-hungry Asian countries are at the same time promoting severe environmental degradation – air pollution, water scarcity and soil contamination to name a few. They also suffer from weak government accountability and lack of civil society participation in environmental issues. It is unlikely they will be able to enforce “international standards” on Chinese-financed projects solely on their own.

Elizabeth Economy argued in a recent opinion article that the international world, especially the US, should see the creation of AIIB as a chance to introduce robust environmental standards to the China-led infrastructure investments in Asia. She further suggested that: “The bank could establish an independent auditing process that insists that broader health, social welfare and environmental considerations are fully addressed. Such measures, however, are only likely to be adopted with guidance from other countries with much stronger corporate social responsibility histories than that of China, such as Singapore, Australia and South Korea — not to mention the United States.”

An editorial in The Hindu, one of India’s most influential newspapers, also urged India, presumably the AIIB’s second largest shareholder, to work closely with China, in order “to ensure that best practices are followed in projects for procurement and materials and in terms of labour and environmental standards.”

But, will China readily accept such involvement from the US, its close allies and other emerging countries in its ambitious multilateral initiative that aims to increase its political and economic influence in the region? The Chinese leadership understands very well that its long-term international influence does not solely depend on “hard power”, but also on “soft power”, which is largely constituted by the social and environmental consequences of its extensive global presence.

As Harvard professor Joseph Nye,  the creator of the popular “soft power” concept said last year: “The development of soft power need not be a zero-sum game. All countries can gain from finding each other attractive.” Leaders from China, US, developed and under-developed countries in Asia will need political wisdom as well as professional collaboration in order to ensure sustainable development of the most populous and fast-growing region in the world.

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