Tuesday, July 27, 2010

Credit where it's due

Credit where it's due
Adina Matisoff
China Dialogue
July 27, 2010

China's commercial banks are making strides in domestic green finance but
failing to show the same commitment abroad. In the conclusion of her
article on sustainable credit, Adina Matisoff calls for new standards.

In the three years since the Chinese government introduced the Green
Credit Policy, progress has been made in sustainable finance on China's
home front. While green finance is gaining traction domestically, however,
there are no such policies governing the investments of Chinese commercial
banks beyond the nation's borders. This is the time, as China's financial
powerhouses are increasing their overseas transactions and grappling with
the associated environmental and social risks, to institute such policies.

Up to now, Chinese commercial banks have not played an influential role in
financing Chinese business activities abroad. Instead, Chinese policy
banks have filled this financing space, often with deals arranged at the
highest political level. For example, China Export-Import (Exim) Bank
recently loaned the government of Ecuador US$1.68 billion (11.38 billion
yuan) to finance Sinohydro's construction of the Coco-Coda Sinclair
hydropower dam, and China Development Bank provided a US$30 billion (203
billion yuan) line of credit to China National Petroleum Corporation for
the oil giant's global expansion.

However, not all overseas investments are on such a large-scale or so
complex. In cases where the Chinese government is not directly involved,
Chinese commercial banks such as Industrial and Commercial Bank of China
(ICBC), China Construction Bank or Bank of China are increasingly willing
to step in, and hence better compete with their international peers. "We
are no HSBC or Citi," says Xiao Shaolin, head of China Construction Bank
(London), "But we are following our clients as they go global."

This is especially true in services such as financing the outward mergers
& acquisitions (M&A) of Chinese companies, where the input of commercial
banks is making possible more deals like China's Minmetals' purchase of a
US$1.2 billion stake in Australia's OZ Minerals in 2009. In late 2008, the
government introduced regulations allowing China's commercial banks to
help Chinese firms acquire companies abroad. Since then, such deals have
seen a boost. According to Cai Ersheng, a vice-chairman at the China
Banking Regulatory Commission, Chinese commercial banks loaned Chinese
companies US$400 million (2.7 billion yuan) in the first five months the
government allowed them to carry out such transactions. According to
financial analysts in Beijing, this helped outward M&A deals account for
close to 25% of all M&A activity in the first three quarters of 2009,
compared with just 8.5% in 2007. But, says Cai, "Improving risk management
remains a key challenge for the healthy development of merger and
acquisition loans."

Despite domestic progress, the three top banks mentioned above and other
Chinese commercial banks do not yet have policies to address the
environmental and social risks of their overseas investments. In contrast,
China Exim Bank's "Guidelines for Environmental and Social impact
Assessments of the China Export Import Bank's (China Exim Bank) Loan
Projects" provides a basic synopsis of how environmental and social issues
are taken into consideration by the institution and how concerns are
addressed. It highlights that host country laws must be followed, impact
assessments must be conducted and that the bank has the right to
investigate environmental concerns at any point during the lending cycle
and call in loans on environmental grounds if need be.

The policy's eight paragraphs pertaining to overseas investments are far
from comprehensive, but have shown potential to deter environmental and
social risks abroad. In 2008 China Exim Bank was considering financing
the China National Machinery Export-Import Company to build the Belinga
Iron Ore Mine in Gabon. This project was a favorite of Gabon's late
president, Omar Bongo, but part of the project was to be built (illegally)
in Ivindo National Park, which, according to Marc Ona of the Gabonese
environmental organisation Brainforest, is home to "the most spectacular
waterfalls in Central Africa… [that] have become the symbol of nature
conservation in Gabon."

When presented with information about this project's violations of
Gabonese laws and negative impacts on the environment and local
communities depending on its natural resources, China Exim Bank announced
that it was freezing financing on the project until the results of
environmental impact assessments could be verified. In the absence of
China Exim Bank's financing, the detrimental project stalled.

Without even basic policies to address environmental and social issues
abroad, commercial banks are ill equipped to address similar risks in
other international deals. The Rio Blanco mine in the mountainous Piura
region of northern Peru is one project that deserves more careful
environmental and social consideration by Chinese banks. Bank of China,
China Construction Bank and ICBC made it possible for Chinese copper miner
Zijin to buy this mine and its other global projects. Zijin bought the
mine from UK-based Montericco Metals in 2007 amid allegations that the
mine's management tortured local community members who opposed the scheme.

Zijin has had its own issues with the project. Peruvians opposed to the
mine say it will pollute the already meagre water resources used for
farming and drinking in this rugged highland. As a result, says Javier
Jahnke from the Ecumenical Foundation for Development and Peace in Peru,
"Polluting this area could bring about an environmental disaster for the
entire region." There have already been breaches of Peruvian environmental
laws, for which Zijin was fined, and local consent to operate the mine -
required by Peruvian law - was never obtained. Jahnke and other Peruvians
concerned about the project wrote to Zijin's financiers earlier in 2010
asking for a review of the scheme, but have not received a response. They
are not aware of any measures the company or banks have taken to address
the environmental and social risks that threaten the communities of the
Piura region.

Citizen groups in Gabon, Peru and other countries on the receiving end of
Chinese ventures have made suggestions for how to improve Chinese
investment methods in their countries. High on some of their lists has
been respecting local laws, local land and the decisions of local people.
Implementing those concepts would most likely include environmental and
social impact assessments, environmental planning, community development
and other measures. Better communication and engagement with civil
society, especially local communities, could also inform project decisions
that impact on the local environment and people and diffuse possible

If Chinese banks adopt environmental and social standards such as these in
their overseas lending systems, they would be able to help companies such
as Zijin avoid or mitigate these project risks. The Chinese government,
which has helped banks address environmental and social issues at home
through the enactment of the Green Credit Policy and other measures,
should work quickly to develop similar guidelines and supervision for
banks in their overseas financing decisions. This would be a new take on
the international model, where voluntary standards such as the Equator
Principles, preferred by banks, have been the norm. However, it would
follow the precedent set by the Green Credit Policy domestically. There
are rumors that China's Ministry of Environmental Protection, Ministry of
Commerce and Banking Regulatory Commission are already in the process of
developing environmental guidelines for Chinese overseas investments;
however such has been the talk for years, with no a draft or timeline yet
publicly released.

As Chinese commercial banks follow their corporate clients overseas,
developing environmental and social standards for lending abroad - like
they are starting to do domestically - could keep the related risks at bay
and demonstrate commitment from China to sustainable finance globally. The
Chinese government should lay the framework to bring responsible Chinese
investments abroad to fruition as soon as possible.

Part one: Progress at home

Adina Matisoff is the China sustainable finance analyst for Friends of the
Earth in the United States.

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