What China’s new foreign aid rules can and cannot do

CIDCA’s proposed Measures open a new window into Chinese foreign aid, but stakeholders should manage their expectations

by Ma Tianjie and Zhang Jingjing

China’s newly established foreign aid agency (China International Development Cooperation Agency, CIDCA) recently released draft Measures for the Administration of Foreign Aid to solicit public comments. This move understandably attracts international attention as observers are eager to learn how the new agency would operate, and, more importantly, how any external stakeholders (recipient countries, contractors, civil society, etc.) may participate in and influence the aid process.

Expectations are high. Chinese foreign aid has long been known for its opaqueness. For years, external researchers and observers had to rely on infrequent white papers to get a glimpse of the scope of the country’s aid program. Piecing together fragmented information on Chinese aid to render a more complete picture has become an effort that entire research programs undertake. With the release of the new draft rules, hopes are that Chinese foreign aid may become more transparent and accessible.

But before people get too excited about the opportunity to reshape Chinese foreign aid, it is important to clearly understand what the draft measures can achieve and their limitations.

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External researchers and observers had to rely on infrequent white papers to get a glimpse of the scope of the country’s aid program. Source: china.com.cn

What the draft Measures do

As a new agency born out of the ministerial reshuffle earlier this year, the new Measures define CIDCA’s core business: the process of designing, implementing and reviewing foreign aid projects.

It is worth noting that even though CIDCA is new, the draft Measures are not. Before CIDCA became China’s coordinating government body for foreign aid, the Ministry of Commerce (MOFCOM) was the main aid distributor, while multiple other agencies shared bits and pieces of foreign aid responsibilities. The draft Measures are built on an earlier MOFCOM version, which was announced and went into effect in 2014, with new elements reflecting the agency’s expanded mandate.

Beyond taking over the supervision of four types of foreign aid projects previously overseen by MOFCOM (complete projects, material donation projects, technical assistance projects and capacity building projects), CIDCA also assumes an important strategic planning role, drawing up foreign aid strategies and plans at the national level. Plus, the multiple streams of aid-related finance, including grants, interest-free loans and concessional loans, will all be subject to CIDCA’s overall budgetary oversight. In the case of South-South cooperation funds jointly set up by CIDCA and other governmental departments, the agency will directly run and distribute those funds.

The draft Measures distills CIDCA’s mandate into a set of concrete policy items that will be created along the process of the agency’s fulfillment of its responsibilities. These include:

  •         A top-level foreign aid strategy (unclear frequency, possibly approved by State Council)
  •         A long-term to mid-term policy plan (unclear frequency, possibly approved by State Council)
  •         Country-by-country aid policies
  •         An annual foreign aid plan (possibly approved by State Council)
  •         A foreign aid management system
  •         Foreign aid international cooperation system
  •         An annual foreign aid budget
  •         Measures to manage the initiation and approval of aid projects
  •         A project evaluation system
  •         A credit rating system for project implementers
  •         Foreign aid statistics collection

Many details are missing from the draft Measures, and some items, such as the process of initiating and approving actual foreign aid projects, require their own stand-alone measures to be fully hashed out. But still, a skeleton of the policy framework that will govern Chinese foreign aid in the future is visible from the draft.

Understanding the constraints of the draft Measures

Promising as they are, the draft Measures have a few built-in limitations that would put clear boundaries around ways external stakeholders may interact with Chinese foreign aid.

The first and foremost limitation lies in its relatively low legal force according to the Legislation Law. The draft Measures rank as a “departmental rule” issued by a ministry/agency under the State Council. Within the hierarchy of the Chinese legal system, laws passed by the National People’s Congress are bestowed with the highest legal authority. Beneath them are regulations created by the State Council (the Cabinet). While rules promulgated by government departments and local provincial people’s councils are lower on the legal ladder.

In principle, lower-level regulations and rules cannot go beyond what higher-level laws authorize them to do. In the case of CIDCA’s draft Measures, as a departmental rule, their legal force is circumscribed by a few higher-level laws and regulations, including, but not limited to, China’s Law of Administrative Permission, Law of Administrative Penalty, State Council Open Governmental Information Regulation, and Law of Administrative Reconsideration. The draft Measures are also bound by the agency’s approved mandate and duties set by the State Council.

Those higher-level legal instruments erect a wall around the Measures. For instance, many would like to see more accountability built into the Measures by creating stronger penalties for violating rules set by the Measures. Yet, the Law of Administrative Penalty and related State Council rules set a RMB 30,000 ceiling for fines that government agencies can legally impose, which is adopted by CIDCA in the draft. The cap on fines is supposed to serve as a check against the abuse of administrative power. Nevertheless, RMB 30,000, a limit set by the State Council in 1996, is of questionable deterrent power today. In the same vein, CIDCA can only impose two types of administrative penalties: disciplinary warnings and fines. The agency is also not allowed to use the Measures as a vehicle to create new roles for itself. For example, even though stronger Environmental and Social Impact Assessments of Chinese aid projects could be a desirable development, without a State Council authorization for CIDCA to involve the Ministry of Ecology and Environment in the management of foreign aid projects, the agency won’t be able to take on the role on its own. To overcome some of the intrinsic weaknesses of the draft rule, CIDCA would need to muster enough political support to elevate the draft Measures to a higher level (such as a State Council regulation).

What can be improved

As a draft for comment, the draft Measures, in their current form, definitely have much space for improvement. One area that can be improved is information disclosure. And this is not an unreasonable ask. The State Council’s 2008 Open Governmental Information Regulation (China’s freedom of information act) constitutes the legal basis for demanding greater transparency from government agencies. Article 9 of the Regulation requires government agencies to proactively disclose information that “needs to be widely known and participated by the public.” Arguably, dispensing public resources to assist foreign countries deserves public knowledge and participation. In theory, many policy items listed above should be released publicly to keep the society informed of where foreign aid is going. Yet no disclosure related clause currently exists in the draft Measures.

The draft Measures by itself can’t impose criminal liabilities, but it indicates that anyone who violates Chinese Criminal Law and other laws during the licensing and implementation of foreign aid projects may be subject to criminal liabilities. Unfortunately the draft Measures doesn’t echo the second paragraph in article 164 of the Criminal Law, which states, “Whoever gives any property or benefit to a functionary of a foreign country or an official of an international public organization for any improper commercial benefit shall be punished according to the provision of the preceding paragraph.” This provision was added to China’s Criminal Law after China signed and ratified the UN Convention Against Corruption in 2005, but it has never been used to prosecute Chinese persons and legal persons for their foreign briberies. Some Chinese companies, including those who implemented or are implementing foreign aid projects, have been criticized for briberies in Africa and Latin America.

The draft Measures also lack an explicit grievance mechanism for external stakeholders, particularly those affected by Chinese foreign aid projects, to report wrongdoings and submit complaints. This appears to be a backtrack from its predecessor. MOFCOM’s 2014 measures at least included one clause that allows “any individual or entity” to report to the ministry when they find Chinese implementers in non-compliance. Besides pressing CIDCA to reintroduce such a mechanism into the rule, one may also find openings in Chinese administrative laws to challenge certain agency decisions. In theory, “administrative licensing” can be questioned on the basis of the Administrative Reconsideration Law, which grants citizens and organizations the right to plea for reconsideration of permissions that violate their interest. The draft Measures contain a few approval/licensing components. For example, approval of foreign aid projects in the draft Measures is an “administrative licensing” by nature. Whether third parties can trigger a reconsideration petition for such approvals on grounds of affected interest is subject to legal interpretation. But in the past, Chinese civil society groups have successfully used the legal tool to overturn government decisions, such as the greenlighting of problematic Environmental Impact Assessments. It will be interesting to see if such clauses can be activated to bring some accountabilities to Chinese foreign aid in the future.

(Write to Panda Paw Dragon Claw by clicking the “Contact” link at the top of our site if you have any question about the draft Measures.) 

Zhang Jingjing is a Chinese lawyer and Lecturer in Law at the Transnational Environmental Accountability Project, University of Maryland School of Law

November monthly round-up: caught in the crossfire

As US-China tension increases over the BRI, third-party actors find themselves caught in the crossfire.

If a butterfly in Nairobi flaps its wings, would it set off a tornado in Beijing?

Last month, what happened in the United Nations Environment Program (UNEP), headquartered in Nairobi, Kenya, certainly would alarm some policy makers in Beijing. On November 20, news broke that UNEP’s Director Erik Solheim resigned after a major scandal that threatened to undermine the agency’s legitimacy as the world’s leading multilateral environmental body. Most of the allegations against Solheim were not China related. An internal UN audit revealed his abnormally high air travel expenses (half a million US dollars in less than two years) and breaching of UN rules (allowing some staff members to work from Europe when they need to be based in Kenya). But the Guardian report also highlighted a side complaint. The United States, and some UNEP employees, had raised questions about his perceived coziness with the Belt and Road Initiative (BRI).

As recently as Nov 5, Solheim was in Beijing celebrating achievements of the International Coalition for Green Development on the Belt and Road. “China could share its green development experience with other countries through dialogue,” he said, and envisioned three roles for the Coalition: promoting green finance, setting up basic principles and rules for BRI, and serving as third party facilitators for green development in host countries. Ironically, it turned out that the Coalition was at the center of American misgiving. According to the disclosed list of questions posed by the Permanent Mission of the US to the UN in April this year, the US questioned the relationship between the agency and the Coalition, especially the justification for “an organization under a universal governance model devoting its resources to promote a plan exclusive to an individual (country).”

The episode underscores the increasingly divisive international space wherein third-party actors need to navigate to position themselves properly vis-à-vis the BRI. The heightened tension between the US and China over the infrastructure program makes the balancing act especially challenging. During Solheim’s brief tenure at the agency, UNEP entered a partnership with China’s environment ministry to promote “Green BRI” and has helped soften the initiative’s international image. That’s probably why upon his disgraced departure, the ministry’s spokesperson had only nice words to say about him: “Mr. Solheim has paid much attention to and worked hard on south-south environmental collaboration and environmental protection in developing countries.”  

MEE on Solheim
China’s Ministry of Ecology and Environment praised Solheim upon his resignation from UNEP.

If the exchange around UNEP was just a skirmish (Solheim’s oust was largely self-inflicted), what happened at the Papua New Guinea APEC summit was almost an open confrontation. Immediately after Chinese President Xi Jinping’s address to the APEC CEO Summit promoting the BRI as “an open platform for cooperation”, US Vice President Mike Pence told the same audience that countries “should not accept foreign debt that could compromise their sovereignty.” He even went on and dubbed the BRI a “constricting belt and one-way road.”

For decades, the West has offered financing to developing countries on conditions of trade liberalization and market reform. For Pence to remind countries of the need to preserve their sovereignty, therefore, is a bit disingenuous. Nonetheless, the “debt trap” narrative sticks. Almost at the same time as Pence was warning against the BRI, the newly elected President of the Maldives, in his inaugural speech, blamed Chinese loans for his country’s “precarious” financial situation and signaled distancing from a relationship that his predecessor had cultivated.

APEC quickly became another victim of the US-China animosity. The annual Summit on Nov 18 failed to produce a joint communiqué, a disappointing departure from its 20-year tradition, due to US-China disagreement over languages about global trade reforms. A narrative quickly developed around how China sabotaged the whole thing, not just with its insistence on policy arguments, but also with its “aggressive, bullying, paranoid and weird” behavior at the event. In contrast, the Trump administration’s own position of dismantling existing global economic mechanisms such as the WTO and its possible contribution to the deadlock did not receive as much scrutiny.

Chinese response to the criticism was to reiterate its position that Asia-Pacific development is not to be a zero-sum game and a binary “win/lose” choice, and that disputes should be resolved under “mutually agreed rules”. Researchers and think tank specialists wrote articles on Chinese platforms trying to refute the “debt trap” accusation, using data from the IMF and CIA to argue that Chinese loans constitute minor portions of the debt burden of countries such as the Maldives and should not be scapegoated for their economic difficulties.

As third-parties struggle to (re)align themselves with the BRI, the landscape of international development finance is quietly being redrawn. Ahead of the APEC summit, the US, Japan and Australia announced a Trilateral Partners infrastructure fund that would support infrastructure development in the Indo-Pacific region that “adhere to international standards and principles for development, including openness, transparency and fiscal sustainability.” The fund is widely read as a counter-offer to the BRI. As a first step, a financing package for Papua New Guinea to expand electricity and Internet coverage, worth USD 1.7 billion, was unveiled on the day of the summit. If the BRI has redirected global attention to the developing world’s massive infrastructure gap, it could be one of its more positive effects. The question is if, as a price of accessing much needed funds, developing countries would have to pick sides in a fight they don’t want.

Unpacking Chinese financing of Pakistan’s “dream” power plant

Chinese companies are not just pouring concrete along the Belt and Road. Financing is a big part of China’s overseas involvement.

By Liu Shuang

There has been much discussion about China’s involvement in coal projects overseas. Critics point to the tremendous carbon footprint it may create, and call for a change in the practice. Analyses have highlighted the complicated dynamics that enable the continued build-up of coal fired power capacities around the developing world, against the stern warning of climate scientists.

Within that complex dynamics, financing is one central piece of the puzzle that is often poorly understood. Due to intrinsic difficulties in gaining access to information about how financial actors (especially Chinese ones) operate, presenting an accurate picture of key financial components at project level proves to be challenging.

This blog tries to shed some light on Chinese financed coal-fired power plant, by using a “strawman case” built out of publicly available information.

The case in point is the Engro Thar Block II (ETBII) project in Pakistan’s Sindh province, one of the key coal power projects listed under the China Pakistan Economic Corridor (CPEC). As a major destination of Chinese coal investments globally, Pakistan provides a good observatory point to understand why coal projects along the Belt and Road continue to get funded by Chinese lenders.

engrothatblockII
Engro Thar Block II 2×330MW Coal fired Power Plant TEL 1×330MW Mine Mouth Lignite Fired Power Project at Thar Block-II, Sindh, Pakistan. Source: CPEC Website

“The Thar dream”

Ever since the discovery of the massive coal reserve in Thar in 1991, a desert area 500 kilometers to the east of Karachi, the anticipation of developing Pakistan’s indigenous source of energy has captured the imagination of the nation. The reserve is estimated to comprise 175 billion tons of lignite coal. Unlocking a fraction of it would be sufficient to power the entire country, which, to this date, still heavily relies on imported fuel oil for its electricity demand. But technological barriers had thwarted attempts to tap the resource in the past. And due to concern with climate change impacts, the World Bank withdrew its support for the endeavor in 2009, leaving the project in financial uncertainties for a few years.

The entry of Engro, one of Pakistan’s largest private energy conglomerates, breathed life into the project. But the prospect of developing the Thar minefield really improved after China got on board. In 2014, Engro Thar Coal-fired Power Plant (660 MW) was listed under the China Pakistan Economic Corridor (CPEC). And the year after, a consortium of Chinese finance institutions committed to fund the project, enabling the project to achieve financial closure in April, 2016. According to CPEC’s official project registry, the Engro Thar Block II project is a combination of coal mining and mine-mouth power generation, with the first phase of the coal-fired power plant consisting of two 330MW units.

Engro’s official website celebrated the project as a “significant feat”, marking “a new era for energy security in Pakistan and brings with it the realization of the Thar dream.”

Chinese actors

The project illustrates a typical financing structure that is increasingly common along the Belt and Road.

ETBII Finance

At least four categories of Chinese actors are involved in this case:

Lender : China Development Bank (CDB), Industrial and Commercial Bank of China (ICBC), Construction Bank of China (CBC)

Credit insurance: Sinosure

Construction company (EPC contractor): China Machinery Engineering (CMEC)

Project developer: Sindh Engro Coal Mining Company (SECMC, with China Power International Holding and CMEC as shareholders)

As in many other similar China-financed projects, the structure features one Chinese policy bank (either CDB or the Export-Import Bank of China), two Chinese commercial banks and Sinosure. The arrangement helps spread financial risks across multiple Chinese players. While players such as CDB has attracted wide attention as one of China’s financial engines powering the Belt and Road Initiative, other key players have managed to stay out of the spotlight. One of them is China Export & Credit Insurance Corporation (Sinosure), whose involvement in such deals can often tip the balance between go and no-go.

Sinosure engages in a business known as “policy insurance”, non-profit oriented insurance bankrolled by China’s treasury, with the aim of promoting the country’s export and overseas investments. In a project like ETBII, Sinosure provides an Export Buyer’s Credit Insurance to the Chinese financial consortium against the risk of repayment delay or failure due to political or commercial reasons. For a range of risks from war to contract breach, the company offers a maximal 95% insured percentage. The safety net is critical in markets with high uncertainty and gives Chinese companies a considerable edge. Despite the seemingly bottomless “pockets” of Chinese policy banks and state-owned commercial banks, whether Sinosure is on board usually accounts for “50-60% of the weight” in their decision making, according to those familiar with the matter. And Chinese actors don’t even have much choice. Alternatives to Sinosure, commercial insurance companies or foreign insurers, are much less desirable for their high charges. Sinosure’s influence in deciding China’s overseas energy footprint cannot be underappreciated.

Even though on paper Sinosure may maintain an “agnostic” approach to the types of energy projects it insures, be they coal-fired or renewable, other project features can tilt it more toward coal. Guarantee from a project’s host country government matters to an insurer. Large fossil fuel projects, in this regard, usually have better access to state support than renewable energy projects much smaller in scale. Smaller project size also means a lower “financial threshold” of entry, attracting developers that, to insurers, are intrinsically riskier. Large fossil fuel projects may also leave behind more valuable fixed assets than renewable projects in occasion of a default, an important consideration for insurers. All those non-climate related factors may make Sinosure more inclined toward projects like ETBII.

A bankable PPA

In any major power project that involves financing from international lenders, the Power Purchase Agreement (PPA) often ranks as the most important contractual component of the deal. On the surface, a PPA is merely an instrument that facilitates the sale and purchase of electricity. But more importantly, for most power projects, payment from the buyer under the PPA constitutes the only revenue stream for the project company to repay its loans. The negotiation and set-up of a PPA would often decide if a project is considered “bankable” to potential lenders.

The Pakistani authority has more or less standardized the PPAs of coal power projects, making them acceptable for international financiers. In a 2016 presentation by Pakistan’s Private Power and Infrastructure Board (PPIB), a government body that facilitates investments into the country’s power sector, it boasts government guarantee of power purchaser obligations, attractive Return on Equity (ROE), tariff indexation against inflation and government assurance of foreign currency conversion as terms that would sweeten a power deal for foreign investors. Most, if not all, of those elements will end up in a project PPA.

Based on the information published by Pakistan’s National Electric Power Regulatory Authority (NEPRA), we could get a glimpse of the key components of the PPA for ETBII.  The following chart lists those components and juxtaposes them with equivalent PPAs of wind power projects in Pakistan for reference.

PPA
* A selection of multiple wind energy PPAs from the NEPRA website is used here for reference purpose

Beyond the fact that a coal power PPA usually features a relatively low electricity tariff, which is highly valued by Pakistan’s policy makers and regulators that put “affordability” of electricity at the center, the PPA also caters to the needs of other key stakeholders in the deal. From a lender’s point of view, the PPA’s tariff formula incorporates debt service considerations of the project, based on a standard interest rate (London Inter Bank Offer Rate plus 450 basis points) for foreign currency loans. In addition, it also promises an over 30% Return on Equity for the project’s sponsors (i.e. shareholders), which is higher than what’s typically factored in in PPAs of other similar projects (15%-20%).

The PPA represents a different kind of product that is being promoted along the Belt and Road: the knowhow of setting up financial frameworks of projects fundable by Chinese financial institutions. As Chinese banks and companies take leading roles in overseas power projects, they share their expertise with host countries, showing them how to make projects work. This is something much less tangible than the infrastructure projects ended up being built, but no less important.

The enabling environment

Chinese financing can only be materialized into projects with the help of enabling investment and regulatory frameworks in Pakistan, co-created by a host of government agencies. The bonding of the two elements releases “energy” that propels Belt and Road power projects forward.

In the ETBII case, beyond PPIB support of the project, endorsement statements were provided by the Ministry of Petroleum and Natural Resources and the Government of Sindh in support of the project, quoting energy security and the use of “indigenous resources” as main reasons; the province’s Environmental Protection Agency issued a No Objection Certificate, with no climate considerations included.

For those with a view to contain and even reverse the “chemical reaction”, understanding both the financing element and the enabling element will better prepare them for engagement and intervention. The strawman case is not meant to depict a complete picture. Yet the snapshot it creates should contribute to the mapping of key players and their interactions that illuminate the way ahead.

Liu Shuang is the Director of Energy Foundation China’s Low-Carbon Economic Growth Program. At Energy Foundation China, she develops and implements program strategies, manages grants on carbon emission scenarios, market-based instruments, economic analysis of environmental and climate policies, and mainstreaming climate research into economic growth. She holds an MSc in Environmental Economics from University College London and a BA in Economics from Peking University.

October monthly round-up: teacher/student complex

Shinzo Abe’s visit to Beijing sets the two countries on a path to collaborate along the Belt and Road

The key word of the past month was Japan.

On Oct 25, Beijing residents witnessed the rare scene of Chinese and Japanese national flags waving side by side near Tiananmen Square. And the public reaction was mixed. The two countries had been on pretty bad terms since the beginning of the 21st century, with sovereignty disputes over islands in the East China Sea and Japanese politicians’ visits to the controversial Yasukuni Shrine, which enshrines WWII war criminals, continuously overshadowing bilateral relations.

2018 saw the rapid thawing of a once icy relationship thanks to President Trump’s increasingly belligerent trade position against both China and Japan. The US has threated auto tariffs against Japan and has slapped punitive tariffs on Chinese goods worth hundreds of billions of dollars. In the face of a United States no longer committed to a global economic agenda that has largely benefitted manufacturing powerhouses like China and Japan, the two East Asia neighbors find it desirable to put their differences aside, at least for now.

The visit turned out to be quite consequential from a Belt and Road perspective. During his visit, Abe would put an end to four decades of Japanese foreign aid to China and start a new phase of China-Japan partnership along the Belt and Road.

To declare an end to Japanese Official Development Aid (ODA) during a friendly visit is a somewhat awkward task.  

Japan ODA
Chinese online commentators reacted to the end of Japanese ODA with mixed feeling.

Since 1979, after relationship normalized between the two countries, Japan has been a major donor and financier of China’s industrialization and modernization, in the forms of grants, concessional loans and technical assistance. According to a WeChat post detailing the history of Japanese ODA to China, the projects benefited from Japanese assistance include infrastructure projects such as the Beijing-Qinghuangdao railway, telephone networks in Shanghai and Guangzhou, and manufacturing projects such as fertilizer factories in six provinces. Total Japanese ODA to China amounts to 20 billion USD by the end of 2007, which wound down significantly after that point, when China surpassed Japan as world’s second largest economy.

Chinese reaction to Japanese ODA is not entirely of gratitude. Debates are still ongoing as to whether the assistance should be seen as a form of reparation for Japan’s WWII atrocities. China officially waived Japan’s WWII reparations (calculated at 120 billion USD) in 1972 as a generous gesture, when the two countries were negotiating reestablishing diplomatic relations. Some Japanese scholars and officials privately called its ODA a “semi-reparation” even though the Japanese government never acknowledges it.

Motivation aside, Japan’s ODA to China did play a unique role in China’s modernization beyond building up railroads and factories. It showed China how development assistance could be done to advance a country’s own economic agenda. Prof Debra Brautigam’s book about Chinese involvement in Africa documents how Japan introduced Chinese policy makers to the idea of “resource-backed concessional loans”, a formula that China would deploy competently later on in Africa and Latin America. Throughout the 1980s, Japan built infrastructure in China to unlock its coveted coal and oil resources, the sales of which would service the loans. The model opened China to the possibilities of “win-win” partnerships that would become a backbone of its own overseas development model in other countries.

In many ways Japan has been a modern-day teacher to China, a reversal of roles from pre-industrial eras when the Japanese culture absorbed and borrowed insatiably from its neighbor to the West. And now the teacher/student relationship is about to change again. In a press conference in Beijing, Abe declared that Japanese ODA has “fulfilled its historical mission,” and that from now on the two countries would become partners in driving global economic growth.

That partnership may take a very specific form. Before Abe’s visit, there were already expectations in the Chinese media that project-level collaborations in the Mekong region countries, including joint participation in Thailand’s Eastern Economic Corridor (EEC) program, would be on the table during the Prime Minister’s visit. The official term for that cooperation is “Third Party Market Cooperation,” a slightly more neutral name for what Chinese media often bluntly call “participation in the Belt and Road Initiative”. The idea is promoted partly to demonstrate that BRI is open for all countries and deflect the criticism that it is to exclusively benefit Chinese business interests. In state media coverage of the China-Japan Forum on Third Party Market Cooperation, a few cases of Chinese and Japanese business cooperation in a third country were listed, including a petrochemical project in Kazakhstan involving Sinopec and Marubeni and an offshore wind energy project in Germany jointly developed by CITIC and Itochu. 

As expected, Thailand “emerged as a major beneficiary” of the Forum, according to South China Morning Post, with multiple Thai-focused deals (smart city development, highspeed rail, etc.) included in the China-Japan agreement. The Forum also produced an agreement between the Japan Bank for International Cooperation (JBIC) and China Development Bank (CDB) to provide joint loans to infrastructure projects overseas.

Japan has been cultivating the Southeast Asia market for years, with its foreign aid, investments and business interests deeply engrained in many ASEAN countries. This blog has just highlighted, for instance, its deep involvement in Indonesia’s energy planning. As a relatively new comer, China is also eyeing the region as a key part of the Maritime Silk Road. Weeks before Abe’s visit to Beijing, the Chinese media watched with suspicion his summit with five Mekong region leaders, viewing Tokyo’s move to establish an “open and free Indo-Pacific region” a defensive posture against China’s presence. Quoting Thai Prime Minister Prayuth Chan-ocha, Guancha.cn, a Chinese nationalist news site, reminded Japan that Mekong region countries “would rather see Sino-Japan collaboration” that gives profits to each country.

With Abe’s successful China trip, it appears that collaboration will be the theme in the next chapter of the two sides’ complicated relationship.

Supply and demand: understanding Chinese involvement in coal projects overseas

China is shifting away from coal domestically but building many coal power plants overseas, why?

China’s involvement in building coal power projects in other countries has been the subject of much criticism. The increasing urgency to address climate change, as highlighted by the recent special report published by the Inter-governmental Panel on Climate Change (IPCC), casts such involvement under serious scrutiny. The IPCC report bluntly states that in order to keep global temperature rises close to the 1.5 degree threshold that scientists deem relatively safe, countries should basically cease using coal as energy for electricity by 2040. Global temperatures are already 1 degree higher than pre-industrialization levels, leaving humanity with very little remaining “carbon budget” to spend if it is serious about keeping climate change under control. As one of the most carbon intensive way to generate electricity, coal-fired power plants (CFPP) understandably rank high in the phase-out list.

To a large extent, Chinese actions in this area would determine the fate of the “black gold” and the global fight against climate change, due to the size of its economy which still relies primarily on coal for electricity. In comparison, coal only accounts for 17.8% of the US’s primary energy source. Alarmingly, as China shifts away from coal domestically, for air quality and economic structure considerations, it appears to be building coal power projects elsewhere in the world that will likely negate part of the decarbonization happening inside China while exporting pollution.

Elizabeth Economy, a China expert at the Council for Foreign Relations, encapsulates the criticism in her 2017 article on Politico, calling out China’s overseas CFPP involvement as “ugly” and “not in keeping with the spirit of (the Paris Climate) Agreement.”

At a recent workshop that I attended in Jakarta, co-organized by the Beijing-based Global Environmental Institute and Indonesian think thank IESR, a local CNN correspondent asked the panelists the same question: Does China’s building of CFPPs in Indonesia constitute a “double standard”?

This is a question that is likely going to be asked more in the future, as the urgency of climate change becomes ever more salient and China’s overseas involvement continues to deepen. The Jakarta workshop, which convened stakeholders from both Indonesia and China, provided an opportunity to do just that, taking a closer look at an issue ripe with contradictions. Discussions at the workshop suggest that there are at least three lenses through which the issue can be viewed: recipient country agency, multi-stakeholder playing field, and Chinese industrial policy.

244165110
An IESR researcher presenting research findings at the workshop

The role (& responsibility) of recipient countries

Responding to the question from the CNN journalist, Professor Yuan Jiahai from the North China University of Electric Power, who was present at the event, argued that it was largely an outcome of recipient country demand and market competition: Indonesia’s power sector is in need of CFPPs and Chinese companies are coming in to capture the market.

According to the Indonesian officials, electrification remains a priority of Indonesia, the 4th most populous country in the world, of over 18,000 islands, where access to safe and affordable electricity in many areas is still all but unavailable. At the same time, on the supply side, the government is at pains to diversify its energy sources, ever since Indonesia became a net oil importer for the first time in 2004. Within a short span of 8 years (from 2009 to 2016), electricity generation from oil fell from 25% in the general mix to below 7%. while coal rose from 39% to 55%. These changes have been led by twosuccesstive administrations (President Susilo Bambang Yudhoyono and President Joko Widodo) who spearheaded the so called “Crash Programs” to accelerate installation of power capacities to ease the country’s chronic electricity crunch.

However, it has not been all smooth sailing. President Yudhoyono’s first Crash Program was known for its poor execution. Announced in 2004, it aimed to add 10,000MW of new capacity by 2009. Instead completion was severely delayed until 2014, and the resulting power plants that were built were of such low quality that they could not perform at their stated capacity.

President Joko Widodo’s new program, created in 2014, aims to add another 35,000MW to the grid by 2019, a goal that many consider unrealistic.

And it is here that China’s involvement dovetails, as Chinese companies pocketed the majority of projects under President Yudhoyono’s initial program. As opposed to outright ownership of the projects, the Chinese companies were mainly involved in design and construction through EPC contracts (Engineering, Procurement and Construct), which meant that they did not operate, maintain, nor own the power plants that they built. Apart from their engineering and construction prowess, favourable financing support for Chinese company involvement may have also played a key role for their winning of this job.

As a result of these developments in Indonesia’s Crash Program, Chinese companies, and by extension, China, came to occupy a primary role in Indonesia’s energy system. Indonesian media was rife with open speculation that favoritism toward China was part of why so many projects were granted to Chinese companies, pointing to the fact that project tender process had deadline submission requirements only China’s companies could meet. The speculations weren’t entirely groundless. Recently, Indonesia’s national power company (PLN) is embroiled in corruption scandals related to its coal power project.

More guests at the dinner party

It is worth noting, however, that China has not been the only outside player eyeing the Indonesian coal power cake. Japan is a key player and has been exerting its influence.

At the workshop that I attended, the below chart kept appearing in presentations from Indonesia officials. It illustrated Japan’s roadmap to assist Indonesia in building its “clean coal” power fleet through to 2025. Created by the Japan International Development Agency (JICA) as part of its development assistance to Indonesia, JICA stated that “the introduction of Japan’s CCT(Clean Coal Technology), which represents the highly efficient technology for coal-fired power plants, will help curb demand for coal and greenhouse gas emissions by making it possible to increase the output of power generation without increasing the use of the resource.” In the planning for the study, JICA also built in a step where the roadmap could be “incorporated into Indonesia’s national power source plan”.

CCT Roadmap
Roadmap of clean coal fired power plant deployment in Indonesia, created by JICA

Beyond the controversy of an external country’s involvement in domestic energy developments, Japan’s pushing of “clean coal” has raised the ire of many who believe it be a false solution to climate change. Ironically, JICA created the roadmap in close coordination with Japan’s Climate Change Program Loan to Indonesia, announced in 2008 as Japan’s first climate change-related Official Development Aid (ODA) loan to assist Indonesia in its effort to reduce emissions, strengthen adaptation to climate change and respond to cross-sectoral issues. This practice of marrying the promotion of Japanese coal technology and its climate finance has been controversial and subject to much criticism internationally.

But Japanese officials are unabashed when confronted with the question. As Japanese media reported, promoting Japan’s high efficiency coal power technology as a climate change solution is part of Japanese government’s efforts to “assist Japanese businesses against Chinese rivals for coveted overseas power plant contracts.”

To some extent, Japan’s efforts in Indonesia have paid off nicely. Of the  8 high-efficiency coal power plants  that are under construction,at least 3 projects, including the 2 largest (Jawa Tengah- Central Jawa and Jawa-4 – Central Jawa), are being financed by Japanese Bank for International Cooperation (JBIC) or built by Japanese companies such as J-Power and Itochu. And despite the controversy over the Jawa Tengah project for its land acquisition issues and environmental problems, Japan’s support for it continues, with one Japanese official telling the Nikkei Asian Review, that they wanted to make the Central Java project a showcase that will open the door to more projects.” Recent signs seem to suggest that there might be a rethinking of overseas coal financing from Japanese financial institutions.

Chinese industrial policy

Japan’s rather high-profile and coordinated activities in Indonesia to promote its coal interest provides a point of reference for Chinese efforts in the same arena.

If there is one component of the nebulous Belt and Road Initiative (BRI) that is relatively well defined, it is its function as an extension of Chinese industrial policy. The need for many Chinese industrial sectors to find new markets outside their home country is a powerful driver for China’s “Going Out” strategy which predates the BRI for more than a decade.

In the specific area of coal power, China, as its neighbor Japan, is keen to see its companies winning lucrative contracts overseas, a need accentuated by a slowing domestic market. According to Prof. Yuan Jiahai, China’s coal power sector is facing a severe overcapacity problem: “failure in power planning” (i.e. not foreseeing slowing electricity demand growth) makes many existing Chinese coal power plants badly under-utilized, spending a good part of the year idling. The situation prompted the Chinese government to apply the brake on new coal power plants, suspending new builds in 15 provinces.

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Prof. Yuan Jiahai’s presentation highlights the problem of overcapacity with China’s coal power sector by showing decreasing annual utilization hours of existing power plants

But the Chinese companies that over the years have excelled in building CFPPs need jobs. And the unique bond between Chinese state-owned enterprises (SOEs) and the state machinery (diplomatic, finance and industrial) makes China particularly well disposed to make concerted efforts to advance the interest of its industries. A 2015 State Council directive on “international industrial capacity sharing” lays out a blueprint for how the government would assist competitive Chinese industries to expand globally. Within its toolbox are instruments such as Chinese policy banks (China Development Bank and the China EXIM Bank) that tie their concessional loans with business deals for Chinese companies; and high-level bilateral government-to-government dialogues that secure “full package” deals for Chinese corporations. Premium Li Keqiang’s “industrial diplomacy” with Kazakhstan is celebrated as the origin of this model.

Power plant construction and operation is listed in the directive as one of the priorities for such state support, as it is a sector through which not just Chinese equipment, but also Chinese services and standards, can be exported. And the model plays out in Indonesia’s power market. Shenhua, one of China’s largest coal industry conglomerates, won the contract to build and run the Java-7 coal-fired power plant in Banten, another high efficiency CFPP listed in the CCT roadmap. The Shenhua-led Chinese consortium managed to beat 36 other competitors in the bid, and attributed the success to its premium clean coal technology and “low-cost, tailor-made financing” based on its strategic partner relation with China Development Bank.

This may give the impression of a formidable, highly efficient industry-policy complex geared up to take over any country’s power market. But in reality, Chinese efforts in promoting the export of its industrial capacities are far from seamlessly coordinated. Government red tapes and lack of service/support are among the many complaints Chinese entrepreneurs make. And in many emerging markets Chinese companies are still required to follow standards set by “Europeans, Japanese or South Koreans.” Chinese actors are barely catching up with experienced players in the arena (such as Japan) that have mastered the art of merging foreign aid, industrial policy and overseas investment into a strategically aligned whole. By and large, Chinese companies still predominantly compete for EPC deals, which is considered low-end and low-value in the global value chain.

GEI-China coal type
Majority of Chinese involvement in overseas coal power projects is through EPC contracts. Source: GEI

Shifting China’s overseas coal involvement

For anyone with an eye to engage and influence China’s overseas energy projects along the Belt and Road, the above should serve as a reminder of the intertwined forces that are collectively shaping the energy landscapes in those developing countries.

To shift the direction of such projects would require pulling multiple strings at the same time: without empowered and enabled host countries that are capable of envisioning their own energy future differently, investing countries alone would find it hard pressed to resist lucrative power deals that are being actively marketed; without a globally coordinated and aligned approach to public financing of fossil fuel projects, one country’s high-minded rejection of a project might simply become another country’s business opportunity; and without a conversation that could engage China’s industrial policy makers, the domestic economic agenda would continue producing strong momentums for Chinese companies to seek CFPP projects overseas, despite warnings from climate scientists.

 

September monthly round-up: great power mentality

FOCAC exposed tension between Chinese overseas involvement and domestic public opinion

The Forum on China-Africa Cooperation (FOCAC) was a highlight of the past month and once again put China’s overseas involvement under domestic spotlight. Held in Beijing from Sep 3-5, the extravagant event brought high-level representatives from 53 African countries to two days of dialogue, deal making and celebration of China-Africa friendship. In his opening speech, President Xi Jinping announced a $60 billion package to finance development in Africa and spelled out the “5 NOs” and “4 CANNOTs” principles (五不四不能) that would lay the foundation for China-Africa relationship in the coming years. The principles mainly served as a re-affirmation of China’s long-standing non-interference, “no-strings attached” aid policy and a warning to third-party forces trying to undermine the relationship.

In many senses the forum delivered what was intended of it. Politically, it confirmed China’s commitment to the continent as a benevolent partner. Economically, it produced a long list of major infrastructure and investment deals between African stakeholders and their Chinese counterparts. And it even paid environmental dividends for the host city by bringing a week of sapphire blue sky (dubbed “FOCAC blue” by the city’s residents) which ended as soon as the forum was over.

But the high-profile forum also exposed a chronic tension between China’s overseas engagements and its domestic public opinion, a pitfall that policy makers usually strive to circumvent. As soon as China’s $60 billion pledge to Africa was made public, the Chinese Internet was buzzing with murmurs and whispers of disbelief and sarcasm. Under Weibo posts that featured President Xi Jinping’s speech announcing the renewed pledge, where comments were often censored or outright blocked, netizens reacted with emojis of dismay and disapproval.

FOCAC Weibo
Under Weibo posts that featured President Xi Jinping’s speech announcing the renewed pledge, netizens reacted with emojis of dismay and disapproval.

“The controversy around aid to Africa is not so much about whether such investments deliver good returns. It’s a way to express domestic frustrations. The Chinese public can be generous if their own lives are comfortable,” said one commentator on Weibo.

FOCAC happened at a tricky time when the Chinese public was anxious over a series of domestic measures on taxation and social insurance that would affect the pockets of millions of Chinese enterprises and individuals. Among those policies rolled out briefly before FOCAC, shifting the collection of pension fund deposits to the tax authority, widely perceived as more stringent in its efforts, was interpreted by the media as the government’s attempt to fill an enlarging national pension hole which would result in a net reduction of many people’s monthly take-home salary. China’s high social benefit charges have been a burden on enterprises hiring large number of employees. For years, corporates try to dodge their share of pension payments by lowering the reported salaries of their employees, while worker are more than happy to pocket more take-home salary that they can dispense on their own terms.

The government’s revenue-grabbing move touched off widespread complaints from the society, and the high-profile $60 billion pledge to Africa (equivalent to almost 400 billion in RMB) understandably received a fair amount of trolling. To some extent this represents the worst nightmare of Chinese policy makers: Chinese financing overseas is pitched directly vis a vis its domestic fiscal policies. For a long time, the Chinese government has been low-key (to the extent of being secretive) when it comes to releasing its foreign aid figures, largely because of concern over domestic criticism. Senior aid workers have openly complained about the public’s hostility towards Chinese aid overseas. The Chinese Political Compass, an online survey that maps Chinese ideological spectrum online, lists the foreign aid question in its questionnaire as one of the 50 issues dividing and polarizing the Chinese Internet.

Experts believe that the Chinese public is misguided. Wang Yiwei, a scholar at Remin University in Beijing and an expert on the BRI, claimed in a Weibo post that majority of China’s pledged financing would require return on investment. It’s not free lunch. And based on China’s track record, returns on Chinese investments in Africa are “unparalleled” by its investments elsewhere. “Chinese are not stupid. They won’t rush to a place if it doesn’t mean economic opportunities for themselves,” Wang proclaimed, “those who spread rumors about Chinese involvement in Africa are trying to create tension between the public and the leadership.”

Wang was mainly referring to the previous round of Chinese pledge made at the 2015 Johannesburg FOCAC, which also amounted to $60 billion. Within that package, only $5 billion was grant money that did not require repayment. The rest was either concessional loans (loans with below-market interest rates), or injection into equity funds that are largely market-based and generally seek (modest) profits. The new $60 billion package announced on Sep 3 is made of $15 billion of grants and no-interest/concessional loans, $20 billion regular loans, $10 billion private investments and another $15 billion dollar injection into special funds.

Information from Africa seems to bear out the claim that China talks more serious business in Africa than people generally perceive. Bright Simons, president of the Ghana-based MPedigree Network, wrote that while China appeared generous with pledges, it was strict with actually unlocking them into real financing. Of the 2015 pledge, only 2/3 (45 billion) had actually come through, most of which “in the form of sovereign-backed, natural resource securitized loans.” Zimbabwe was particularly bad at translating Chinese pledges into actual financing, redeeming just 2.5 billion of Chinese funds from over 33 billion promised over the past two decades. Angola did much better in this regard largely due to its oil reserves that allowed a reliable means to service its loan payments to China.

Weibo commentators who consider themselves endowed with a long term view urge policy makers to disregard public sentiments and stay on course of its African strategy: “You should stick with  things that are fundamentally right.”

On the other hand, the Global Times‘s editor in chief Hu Xijin reminds readers that they should equip themselves with a “great power mentality:” “China will not be able to maintain its global stature today if it does not fulfill its obligations as a great power,” he wrote, “the idea that foreign assistance is immoral as long as you still have poverty inside the country represents agrarian era thinking and cannot guide our grand practices today.”

Like it or not, the architects of China’s grand schemes along the Belt and Road would probably have to tango with domestic public opinion for a while.

Letter from the Desert: A Glimpse of China’s “People to People” cooperation along the Belt and Road

A Russian environmentalist’s account of the Chinese effort to engage BRI country NGOs for environmental restoration

Among the five pillars of China’s Belt and Road Initiative (BRI), “promoting people to people connection” is probably the least well understood, not just because of the intangible nature of such cooperation in general (compared with huge “connectivity” projects such as railroads and ports that are concrete in its literal sense), but also because traditionally China is often seen as lacking the kind of soft power needed to genuinely engage with the “hearts and minds” of the public in other countries.

Recently, Eugene Simonov, a Russian environmentalist and a friend of this blog, had the rare opportunity to participate in the “Belt and Road International Forum on Public Cooperation for Ecological Remediation” held from September 11-14 in Wuwei, Gansu, a drought-stricken province of Western China bordering the Gobi Desert.

CGFForum1
Founding of the “BRI NGO Partnership for Ecological Management” (actual objectives and program are yet to be defined), Photo supplied by Eugene Simonov

The event was jointly organized by the China Green Foundation (CGF), China NGO Network for International Exchanges, and the International Forestry Cooperation Center of the National Forestry and Grassland Administration (FGA), a mixture of governmental and semi-governmental bodies charged with the task to advance “people to people connection” through environmental collaboration.

Compared with more traditional forms of accepting international students and training developing country bureaucrats, the “Green BRI” initiative, if played well, could kill two birds at once: finding an area of “people to people” cooperation that can tap into a rich pool of existing exchanges between Chinese environmental NGOs and their foreign counterparts, while reinforcing China’s “green leadership” image internationally.

As Eugene’s account shows, however, the reality is far from ideal. In many aspects the event appeared well-intentioned, but too orchestrated and somewhat awkward. Genuine engagement with BRI region civil society on environmental sustainability apparently requires Chinese actors to change their modus operanti. And the rare occasion also gives BRI country NGOs a chance to learn how to approach the Green BRI initiative.

“So I had to represent Putin.”

Panda Paw Dragon Claw(PPDC): So how did you end up at this extravagant Green BRI event in Gansu?

Eugene Simonov (ES): Foreign participants like me were invited for various   reasons not necessarily related to the key theme of the event or our NGOs’ experience with the BRI. It is worth noting that two thirds of the Forum participants were Chinese FGA officials and experts, as well as functionaries of local party committees. About 15 foreign NGOs from various countries were invited, mostly with the help of the United Nations Convention for Combating Desertification (UNCCD) secretariat, as well as up to a dozen representatives from Chinese branches of international environmental groups (WWF, IFAW, NRDC, etc). Local grassroots NGOs from China’s desertification-stricken areas were neither seen or heard at the Forum.

CGFForum2
The largest NGO delegation was the Saudi Desert Plant Cooperation Society headed by His Highness Prince Muteb. Photo supplied by Eugene Simonov

In my case, I was recommended to CGF by an Indian colleague, to whom I was accidentally recommended by Rivers without Boundaries (RwB) Mongolia when asked to find a “representative of Russia”. So I had to represent Putin, sitting at table no.1 with key cadres at banquets, rub shoulders with His Highness Prince Muteb from Saudi Desert Plant Society, and to the extent possible, behave myself.

PPDC: The Chinese government isn’t really known for its engagement with civil society groups. What’s your impression of attending a government organized NGO gathering in China?

ES: Having uneven support from governments and local communities in BRI regions and being criticized by foreign press for lack of consultation in project planning, China is eager to demonstrate its willingness to build cooperation with NGOs in BRI countries.

In particular case of this Forum, the Chinese authorities did not seek recommendation or approval from the respective governments of BRI countries to interact with foreign NGOs, which goes beyond the “government-centric mentality” expected from them. So I see it as a progressive approach and a sign of openness.

On the other hand, little effort is made so far to engage NGOs in joint planning and/or at least to get feedback from them on proposed cooperation plans. They were largely there to “demonstrate support for Green BRI” and at best seen as implementers of already proposed projects. When NGOs expressed doubts they were reminded that it’s their own decision whether to continue such cooperation. This is very similar to mode of official bilateral negotiations with China on many “joint projects”.

“Exporting green solutions like exporting industrial capacity”

PPDC: The “Green BRI” initiative, first announced in May 2017, always feels a bit vague and empty. Does the event give you any concrete idea as to what China is trying to achieve?

ES: The event shows how China’s newly established Forestry and Grassland Administration (FGA) would likely advance the initiative.

The Forum was a follow-up to the UNCCD conference held in China last year. At that conference, China made a pledge to combat desertification and “to carry out cooperation on ecological restoration” along the Belt and Road.

On the first day of the event the organizers arranged a day-long field trip to desertification control project sites of Gansu Province. We toured experimental bases of various companies designing desert-combatting technology, state-owned orchards and vineyards in oases, and poplar plantations. From the bus we only glimpsed the edge of the beautifully natural Tengger Desert, the advance of which all these fortifications are being designed to slow down.

At the Forum, Secretary General of CGF, Mr. Chen Peng, made a detailed introduction to the project “Restoration of Populus Euphratica Forest Eco-system along the Belt and Road”, which was offered as the key practical contribution to “greening BRI” by the CGF and FGA.

This poplar is one of the keystone species of riparian forests at vast floodplains of Central Asian and Middle-Eastern rivers from Tarim and Indus to Amu-Darya and Euphrates. FGA believes the poplars provide important economic value to people (erosion control, fodder, tourism, wood, firewood, medicine, etc). Under the plan, a cooperative partnership will be established with local NGOs to encourage more exchanges of experience in different countries with Euphrates Poplar as a symbolic keystone species. Most activities so far are planned, however, in Xinjiang and across Northwestern China.

CGFForum4
Slide quotes: “Populus euphratica (Hu Yang) is a symbol of the tenacity of the Chinese nation…” Premier Wen Jiabao, 2009, Photo supplied by Eugene Simonov

PPDC: So it sounds like a massive tree-planting effort along the Belt and Road?

ES: It’s slightly more than that. During the forum, the GCF also announced the launch of an international ecological restoration fund, drawn from donations from companies worldwide to promote a green economy in countries involved in the BRI. First pilot project for poplar planting abroad is planned in mountains of Pakistan along the China Pakistan Economic Corridor (CPEC), but I found no Pakistani representative at the Forum or among the listed editors of the very detailed bilingual report “Restoration of Populus Euphratica” handed out to participants.

Dozens of Chinese companies, including the very famous ELION Group which has been celebrated for its anti-desertification efforts in Kubuqi Desert, were featured heavily at the event. The whole thing makes me feel that the logic for doing such “Green BRI” projects is quite similar to the logic behind “industrial capacity sharing” along the Belt and Road, i.e. exporting Chinese industrial capacities such as power plants and steel mills to other countries. China has some mature desertification-control technology, buttressed by domestic success stories and may be shared and exported with some involvement of China companies. Whether or not the marketed approach fits local needs, ecological conditions and social demands is to be studied AFTER overall project direction has been identified.

Like high-speed railways and other “exported capacity”, success of such projects directly depends on how they match local conditions. Strategic planning and public consultations are straightforward means to increase likelihood of success. So far those tools are rarely used in early planning of BRI projects and “capacity sharing” programs.

PPDC: Were there reservations expressed at the event about this approach?

ES: First of all, I must clarify that I do not disagree with necessity to plant trees. And I see great necessity to restore natural multi-species riparian forests in Central Asia. But similar to many other scientists, I tend to view with great suspicion tree-planting projects in deserts and steppes which naturally do not support woody vegetation, unless it is done due to extreme economic need and in environmentally sustainable manner. Water availability and equitable access to its use is the key factor on which adaptation strategy in a given place depends on. For example, the key to restoration of riparian forests is in preserving adequate flooding by respective rivers and controlling grazing and other activities that suppress tree growth. Artificial planting is only a supplementary measure, especially in places where seeds from trees are not available naturally.

From all foreigners who came to the forum, only Meskele Lera Lencha, the officer of the Hailemariam and Roman Foundation from Ethiopia called China to support large-scale tree-planting endeavors overseas. Other foreign participants had stressed different priorities such as local community empowerment and diversification of local economies.

Even tree-planting champions like the very articulate John H. Kwon from Korean Future Forest, which plants forests in China’s easternmost deserts, explained that planting efforts alone cannot catch up with the speed of land degradation, and preventative policies and measures are essential to win the battle.

PPDC: Did you weigh in on the debate?

ES: At the event I attempted to describe long-term cooperation in China-Mongolia-Russia Dauria International Protected Area, where government agencies, scientists and NGOs complement each other. I emphasized priority of protection measures and strategic science-based environmental assessment of any development and climate adaptation project. Interesting enough, my pitch was immediately echoed by the Head of the FGA Grassland Management, who stated that the main task of desertification control is to prevent conversion of the desert margins into arable land during wetter phases of climate cycle.

Other than delivering our speeches and remarks from the podium (by the way, completely uncensored, which is another good sign of the Forum’s openness) we had not any other slot where we could actually discuss issues and plans.

“Very straightforward recommendations should be repeated again and again.”

PPDC: As an NGO participant, how do you envision this project to unfold hereafter?

ES: Except for the “Euphrates Poplar Project” there is no publicly available overall plan for advancing the cooperation outlined at the event, at least in the realm of FGA activities. Likely what will happen is “development aid” type of cooperation where partners are sought to implement predetermined projects and resources are distributed to consortiums of Chinese actors and foreign NGOs.

Developing countries have large number of NGOs for which distributing foreign aid for predetermined projects is the main mode of operation. So the approach is theoretically doable, but hardly the most effective or innovative. And most NGOs invited to this Forum are not likely partners for such an endeavor, as they are generally mature enough to formulate and execute their own programs best fit for specific local conditions. We are yet to see whether partners from China are willing to engage in a dialogue with local stakeholders and redesign predetermined projects. If you want another forest plantation, it is logical to go to local Forestry Departments in BRI countries instead of NGOs.

CGFForum3
At the end of the Forum, International NGOs were given bottles with shiny green liquid to poor it over a large poster revealing the name of the new-born “Belt and Road Euphrates Poplar Forest Ecological Restoration Plan and International Cooperation Fund on Ecological Management”. Photo supplied by Eugene Simonov

PPDC: What would be the more effective ways then?

ES: Hopefully FGA, which has key responsibilities in nature conservation and ecosystem management, will be able to start other lines of cooperation with foreign NGOs, for example to prevent destruction and degradation of valuable and vulnerable wildlife habitats, which happens because of many reasons, but increasingly due to poor planning and management of BRI projects. However, no sign of that was seen at the Forum. It was dedicated fully to “remediation” after damage is done.

It is especially urgent along the Silk Road Economic Belt (SREB) where arid conditions make huge portions of natural and semi-natural landscapes very vulnerable that need preventative measures. In early Green BRI policy documents and associated research project outcomes, it is openly said that identification of valuable and vulnerable areas and preventing their degradation is an urgent task.

Strategic environmental assessments (SEA) are among most needed and accessible tools, since they are written into in legislation of China and most BRI countries.

PPDC: Do you find this experience overall worthwhile?

ES: Sure, meeting so many natural resource management actors from national to very local level was very useful experience.  It is necessary to participate in such official fora to keep channels of communication open. Although not very effective, such channels are much better than absence thereof. And at those occasions, very straightforward recommendations should be repeated again and again publicly on strategic planning, good governance, meaningful performance indicators and open information, even though you may not get meaningful response immediately.

When it comes to specific pilot projects in their countries foreign NGOs may link Chinese actors with interested and knowledgeable local stakeholders, or at least help local communities to prepare for projects coming their way. This Forum could have achieved more if it was multi-stakeholder. A mix of academians, NGOs, indigenous leaders and forestry officials from various BRI regions would provide better matching opportunities and ensure greater acceptance for future joint projects.

Eugene Simonov is a Russian environmentalist who co-founded the Rivers without Boundaries International Coalition(RwB-www.transrivers.org). He has cooperated with a network of stakeholders interested in river conservation along the Russia-China-Mongolia borders, where dam building and water transfers on a monumental scale threatens the fragile wetland ecosystems in the birthplace of Genghis Khan. 

August Monthly Round-up: BRI turns 5 years old

A digest of Chinese media coverage of the BRI in the past month

BRI5yr
Chinese media outlets produce reporting series for BRI’s five year anniversary. Source: Caijing

On September 7th, 2013, President Xi Jinping proposed the “21st Century Maritime Silk Road” while visiting Indonesia. The proposal was a key component of what later became the Belt and Road Initiative (BRI). And to mark the 5th anniversary, Chinese state media have ramped up their BRI coverage with multiple reporting series looking back at the past 5 years.

State media outlets such as Xinhua, CCTV, and People’s Daily have all chosen to allocate generous space to the topic. Among them, CCTV’s coverage is unquestionably the highlight: the television station dispatched teams of reporters to travel along different routes of the BRI. Besides the usual stops at landmark Chinese BRI projects, one team embarked on a Chinese ship that sailed all the way from Jiangsu province in China to Europe through the Arctic Ocean, in a report dubbed “The Silk Road on Ice”.

Across China’s mainstream media, most reports touted the success of the BRI, as expected, and highlighted key projects, with  the People’s Daily offering a comprehensive list in an article titled “China’s Contribution”. Projects cited include the the Gwadar Port in Pakistan, the Kuala Lumpur subway system in Malaysia, and China-Europe freight rail and industrial parks in Belarus and Cambodia.

Despite the largely celebratory coverage, there were still hints of tempered defensiveness in tone and language. For example, in a commentary published in the ideologically conservative Red Flag Digest, the authors insisted that “BRI is an economic cooperation initiative” that should not be overly conflated, and that its two core components were “connectivity of infrastructure and cooperation on (building) industrial capacity”. The authors also responded to comparisons of the BRI to the Marshall Plan, saying that the “BRI is not China’s Marshall Plan” and “it does not seek to expand China’s ‘sphere of influence’, nor does it aim to export the ‘China model’,”

This is notable, and suggests a dialing down of a more assertive message from a year earlier, when state media and key supporters for the BRI advocated the spread of “Chinese wisdom”,”Chinese experience” and “Chinese solutions” to other developing countries. Recently, the escalating animosity with the United States over trade and industrial policy has led some to question the wisdom of touting the Chinese wisdom so loudly.

In less-official media outlets facing fewer restrictions, commentators have been less constrained in their analysis of the BRI. The Financial Times’ Chinese site (paywalled) has recently become a hub of reflective BRI pieces that try to re-calibrate outside perceptions of the grand initiative. In one interview, Singapore-based Chinese politics pundit Zheng Yongnian believes that external world has fundamentally mistaken the BRI as President Xi’s project to achieve “China’s Rejuvenation”. He offers a more tempered rationale for the BRI project, arguing that  “the surplus industrial capacity and capital, a consequence of slowing economic growth domestically, is the main driver of (BRI)” and because “most of (China’s) exported capacity and capital is state-owned, the outside world (has) “mistaken” it for some kind of broader governmental strategy. He also suggests that the BRI is a phenomenon more related to China’s developmental stage than to the will power of its top leader. In his view, Chinese capital and capacity have reached a point where they must search for a “way out” and that trend already started during President Jiang Zemin’s tenure and has only truly accelerated recently. Thus, he believes that the style and personality of the current leader is only a secondary driving factor behind the BRI.. “If this administration did not start the BRI, the next administration certainly would have,” he said.

Besides the Zheng Yongnian interview, Chinese think tankers have offered their take on what went wrong in the international communications of BRI, and how it should respond to negative coverages overseas, reflecting a general concern with the recent prevalence of negative views of the initiative in the international press.

At the other end of the media spectrum, outlets are taking a much more combative approach to the BRI’s image problem overseas. In an interesting piece titled “Who’s denigrating BRI from the United States?”, the nationalist Global Times did some digging inside the beltway and uncovered what it believed to be the source of negative coverage of BRI originated in the US. Beyond editors ideologically hostile to China and politicians with an agenda to thwart China, the newspaper also traced some of the bad-mouthing to an obscure, US Congress-funded organization called BBG that supervises the Voice of America and other outlets. The popular newspaper accused the BBG of orchestrating anti-BRI propaganda through its network, a “Cold War residue”. On the other hand, Global Times also found that “pragmatist Americans” don’t all object to the initiative. Enterprises and individuals are keen to participate. At the end, it cited Janet Eom of Johns Hopkins University as confirming, in her Washington Post article, that the BRI “looks more like a stimulus project than a blueprint for geopolitical control.”

On Aug 27, President Xi Jinping spoke at a Leadership Group meeting marking the 5th anniversary of the BRI. He emphasized that BRI was simply an answer to the changing demand of global governance: “(BRI) is an economic cooperation initiative, NOT geo-political or military alliance building; it is an open process, NOT a closed, exclusive “China Club”; it is a welcoming initiative, NOT a zero-sum game divided by ideological lines.” In this month of backpedalling, the three NOTs sound particularly accentuated.

Letter from Ghana: Africa embraces its China partnership reluctantly

African leaders, more than a “benevolent” China, should set the tone for Africa-China relations, argues Kofi Gunu

By Kofi Gunu

When I first became aware of China’s growing influence in Africa, I was only ten years old. Ghana was set to host the 2008 African Cup of Nations, the continent’s biggest soccer competition, and work was progressing steadily on a new multipurpose stadium in my hometown, Tamale—one of the tournament’s host cities. Our remote savannah town swirled with rumors about the Chinese construction firm undertaking the project and the files of Chinese foremen who marched chain gang-style to the construction site each morning. I recall my Catholic priest explaining once that the contractor, apparently frustrated with the negative work ethic of his Ghanaian laborers, had replaced all but a few of them with convict labor imported from China.

Later I would learn that this was nothing more than a myth, one of many urban legends concocted by locals trying to make sense of the strangers in our midst. But for a long time afterwards, the imposing Tamale Stadium stood in my young mind as a symbol of China in Ghana and Africa, at once shrouded in mystery and impossible to ignore.

The scale of China’s involvement in Africa is a point of surprising contention. Western politicians and media, alarmed at the significant diplomatic, economic, and military roles China has assumed on the continent, often exaggerate its efforts. Chinese experts, eager to assuage these fears, hasten to cite studies which show that Chinese investment and aid to Africa is safely smaller than the West’s.

However, nothing can obscure the truth that China is Africa’s biggest economic partner now and into the foreseeable future. China is currently Africa’s largest trading partner. Additionally, according to the Bilateral FDI database and McKinsey, China is poised to surpass the US as Africa’s largest source of foreign direct investment (FDI) stock within the next decade Chinese official development assistance (ODA) and other official flows (OOF) to Africa together added up to 6 billion USD in 2012, making China the third largest country donor to the continent. Besides, since 2012, loan issuance by Chinese institutions to African governments has tripled accounting for approximately one-third of all new sub-Saharan African government debt.

A recent groundbreaking report from Mckinsey & Company, that sought to evaluate Africa’s economic partnerships globally, showed China among the top four partners for Africa across five key dimensions: trade, investment stock, investment growth, aid, and infrastructure financing.

MCKinsey
Source: Dance of the Lions and Dragons, McKinsey & Company, Jun 2017

To objectively analyze China’s footprint in Africa, we must first arrive where reality is. The reality is that China is indispensable to Africa’s development agenda.

This reality is one that many on the continent acknowledge but with mixed feelings. A recent large-scale public opinion survey showed that ordinary Africans appreciate the infrastructural development that closer ties with China has brought. Chinese-led projects and businesses also employ several million people across Africa. African policymakers, a growing number of them Chinese-educated, increasingly look to China, rightly or not, as a model for catalyzing growth and eradicating poverty.

These positive reviews notwithstanding, legitimate questions persist about the motives behind Chinese assistance. Resource-for-infrastructure deals, which may make perfect financial sense to Chinese bankers, set off loud alarm bells on a continent whose vast mineral wealth has been used to enrich everyone but its own people. Citizens decry a political elite that appears incapable of looking beyond narrow political considerations to safeguard Africa’s interests. With a few notable exceptions, African governments lack defined China strategies, master plans for translating increased investment in priority sectors into sustainable development or for ensuring technology and skills transfer. They are waiting for Chinese firms to take the initiative. This lack of confidence in our leaders, far more than a crisis of explanation as proposed in a blog entry by Shou Huisheng earlier this week, is the main reason Africans remain apprehensive about this budding partnership.

Take, for instance, tensions sparked by the influx of hundreds of thousands of Chinese migrants to Africa in recent years. In Ghana, these tensions are felt most acutely in the small-scale mining sector, where the arrival of Chinese prospectors  with machinery and heavy equipment has transformed a hitherto unsophisticated industry into a major driver of ecological catastrophe. Galamsey, as the practice is commonly known, has caused irreversible damage to protected forests and polluted vital water bodies. Matters got to such a point that the government was forced to impose a blanket ban on small-scale mining last year and to arrest several Chinese operators, over the objections of the Chinese ambassador. But far from being placated, many Ghanaians continue to point fingers at the authorities for permitting Chinese nationals to flout the country’s laws in the first place. To quote a caller on a Ghanaian radio program: “The Chinese government will never allow us to go to their country and trash it. Why does our government allow it here?”

The fate of China-Africa relations depends on Africans like this caller who are willing to hold African governments accountable for protecting the continent’s interests as they engage with China. As African heads of state convene in Beijing next month for the Forum on China-Africa Cooperation (FOCAC), ordinary Africans are expecting them to show more agency in articulating a clear and well-prioritized China strategy. China’s presence in Africa will produce win-win dividends, not because benevolent China pre-ordains it, but because farsighted African leaders insist on it.

Kofi Gunu is from Ghana. He graduated from Tsinghua University’s Schwarzman College in 2018 with a master’s degree in global affairs and public policy. Prior to that, he held roles at the Council on Foreign Relations and the Global Green Growth Institute. He is currently completing a year of national service in Accra.

 

China in Africa: discovering the “China Model” through empirical evidence

Empirical research depicts a picture of Chinese involvement in Africa different from common perception

By Shou Huisheng

Africa is a continent where many Chinese ideas about investment and foreign aid are being piloted. As a result, China’s experience there is valuable for its involvement in other developing countries, particularly those along the Belt and Road. Since the early 2000s, “China in Africa” has been a major focus of international attention. The focus of the discussion is on the “China model” as reflected by the patterns of Chinese investment and aid. This blog tries to summarize that discussion, and outline how the international community, in particular Western countries view Chinese involvement in Africa. It is hoped that a better understanding of the discussion will help China improve its practices in other developing countries.

Common Misconceptions

Relying on empirical studies and statistics, many Western scholars have objectively evaluated China’s contribution to African development. They recognize that China’s infrastructure investments and foreign aid in African countries have fundamentally changed their developmental path. Many also acknowledge the uniqueness of China’s “unconditionality” approach. They believe that the “no strings attached” method does indeed give agency back to African countries trapped by Western conditional aid in the decades following World War II.

But such views tend to dwell only in academic circles. In government and public opinion, negative perceptions of Chinese aid and investment prevail and persist. In this regard, Rex Tillerson’s comments are quite representative. Before the former US Secretary of State visited Africa in March this year, he made a speech criticizing Chinese involvement in Africa. “Chinese investment does have the potential to address Africa’s infrastructure gap, but its approach has led to mounting debt and few, if any, jobs in most countries,” he told his audience. “When coupled with the political and fiscal pressure, this endangers Africa’s natural resources and its long-term economic political stability.” Later that week, in Ethiopia, he reminded African countries to “carefully consider” the terms of Chinese investments and the “predatory” model behind them.

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Former US Secretary of State Rex Tillerson expressed disapproval of Chinese involvement in Africa on Mar 6, 2018. Photo courtesy US Embassy in Senegal.

Some experts consider Tillerson’s views to be “singing the same tune” as Hillary Clinton, when she visited Africa in 2011 and 2012, even though things have changed much since then. But such views remain popular today. In sum, the “predatory model”, as understood through such a lens, means three things:

First, that China is promoting neo-colonialism in Africa. It supports proxy regimes, “divides and conquers” African countries, and bases investment and aid decisions on diplomatic and political considerations. Cheap Chinese loans make African countries dependent on China’s economic largess. Chinese investments mainly target primary resources and land, creating an unhealthy economic structure and unbalanced trade in recipient countries. Short-term prosperity may become a long-term trap.

Second, that Chinese investments actively seek corrupt and autocratic governments to work with. Unconditional Chinese aid in fact provides a free pass to these regimes. In other words, China’s autocratic government is actively looking for its own African proxies through aid and investment.

And last but not least, that the Chinese government and its corporations disregard local environmental, social and cultural concerns. They turn a blind eye to labor rights and the interest of minority social groups.

The real model in statistics

The negative perceptions are persistent, but they are not evidence-based. In contrast, some Western scholars have done long-term empirical studies of China’s presence in Africa. They have collected data on Chinese aid and investment, run fact-based analyses and come to conclusions different from popular perceptions. The AidData database developed at William & Mary College, and the China Africa Research Initiative led by Prof. Deborah Brautigam at Johns Hopkins University are two major sources of such analyses. Even though the data quality and methodology could be improved, these quantitative studies do complement the more anecdotal case studies and observations we often see.

Below are a few key observations from the empirical studies:

First of all, Western media has generally overstated the scale of Chinese investment and aid in Africa. People are made to believe that Chinese involvement in the continent is way larger than that of the West. A wide range of figures about the stunning scale of Chinese finances in Africa have been floating around, but many have been proven to be wrong. In addition, Western media often gives the impression that China’s Export Import Bank provides more loans to Africa than the World Bank does, despite the fact that the World Bank remains Africa’s largest development finance provider since 2010. These exaggerations do not just create anxiety in the West. They may also mislead African countries into believing that Chinese loans are easy to get.

The second observation from empirical data is related to resource grabbing. In fact, only 10% of Chinese loans to Africa goes into oil and minerals. And much of that is concentrated in just a few countries. The biggest loan in this area was offered to Sonangol, the state owned oil company of Angola. On the other hand, 56% of Chinese loans flow into transportation, electricity and telecom. In other words, China invests more in African infrastructure than natural resources.

The third notable fact is that roughly one third of Chinese loans require or allow African countries to repay in energy, minerals or agricultural products. China calls such arrangements “resource-backed loans”. These are often the target of “resource-grabbing” criticism in Western media. But in reality, even though the Chinese government and companies purchase large quantities of energy and mineral products, they seldom control the ownership of such resources. For instance, even if China imports 49% of Angolan oil, most of the country’s oil is controlled by American companies, with Chinese firms controlling less than 10%. The main purpose of having loans repaid in commodities is to hedge against financial risks, rather than controlling resources. This is a reasonable arrangement, given China’s own experience of attracting foreign investments with the same approach in the early years of its Reform and Opening. From as early as 1975, Deng Xiaoping encouraged commodity-backed investment deals with Japan, which allowed China to get access to much needed funding for development. China repaid much of those Japanese loans in commodities throughout the 1980s and 90s.

Data also shows that the destination countries of Chinese policy loans are no different from those of the World Bank, despite perceptions that they predominantly go to countries with rich resources and corrupt governments. Between 2000 and 2014, Ethiopia was the second largest recipient country of Chinese loans in the continent. The country isn’t particularly rich in natural resources, and China’s involvement there is mainly in building industrial parks, driven by the country’s large population and potential market size. Over the same period, Ethiopia was also the World Bank’s top borrower in Africa.

There also appears to be no strong correlation between an African country’s political ties with China and the likelihood of receiving Chinese aid and investments. Zimbabwe traditionally has a strong tie with China. However, it does not even make the top ten list of Chinese lending in Africa. Moreover, unlike ODA, China usually does not cancel a country’s loans. Chinese policy banks and commercial banks usually choose to extend a loan or lower the interest rate to deal with payment issues. Even Zimbabwe, widely seen in the West as China’s proxy regime in the region, complained about how difficult it was to get a cancellation of debts. Chinese bank officials have made it clear that they don’t waive debts against market principles.

Orange and Apple

And finally, the data tells us to differentiate numerous types of Chinese finances in Africa. In the West, people tend to group Chinese money all in one basket and consider it all directed by China’s diplomatic and political priorities. But Chinese ODA and commercial loans follow different logic. Statistics from AidData show a very weak correlation between Chinese ODA and a country’s natural resource endowment. It also has very little to do with political systems or governance capabilities. This is in line with the non-intervention principle that China upholds.

Western countries’ ODA tends to go into African countries with large populations. Chinese ODA is not, however, tied to population size. The one clear feature of Chinese aid is that it leans more towards low-income African countries. These characteristics indicate that Chinese foreign aid is more development-oriented than political or commercial-oriented.

Chinese commercial lending, however, is different. The same analysis from AidData shows that it has a much stronger propensity to go after natural resources, thanks to the Chinese market’s large appetite for African resources. They are also more likely to be associated with corrupt and autocratic regimes. Researchers at AidData offered two plausible explanations. First, some Chinese companies and government departments do regard corruption as a “lubricant” to commercial activities, and have brought certain problematic domestic practices to Africa. Another explanation is that Chinese commercial entities are less risk-averse than their Western counterparts, as commodity-backed arrangements and the likes effectively reduce risks in investing in such countries.

Both explanations have some validity. And the two factors could indeed work together. Considering that the economic growth of the continent in the past 20 years has been driven largely by energy and resource demands from China and other emerging markets, rather than the ODA or investments from Western countries, it is reasonable to state that Chinese commercial lending, with its distinct features, are better suited to the pragmatic needs of African countries. Being a “business partner” with corrupt governments is something ideologically repulsive to many Western actors. Convincing Western society that this could be overall beneficial to African development is a huge challenge for China. And for the moment, China should do its best to make its ODA and commercial investments more transparent in Africa.

To be clear, the main reason for the lack of statistics-based, quantitative research on Chinese aid and investment is the low transparency on the side of the Chinese government. Researchers have observed that existing statistics actually tell a quite positive story about China’s involvement in Africa and have suggested the Chinese government to be more upfront with collecting and releasing statistics. But apparently China still has lots to worry about when it comes to transparency (one of the biggest concerns is possibly domestic public opinion, strands of which see China’s involvement in Africa as “handing free gifts to other countries” while many regions of China are still relatively poor). Short-term improvement of the dataset is therefore unlikely. Nevertheless, the government should attach more importance to the matter and begin to invest more into setting a more quantitative and objective basis for assessing Chinese aid and investments overseas. The recent setting-up of China’s international aid agency (CIDCA) is a welcome move to facilitate the process.

Dr. Shou Huisheng is Senior Fellow at the Statecraft Institution, Research Fellow at the National Strategy Institute, Tsinghua University. Dr. Shou received his doctoral degree in political science from University of Illinois Urbana-Champaign. The blog is based on a recent speech he made recently.