by Calvin Quek and Lauren Huleatt
In his articulation of the Belt & Road Initiative (BRI), President Xi outlined an international vision that connects economic, security, cultural, and development themes. However, across China’s policy-making machinery, Chinese bodies associated with supporting the initiative face formidable challenges in realizing this vision.
The foremost challenge is this: how to bridge Xi’s new international vision with domestic priorities. On the one hand, Xi’s vision calls for multilateralism, win-win partnerships, and sustainable development. On the other hand, China’s domestic priorities, most clearly articulated in its five-year plans and industrial policies, have seen a shift towards stronger central government control over all aspects of the economy, particularly of China’s state-owned enterprises.
Thus, the external optics of the BRI can be confusing. Despite the strong public display of domestic support for the BRI theme, there is as yet, no single coordinating authority body in China. China’s newly announced State Aid Agency does not appear to be immediately operational or influential, and incumbent Chinese institutions are likely jostling for influence, each pushing their own version of a program that they believe adheres to Xi’s goals.
This dissonance is particularly apparent in the field of development finance, where China’s new crop of financing institutions operate in a field that was previously the domain of more traditional and conservative players. Here, even though they are all associated with the BRI, the China-based Asian Infrastructure Investment Bank (AIIB) and the New Development Bank (NDB), operate in an observably different fashion from China’s largest policy banks, the China Development Bank (CDB) and the Export-Import Bank of China(EXIM Bank).
A bumpy, but hopeful start
Recent news that the AIIB is considering financing solar power in one of the riskiest countries on earth, Afghanistan, is the latest sign of how it is charting its own course and surprising skeptics along its path. Famously proclaiming to be “lean, clean, and green” at its inception, it continues to be small, with less than 150 staff, has set up a compliance team that reports to the board, not to management, and has so far avoided financing any mining, oil, or coal projects. Over in Shanghai, the NDB has similarly attempted to match sustainability rhetoric with real action. At its first annual meeting in 2016, it announced financing for five non-fossil fuel renewable energy projects in its member countries, and has committed 60% of its funding towards renewables – a target that few of its multilateral banking peers have aimed for.
However, both are far from perfect. The AIIB’s small size inhibits its capability, and its shareholders, particularly from borrowing countries, privately demur about the bank’s slow rate to lend commensurate with its invested capital. Since its establishment two years ago, the bank has only committed USD $4.4 billion, far below its stated objective of USD $10 – 15 billion per year for its first five years. This undershooting of expectations may either be a display of valuing quality over quantity, or be indicative of how “lean” may also mean prohibitive. Further, the bank has also faced criticism from civil society. Its energy policy trails some international peers in setting restrictions on coal power finance, and a few of its projects have raised some concerns among NGOs over environmental and social risks.
While the NDB has deployed more shareholder capital relative to paid-in capital, committing USD $3.4 billion in its first two years, this might have come at the expense of disclosure, due process, and policies, which so far lag that of the AIIB. In addition, despite the strong initial momentum, a combination of economic and political turbulence in several of the five-nation BRICS bloc may have dampened collective interest in the NDB project. It is also an ongoing question whether the bank can truly expand lending beyond its five-country mandate.
Crucially, even if the NDB and AIIB are representing a shift in China’s funding of sustainable development, they are minnows in both total China’s commitments to development finance, and as a share of projects identified with the financing into the BRI. As of year-end 2016, the AIIB and NDB together made up only 1.4% of the estimated USD $292 billion estimated outstanding loans or equity investment into BRI countries.
Yet despite their small size, the new multilateral development banks have become almost synonymous with the BRI, and have become both the poster children and the punching bags for everything that is perceived to be right or wrong with China’s growing assertiveness. Few seem to realize how small their piece of the pie actually is compared to more established domestic players. In response, both the AIIB and NDB have remained at arms-length on having an explicit connection to the BRI; The AIIB has said that it “maintains a qualified relationship to the Belt and Road Initiative (BRI)” and the NDB has said it “sees [BRI] as something that will clearly spur economic activity in the region”.
Nonetheless, their size and initial bumps notwithstanding, the trend being outlined by these two newly-created organizations does broadly tilt towards the spirit of multilateralism, win-win partnerships, and sustainable development that President Xi has espoused. Projects announced by both the AIIB and NDB have not, for the most part, been particularly unilaterally China-driven. Albeit NGO dissatisfaction with several issues, both banks have published environmental standards, and both have engaged the public and the media. Whether this showboating is hiding more nefarious intentions remains to be seen, but the general trajectory may suggest some tacit optimism may be warranted.
Table 1. Comparison of CDB, EXIM Bank, AIIB, NDB, IBRD and IFC
Dinosaurs in need of a new script
The same cannot be said for the other end of this spectrum in China’s development finance arsenal. Dominated by heavyweight incumbents, the China Development Bank (CDB) and the Export-Import Bank of China (EXIM Bank), both banks exhibit a public character very different from the AIIB and NDB, and suggest a BRI strategy less informed by multilateralism and sustainability. This matters, because the CDB and EXIM Bank accounted for 37.7% and 8.2%, respectively, of estimated outstanding loans or equity investment into BRI countries at year-end 2016. At the same time, this finance is flowing into hard infrastructure that has broad and lasting economic, financial, social, and environmental implications, both positive and negative.
For sustainability, while both the CDB and EXIM Bank have nomenclature for corporate social responsibility, they have almost zero published detailed standards for sustainability, information disclosure, and grievance handling. While China’s Green Credit Guidelines promulgated by the banking regulator applies to these policy banks, it only requires the “bare minimum” (e.g. ensure compliance with local laws and regulations). Moreover, the CDB and EXIM Bank are the largest funders of carbon-intensive infrastructure globally. According to the Natural Resources Defense Council, the two banks combined for the largest proportion (approximately 34%) of international public financing from G20 countries into the coal industry since 2013. Research by Boston University also shows that despite both banks being significant funders of the renewable energy sector in China, they strongly support fossil-fuel energy financing into BRI countries. In 2017, BRI countries received 55.9% of total energy financing from the two banks, and of that financing, 34.2% was made into the coal sector, with no investment at all into solar or wind since 2015.
On multilateralism, it is also unclear. The mandate to implement China’s ambitious industrial policies such as “international capacity cooperation”, which aims to promote Chinese “advanced industrial technologies” to international markets, falls squarely on the shoulders of the EXIM Bank. And with technologies such as high-efficiency ultra-supercritical coal power plants formally included in the high-profile “Made in China 2025” strategy as key advanced technologies that ensure China’s industrial competitiveness, it is hard to see how the policy bank would deviate from its set course.
A generation gap
Granted, the CDB and EXIM Bank were borne out of a context vastly different from today’s China. Unlike the AIIB and NDB, which were launched under President Xi’s watch, and are connected to his global vision, the CDB and EXIM Bank were both founded in 1994, when the country’s leadership was then staying true to Deng Xiaoping’s maxim for China to maintain a low foreign profile and to focus on domestic development. Both the CDB and EXIM Bank’s mandates flowed from this focus, with a majority of their funding flowing to domestic heavy industry that would support China’s development. For the CDB, it was central towards spurring domestic investments in infrastructure through local government financing vehicles (LGFV) which used land as collateral. For the EXIM Bank, it supported China’s “going abroad” strategy, providing financing for overseas deals, often at concessional rates that would favor Chinese companies and suppliers. It bears worth mentioning that these practices favoring domestic industry is characteristic behavior of other rising developing nations in the past, from the US in the 1900s, to Japan in the 1970s, through to the East Asian “tigers” of the 80s and 90s. China and its financing institutions are following a familiar pattern.
Nonetheless, the contrast in policy and practice between China’s newly created multilateral banks and its domestic policy banks is jarring. With a set of completely different mandates and priorities, China’s policy banks are more insular than their more internationally-oriented siblings and are more committed to domestic policy goals than they are to international environmental goals such as the Paris Climate Agreement. Thus, it remains to be seen which version of a BRI finance strategy will characterize overseas development finance flows.
Will the real BRI please stand up?
The larger picture that emerges is one of competing visions in China’s overseas finance space, to say nothing of other important BRI-associated organizations, such as the China-Pakistan Economic Corridor (CPEC), the Forum on China-Africa Cooperation (FOCAC), or the Sino-Russia and wider central Asia cooperation via the Shanghai Cooperation Organization (SCO). Perhaps this divide between China’s overseas finance players is indicative of an emerging trend that the BRI concept has become inflated, and increasingly means many different things to different organizations, with various implementing bodies, themes, and programs.
As a result, despite the fanfare and excitement that the launch of the AIIB and NDB elicited, and despite their efforts to espouse multilateralism and sustainability, China’s new batch of BRI-associated institutions have so far not been able to set the tone for the whole Belt and Road Initiative. This has frustrated many early proponents of the initiative, most notably European governments, who have visibly backed away from explicitly endorsing the projects over objections of China’s lack of trade reciprocity, and given further legitimacy to the concerns of the South Asian giant, India, which has refused to support the initiative. Given the ratcheting suspicions over China’s foreign policy, the time is now is for China’s top leadership to reassert President Xi’s commitment to sustainability and multilateralism through action. Pushing China’s policy banks to meaningfully engage the world would be a good start.
Calvin Quek is the head of Greenpeace East Asia’s sustainable finance program; Lauren Huleatt is a staff member of the same program.