How does 2020 bode for China’s overseas investment? A Chinese lawyer’s take

Zhang Jingjing previews legal challenges awaiting a few controversial projects and welcomes a groundbreaking move by China’s Supreme Court

The last year of the 2010s was certainly eventful from the perspective of China’s Going Global strategy. Beijing held the 2nd Belt and Road Forum in early 2019 as both a celebration and a moment of reckoning, as China’s signature global development program was questioned by some host countries on its financial sustainability and from the international environmental community on its green merits. A correction of course (the publication of a Debt Sustainability Framework and the creation of a green coalition) was presented at the forum as a response to international concerns. But the rest of the year still saw major controversies erupt in different parts of the world. These surrounded, for example, a power plant in Kenya, a resource–infrastructure swap deal in Ghana, and a river dredging project deep in the Amazon forest.

Zhang Jingjing started practicing law in the late 1990s, helping Chinese pollution victims win cases against polluters. She is one of the few Chinese lawyers in the overseas investment scene who stands side by side with affected communities. Based out of the University of Maryland Law School, over the past few years her nascent legal initiative, the Transnational Environmental Accountability Project, has been involved in a number of legal battles centering on China-related overseas projects. In one of those cases, her amicus curiae brief, delivered for the first time by a Chinese environmental lawyer at an Ecuadorian court in Cuenca, played an unprecedented role in bringing about a historic court order to suspend mining activities at a gold mine operated by Chinese mining company Junefield.

Panda Paw Dragon Claw spoke with Zhang Jingjing recently to get her take on the year ahead. Her insights about the evolving legal landscape surrounding a few high-profile Chinese outbound investment cases and the Chinese Supreme Court’s new interest in Belt and Road cases are as refreshing as ever.

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Zhang Jingjing inspecting a borehole in a village affected by bauxite mining in Boke, Guinea. (Image provided by Zhang Jingjing)

Panda Paw Dragon Claw (PPDC): In the past two years you have been deeply involved in a case in Guinea, West Africa, where a consortium of Singaporean and Chinese companies led one of the world’s largest bauxite mining operations, affecting the livelihood and environment of local communities. Could you share with us the latest developments with this case?

Zhang Jingjing(ZJJ): Chinese businesses have been very active in Guinea’s bauxite mining sector. SMB, the consortium that consists of Singapore’s Winning Shipping and two Chinese companies [Shandong Weiqiao Group and Yantai Port Group], entered Guinea in 2015 after their bauxite supply chain got cut by an export ban from Indonesia in 2014 due to heavy pollution caused by the business.

Since the operation began, SMB’s activities have been shrouded in controversies over impact on the environment and livelihood of local communities. The mining roads, full of heavy-duty vehicles transporting reddish bauxite ores, create large amounts of dust pollution. Open pit mining disrupts the local hydrology, dwindling precious drinking water resources for villages and polluting water from wells and boreholes that villagers depend on. Mining areas were never, or poorly, rehabilitated with recovered topsoil and vegetation. Those existing problems have barely been resolved yet. SMB, pressured by a major anti-mining riot in 2017, is still updating an Environmental and Social Impact Assessment (ESIA) of their existing mining sites. And despite this ongoing situation, big Chinese investments are pouring into the sector, with Chinalco and Henan International Mining all lining up to enter the scene on bauxite.

PPDC: What is on the horizon for SMB and other Chinese bauxite involvements in Guinea in 2020?

ZJJ: SMB is set to expand its operations this year with new mining sites, a planned aluminium refinery, and new railway construction. Land acquisition and other preparations are already underway. ESIAs for the new mining sites and railway construction are already being carried out but so far information about the expansions is scant.

This represents a major upgrade of its operation from a purely extractive nature – mining bauxite and then shipping ores all the way back to China – to a more value-added business of aluminum making. What’s important is the possible model for that business. Shandong Weiqiao Group, a member of the SMB consortium, is China’s largest aluminum maker and is known for its unique model of captive coal power plus aluminum electrolysis (an extremely power-intensive process). Captive power, self-generated electricity unconnected with the power grid and not subject to grid dispatching, helps keep costs low (a crucial component for the model) but is highly controversial in China for staying outside the environmental regulatory regime on the power sector. Weiqiao Group’s captive power plants in China are known for pollution problems. If this model is now exported to Guinea, we can certainly expect much more significant environmental impacts.

PPDC: Are there efforts to make SMB accountable for its practices in Guinea?

ZJJ: Local communities and civil society groups have been making complaints to the consortium about pollution. Unfortunately, such complaints have now been internalized as a kind of routine for the companies. SMB prepares small compensations to be doled out when complaints are made. It has also initiated Corporate Social Responsibility (CSR) projects that provide small scale livelihood support for affected local communities. But these cannot substitute legal obligations to minimize and mitigate negative impacts.

Guinean civil society is even more concerned after SMB recently won a bid to develop the controversial Samandou iron mine located in a key biodiversity hotspot area, given the consortium’s previous environmental records in the bauxite sector.

Guinea adopted a relatively modern Mining Code in 2011, incorporating some of the good practices from regulatory regimes of other African countries. It provides relatively strong protection to affected communities but is poorly implemented in reality. The country also has a basic Environment Act in place. However, Guinean NGOs and communities have never initiated any legal challenges to corporate ESIAs, nor have they had experience bringing environmental lawsuits to the court. With the massive inflow of Chinese investment into bauxite and iron mining, both Guinea’s governance capabilities and the capacity of its civil society to safeguard community interests are put to great test.

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A puddle frog on a large leaf at night in the Atewa Range Forest Reserve, Ghana. (Image: Alamy)

PPDC: In the past year, another bauxite mining project has garnered much more international attention. In exchange for Chinese supported infrastructure, Ghana plans to open up the precious Atewa forest for bauxite mining, using the ores as repayment for the US$2 billion deal. What is the prospect for this project in 2020?

ZJJ: It is almost certain that the project will encounter fierce opposition for its environmental and social impact. Ghanaian society is still very much traumatized by the havoc wreaked by Chinese small-scale gold miners (galamsey). Today you can still see the scarred landscape left by such illegal activities. Even though the individual Chinese miners were not part of any national strategy, they nevertheless shaped the Ghanaian impression of Chinese investment and would definitely overshadow the massive resource–infrastructure swap deal.

Unlike Guinea, Ghana’s governance capabilities are more advanced, and the country has an active civil society, including a great number of environmental lawyers. They are already mobilizing to challenge the deal through legal means.

PPDC: The company behind the Ghana deal, Sinohydro, is also currently at the center of another major infrastructure project in Peru. The Amazon Waterway project aims to dredge the Amazon river to facilitate transportation and commerce but has met with strong opposition from indigenous groups for its potential impact on fisheries and local culture. How is this case being handled in Peru?

ZJJ: The project’s Environmental Impact Assessment (EIA) is being challenged from multiple angles now by indigenous groups, which will likely affect the timetable of this major infrastructure program that Peru and Brazil have planned for over two decades. Even though reports are saying that approval of the EIA is imminent (as early as April this year), I have learned that local civil society will keep challenging it. Lawsuits might be on their way.

A few Latin American countries, including Peru, have enshrined indigenous rights in their constitutions, particularly the right to be informed and consulted before projects like this can go ahead [Free, Prior and Informed Consent, FPIC]. It is therefore unsurprising that local groups are now challenging the EIA for lack of prior consultation with indigenous people and have sent the case all the way to the Supreme Court in Lima.

None of the legal actions are directly targeting the Chinese company. Rather, their objective is to revert administrative approvals and decisions made by host country authorities. If those challenges are successful, they will invariably delay the progress of the project and bring losses to the developers. This is a prospect that any Chinese investors in the region should be aware of.

PPDC: You have been following a few other cases in 2019, including legal challenges to coal power projects around the world. What signals have you picked up from them?

ZJJ: A tidal wave of “climate litigation” is coming. Kenya’s Lamu power plant case, in which Chinese companies are deeply involved, is but one outstanding example of how a combination of lively civil society and an independent judiciary can become a formidable obstacle for environmentally questionable projects.

Globally, with climate change becoming an increasingly urgent concern, climate litigation is set to become more commonly used by communities and activists to challenge not only coal power but also government policies allowing such projects. In the past year, Indian farmers and fishermen have brought the International Finance Group (IFC) to court in the United States for funding a coal power plant in Gujarat. Bosnia-Herzegovina’s China-funded Tuzla 7 coal power plant is also bogged down by legal challenges.

Just a few weeks ago, the Dutch Supreme Court delivered a historic ruling ordering the government to cut greenhouse gas emissions 25% below 1990 levels by the end of 2020, after NGO Urgenda sued the Dutch government. Those developments around the world foreshadow the bumpy legal roads ahead if China continues funding and building coal power plants overseas.

PPDC: So far, those legal battles have all been fought in host countries. But people often wonder, can China’s own legal system be activated to make Chinese investment accountable overseas?

ZJJ: In transboundary cases, it is a commonly accepted principle to give host countries jurisdiction over lawsuits on environmental and social impacts. This is because their judiciary can more easily ascertain facts concerning damages and infringements on their native ground.

This doesn’t mean China’s regulatory regime has no role to play in injecting responsibility into its overseas investments. In fact, a host of policy items have been promulgated to steer outbound investment towards a more sustainable path. The 2017 Guidance on Promoting Green Belt and Road, published jointly by four ministries, calls on Chinese companies to abide by host country laws, global treaties and international high standards. But such policy items are often mere aspirational statements without binding force. The very few binding rules, such as the National Development and Reform Commission’s (NDRC) Measures on Outbound Investment, are low-level departmental rules with limited force. So China does need to install higher level outbound investment laws and regulations to introduce accountability to its companies going global.

What is really encouraging is that at the end of 2019, China’s Supreme People’s Court issued a groundbreaking opinion on how the judiciary system should support the Belt and Road Initiative, stating that China should “proactively contribute its judicial resources to global environmental governance”. More specifically, it calls on the Chinese judiciary to strengthen environmental public interest litigation and tort litigation to “stop environmental violation” and “enforce liability for damages”.

If these words are meant genuinely, the opinion in effect opens the doors of Chinese courts to environmental public interest litigation and tort cases on damages happening outside China’s borders, particularly along the Belt and Road. China’s judicial resources, and its experience with trying domestic environmental disputes, are now accessible by communities affected by Chinese investments in countries with underdeveloped environmental governance. This is certainly the best new year present I have received as a Chinese environmental lawyer and an offering that I am keen to activate in the coming year.

This interview has been co-published with China Dialogue

From Pioneers to Brokers: How a diverse Chinese diaspora facilitates the Belt and Road in Lao

A lively snapshot of those who lubricate deals and exchanges that make the Belt and Road possible

By Juliet Lu and Wanjing (Kelly) Chen

There is something about China – perhaps its size, perhaps its foreignness to Western audiences, or perhaps the simple fact that it is a new global economic power – that lends to vast oversimplifications and doomsday portrayals of the country’s global integration. China’s increasing presence overseas is without doubt one of the topics on which this oversimplification gets the most play. Summary statistics and breathless reports give the sense that Chinese firms parachute into countries, checks in hand, and unilaterally determine what to build, grow, and extract. But in order to understand how China’s global integration is unfolding on the ground, we need to ask a few questions. How does this emerging wave of investment actually take root? Through what channels does Chinese money flow, and through whose hands?

Investing in new country contexts is a laborious process that requires a diverse set of actors who can assemble disparate resources and apply niche expertise to carefully facilitate investment deals. Long before the Belt and Road Initiative (BRI) was announced in 2013, waves of Chinese migrants struck out into the world to make a living beyond China’s borders. These pioneers are now positioning themselves as brokers to the various investment projects encapsulated in the BRI, serving as pivotal in-country links but also taking advantage of newer, more naïve arrivals. They pave the way for the current day globalization of Chinese capitalism with their years of experience, knowledge of cross-cultural business and cultural norms, and social and cultural capital in host countries.

We believe it is important to understand China’s global integration not only from the point of view of elites, but also from the ‘civilian perspective’ (民间视角). Our field research aims to uncover some of these perspectives from a handful of Chinese migrant pioneers-turned-brokers of Chinese capital in Lao. They are not the face of Chinese investment which normally comes to mind – polished government officials and suit-wearing state owned company CEOs. Instead, we point to the hidden army of people who draw, direct, and enable the flows of capital into new contexts and unsettle the tendency (which dominates coverage of the BRI) of grouping Chinese actors into one monolithic category.

The View from China’s Backyard

Although a majority share of Chinese global investment has been in Southeast Asia, reporting and research on China in the region has been noticeably less alarmist and negative than that on China in Africa and other regions of the world. This is partly because Chinese traders and investors are neither new nor the only foreign investors active in the region. As early as the 16th century, sojourners and settlers from coastal China had already formed enclaved communities across the region through sea-based emigration. Over land, upland ethnic groups in southwest China were particularly mobile and heavily engaged in trade with their neighbors in mainland Southeast Asia. More recently, during the Reform and Opening Era, the Chinese state relied heavily upon the Chinese diaspora in Southeast Asia (referred to as the “Bamboo Network”) for investment capital to kick start the country’s economic reform and eventual dramatic rise.

The Lao PDR is an especially interesting country from which to examine the role of the Chinese diaspora in the making of the BRI. A diverse set of communities have come from China and settled in Lao during different periods, from long established groups of Yunnanese traders who migrated generations ago and now refer to themselves as the ‘Ho,’ to Lao refugees who fled to China during the civil war in the 70s and 80s and returned in the 90s to resettle or just establish trade links, to more recent arrivals seeking a wide range of economic opportunities. The Chinese community in Lao is thus highly diverse; they have come from a mixture of places within China, arrived at varying times for different reasons, and hold contrasting class positions and occupations. But as the country’s global economic import grows, this diverse group of pioneers position themselves strategically and rearticulate their links back to China as they come into new roles as bridges between Lao and China.

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View from a hill in Luang Namtha, photo supplied by the authors

The Chen Family and Chinese Business Associations in Lao

Chen Li *, had been doing business in Lao for over two decades by the time we met during my preliminary fieldwork interviews. I* stumbled upon his company headquarters, a converted two-room Lao home in the tiny provincial capital of Luang Namtha. He was sitting inside in a tank top pulled up to rest on his belly, pants rolled to his knees exposing a pair of pink plastic slippers. Despite the tropical heat, I sipped steaming tea with him under the light buzz of a ceiling fan in his office and we talked about how he had come to Lao. Lao Chen (老陈), as he is referred to by those familiar with him, is the son of migrants from Hunan Province who came to the borderlands of Yunnan to tap rubber in the 1960s. His parents answered Chairman Mao’s call to secure the border by working on the rubber plantations of Yunnan’s State Farms – former border military units turned state agribusiness operations after 1949. Like workers in most state-owned enterprises, Lao Chen enjoyed a certain level of security as a State Farms worker but wages were abysmal and would never allow him to build a better life for his children.

So, in the mid 1990s, he scraped together enough savings to strike out and begin a modest trade enterprise importing fertilizer and rice seedlings from China to sell to Lao farmers. Soon he began lending maize seeds on credit and in the early 2000s, turning back to his roots in rubber, Lao Chen managed to secure a small plot of Lao state land to establish a rubber plantation, which he supplemented by contracting nearby villagers to grow their own plots which he helped them manage. By the time we met in 2017, his hair had begun to gray and he had hired Lao staff and a few relatives to run the day-to-day operations of his trade enterprise. His son had also moved from China to take over the rubber plantation. “I just come to check on things occasionally,” he explained as he showed me his border pass which allows Lao and Chinese citizens like him who reside within a few kilometers of the border to cross between the two countries for short-range trips lasting up to 10 days without having to apply for a visa. “It’s convenient enough to come, just an hour or so with the new road” he shrugged, “but my wife is tired of coming here all the time … and keeps asking me when these investments will pan out and we can retire.”

Just as we were ending our interview, Lao Chen’s cell phone rang and he paced around the front porch chatting loudly in his native Hunan dialect as I cracked sunflower seeds and drank my tea. After hanging up, Lao Chen insisted I join him for lunch and promised I’d meet other Chinese investors to interview – “don’t be polite” (别客气) he chided as he opened the passenger door of his truck for me. “Lunch is at our local Hunan Business Association, I’m the founding member” he beamed, and we sped off down the cracked road a few short blocks to one end of the town’s main drag.

I had imagined something akin to an American Chamber of Commerce, perhaps an office building adorned with state slogans of Sino-Lao friendship. Instead, we pulled into the dusty yard of another converted Lao home next to a few haphazardly constructed meeting rooms and a dilapidated sign that announced in peeling letters the business association in Lao and Chinese. Off the house, a dining area had been built with a few wooden beams and a corrugated aluminum roof. The table was set with a combination of Hunan and Yunnan staples, and a few Lao style salads with bottles of Beerlao served with ice. Lao Chen introduced me hastily before diving into a hurry of handshakes and gossip.

As I have learned is common in Chinese migrant communities across Lao and elsewhere, Lao Chen’s business association was less of a formal organization than a loose group of friends from the same origin province in China. In other towns in Lao I would encounter the Liaoning Province Business Association, the Guangdong Province Business Association, and many other groups built around common ties back home. Lao Chen explained that they provided some formal services for modest fees, such as procuring visas and business licenses, and he often used the association to legitimize his role facilitating connections between Chinese investors and Lao state officials or trade partners. But for the most part, the association simply served as a loose organization of fellow Hunan migrants with a diverse set of business operations in that area of Lao.

As we ate, the group exchanged lively banter, gave advice and shared complaints about doing business in Lao. One woman there who I had already met earlier that month on the bus from the Chinese border had come with her husband twelve years before and started selling farm equipment until they had enough capital to shift to selling Chinese electronics. She complained about how luohou (落后, backwards) Lao is as she laid SIM cards out on the table for the two men next to her to pick through for a lucky phone number. They had just arrived from Xishuangbanna to sell a truck full of construction supplies, and were asking her about the road conditions on the way to the next district and what to do if stopped by Lao police and asked to pay transport fees. Lao Chen’s younger cousin had also just arrived from Hunan at Lao Chen’s prompting, and while he too referred to Lao as luohou, he fostered a boyish excitement about it. He made a grand performance of recounting the wildlife he’d bought at the town market – bamboo rats and a few lizards, photos of which he showed us proudly on his phone – and eagerly asked others about life in this remote border region. He had found some success in the real estate market back home and was predicting grand profits if he could figure out the path where the Kunming-Vientiane Railway (the flagship Belt and Road project in Lao) would run and procure land in those areas.

The man sitting across from me was particularly boisterous – he had been hired by one of the Chinese construction companies contracted to help with the train construction to facilitate their negotiations with the Lao government to import equipment and supplies. He laughed at some of the company boss’s misconceptions about doing business in Lao – “I told him, everything in Lao is slow! Not like in China, here you cannot do anything fast” – and boasted proudly of the company’s reliance on his Lao state connections. Next to me sat the oldest man there, my guess put him in his early 70s. He sported a worn jacket and matching slacks and introduced himself as the deputy head of the association after Lao Chen. He smiled broadly and explained that, although he had lived in Lao for almost twenty years, he’d never learned to speak Lao. “I have studied how to drink Beer Lao instead! So I know how to do business here just fine!” He clinked our glasses together, finished his beer in one gulp, then placed it back on the table empty with a laugh.

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80th anniversary gala of a Chinese school, photo supplied by the authors

Dissidents in Disguise: politics and profit along the BRI

Not all Chinese business community gatherings in Lao are so lively and pleasant as the casual lunch orchestrated by Lao Chen. In November 2017, I found myself attending a dinner gala for the 80th anniversary of a Chinese school in Vientiane where some guests found it hard to enjoy themselves. For A Zhen, the atmosphere of the gala went sour as the celebratory performances became increasingly infused with Chinese communist ideology. As singers at the gala began performing Me and My Country, one of the most famous propaganda songs in China, A Zhen decided to go outside to clear his mind.

An established businessman in his 50s, A Zhen stood on the porch of the grand event hall, trying to calm his critical thoughts with the help of a cigarette. “There is too much patriotism in there,” he whispered to me as I snuck out of the gala to join him for a cigarette. Having known each other for a while, he had grown quite candid with me about his general discontent with the politics of the Chinese state. Yet he kept a tight lip around his other Chinese contacts. If revealed, his opinions would be devastating for his current career as broker, which allowed him to extract commissions and kickbacks for fixing deals for newly arrived Chinese investors. Given that some of his top clients are Chinese state-owned enterprises looking to establish projects in hydropower, logging, and mining under the Belt and Road Initiative, the cost of being vocally critical could be huge.

A Zhen represents a particular segment of overseas Chinese who are faced with day-to-day struggle to reconcile their personal politics and economic interests. He is one of many descendants of Chinese migrants who came to Lao throughout the 19th century and the first half of the 20th century, long before China became the People’s Republic of China. Many of this community speak Teochew and Hokkien and originate from two coastal regions of China known historically as the cradle for Chinese traders who set out across Southeast Asia. Individuals like A Zhen were mostly raised in families and communities with strong transnational business traditions. In an era when Chinese capital is flooding into Lao at an unprecedented speed and volume, those who have managed to preserve their Chinese language capacity and cultural affinity have used their entrepreneurial spirit to quickly carve out a new career path as brokers. They possess the cultural and social capital necessary to navigate Lao’s opaque regulatory system and seal big deals, like contracts for hydropower project worth millions of dollars.

A Zhen just recently managed to land such an investment project for a Chinese state-owned enterprise and took 5% of the total contract value as commission. His ability to comprehend the Lao cultural subtext in important business meetings with state officials greatly facilitated the process throughout. More importantly, he had inside access in government through his half-brother. This allowed him to gauge dynamics within key state bureaus that regulate foreign investment in energy sector. Such nuanced cultural familiarity and deep social connections are rarely found amongst the more recent wave of Chinese migrants in Lao who came in the last two decades. Therefore, while most brokers are preoccupied with providing tedious services like securing visas and renting local offices for investors (services which earn them relatively meager incomes) A Zhen facilitates big deals and, consequently, secures big paychecks.

Still, for descendants of Chinese pioneers who settled in Lao a century ago, a successful career as broker often requires repressing one’s personal political opinions. Due to their unique position in Lao history, and migratory life journeys, this segment of overseas Chinese are generally highly critical of the PRC regime. Many of them suffered a turbulent youth due to the Lao communist takeover in 1975. During decolonization after WWII, Lao sank into a civil war between the American-backed Lao and communist Pathet Lao. Teochew and Hokkien Chinese stood firmly with the Lao Royal Family. The vast majority, including A Zhen’s family, fled Lao in fear of communist persecution when the Lao Royal Family lost the war. They packed up important documents and portable valuable items before running across the border into Thailand. Thus, the word ‘communism’ alone brings back terrible memories of when their community was dispersed, families were separated, property was confiscated, and the place they called home was permanently changed.

Implicitly or explicitly, such experiences underpin their negative feelings toward Chinese communism. Moreover, the nomadic lives many of them have lived since fleeing Lao have further exposed them to liberal ideas that are incompatible with PRC ideologies. A Zhen for one, received an education in the United States and spent a considerable period of time living in France, Japan, and Taiwan before returning to Lao in 2012. A pro-democracy poet who writes against authoritarianism in private, he has struggled more than others in his everyday encounters with investors fresh out of China, who are deeply patriotic and enthusiastically draw upon PR China’s state propaganda – especially in promoting their projects within the context of the Belt and Road.

When our brief smoking session ended, A Zhen returned to the gala with a reserved smile on his face. He rejoined a crowd of people and politely if stiffly clapped at appropriate moments. After all, in the struggle between moneyed interests and liberal political beliefs, the former seems to always win out. There are thus many dissidents in disguises like A Zhen, who diligently work to facilitate the global expansion of Chinese capitalism today.

Viewing the BRI from the Ground Up

Chen Li and A Zhen are just two members of a diverse group of pioneering emigrants and sojourners who came from China to Lao a generation before the new wave migrants now arriving. After years of modestly making a place for themselves in the slow Lao economy, they now scrap together a wealth of local connections and years of experience to facilitate the ambitious plans of incoming Chinese investors mobilized by the Belt and Road Initiative. These pioneers-turned-brokers are pivotal links. It is based on their own past experiences that new investors’ expectations are set, through their family ties and established networks that Chinese capital connects with the Lao state, and on their advice and facilitation that a huge variety of deals across sectors take shape on the ground.

Their brokerage activities, however, are not underpinned by a unifying loyalty towards Beijing, nor do they respond to the state’s directives above their own. Instead, they are driven by a multiplicity of interests, dominated by their own quest for wealth and shaped by localized ties and personal histories. They reflect the complex nature of cross-border relationships and the evolution of the Belt and Road over time. The emergence of pioneers-turned-brokers like Chen Li and A Zhen amidst the rolling out of Belt and Road Initiative serves as a reminder that China’s global integration is a process which presents complicated contradictions and the need to negotiate personal, practical and historical realities.

* On the request of the authors, the authorship of respective segments of the article has not been stated.

* Pseudonyms are used in this article to protect the identity of the interlocutors.

* Please refer to the links here and here for questions concerning the usage of “Lao” in the article.

Juliet Lu is a doctoral student at UC Berkeley’s Department of Environmental Science, Policy and Management with a focus on political ecology. Wanjing (Kelly) Chen is a doctoral student at University of Wisconsin – Madison’s Department of Geography. Her current research focuses on the globalizing processes of contemporary Chinese political economy.

 

Between the lines: new reports offer a peek into Chinese policy banks

Research teams at Chinese and international institutions collectively shed light on the practices and thinking of CDB and Exim Bank.

In the past few weeks, reports released by teams at UNDP, China Development Bank, the Boao Forum for Asia and NRDC-Tsinghua University open windows into the operation of China’s policy banks when it comes to overseas financing.

None of the reports, even those compiled by China Development Bank itself, are particularly revealing in their description of practices and policies of the state controlled banks, underscoring the general opaqueness of those financial institutions. Most of the information presented in the reports is based on already published materials (policy papers, case studies, news reports etc), and only the Tsinghua University team’s report involved interviews with policy bank executives, providing fresh, first hand information on the banks’ sustainability policies.

Nonetheless, in this desert of accessible information on Chinese state actors, the reports’ compilation of information on the banks’ operations provides some interesting additional insights into how the two policy banks attempt to align their investments with Belt and Road goals and the global sustainability agenda, if you read carefully between the lines. In particular, we get a sneak peek into their differing approaches to environmental and social standards, and how loans for risky but much needed development projects are made secure, at least from the banks’ perspective.

Policy Banks on the Belt and Road

There is already an existing literature on the roles played by China’s main policy banks, China Exim Bank and China Development Bank(CDB), in China’s overseas industrial build-up. It is still worth highlighting, however, the distinctive roles of the two banks, as described in the UNDP-CDB “Harmonizing Investment and Financing Standards towards Sustainable Development along the Belt and Road” report (hereafter as “UNDP-CDB report”). CDB, being the world’s largest national policy bank, offers mainly mid-to-long term non-concessional, commercial loans on the Belt and Road, while China Exim Bank provides mostly concessional loans and export seller’s/buyer’s credit based on market interest rates. According to the UNDP-CDB report, by the end of 2018, CDB had provided financing for over 600 Belt and Road projects with accumulated value of USD 190 billion (USD 105.9 billion still outstanding). The Exim Bank’s Belt and Road portfolio is larger in size, with outstanding loans over 1 trillion RMB (about USD 143 billion) spread across 1800 projects.

A key observation made by the UNDP-CDB report is that loans still occupy a dominant share of Belt and Road financing, as opposed to equity investment. This may be due to the fact that most Chinese financial participants of the Belt and Road Initiative are banks, whose mandate is to provide lending (especially for commercial banks). Nevertheless, the UNDP-CDB report notes that Chinese financing may have also tilted toward loans for their relatively low risk and ability to pool resources for supporting large projects, while equity investment involves longer term exposure to risks over the entire lifecycle of projects and higher transaction costs. But, as a previous blog post on this site has shown, this preference might be changing for some Chinese Belt and Road players as they become more attracted to the higher and sustained return of projects funded through equity investments.

Policy Banks on the Belt and Road
Source of information: UNDP-CDB report

BRI’s heavy infrastructure focus means that the banks’ Belt and Road portfolios tilt heavily towards energy, transportation and construction, with the energy sector the largest recipient of bank financing. The go-to data source for BRI researchers – even for established and connected Chinese research teams, such as at Tsinghua University – Boston University’s Global Economic Governance Initiative shows that coal makes up the majority of the two bank’s BRI financing between 2000 and 2017, followed by oil and gas financing.

Sustainability, Sustainability, Sustainability

One question that observers of the BRI often have is how come Chinese policy banks, despite a domestic emphasis on sustainable development, continues their funding of overseas projects with questionable sustainability, both environmentally and financially. Many analyses approach this question by looking at the banks’ “safeguard policies”, i.e. to what extent can mechanisms at the banks rule out financing “bad” projects. But an interesting insight from the NRDC-Tsinghua report “Research on Green Investment and Financing Standards for Policy Banks in the Belt and Road Initiative” (hereafter as “NRDC-Tsinghua report”) is that domestically, Chinese policy banks, particularly CDB, approach sustainability not so much from a safeguard point of view, but rather from an industrial policy point of view. China’s “green banking” policies are essentially an extension of the central government’s industrial policy. Its central components are sector-specific or client-specific credit guidelines. Through those sector-specific policies, CDB systematically channeled more than RMB 1.6 trillion (about USD 229 billion) into supporting China’s domestic green transformation agenda, which involves the set-up of low-carbon cities and smart cities, pollution control and environmental rehabilitation, renewable energy development and circular economy. In the process, CDB sets up a regular communication channel with the Ministry of Industry and Information Technology (MIIT), a key maker of Chinese industrial policies, to screen and create a pool of bankable industrial energy saving projects.

Without the same level of industrial policy coordination and strategic guidance, Chinese policy banks have a much less clear green mandate when financing overseas, and have to resort to basic safeguards based on host country policies. According to the NRDC-Tsinghua report, this approach has clear limitations. The idea of deferring sustainability standards to host country regulations seems to have been deeply rooted in the thinking of bank executives. The NRDC-Tsinghua team’s interview indicates that those executives are fully aware of the “strictness of environmental and social safeguards developed by the World Bank and Inter-American Development Bank”. But they also believe that strict standards “limit where banks can go in terms of their businesses”, as they require too much on the side of the recipients. These executives nevertheless conceded that when local standards “prove inadequate”, they are willing to bring in Chinese standards (if more robust) as a stopgap. The rationale for applying Chinese standards is to elevate their global acceptance for future technological exports.

The deference approach also applies to grievance mechanisms, where Chinese policy banks demonstrate a clear preference for complaints to be directed to recipient country authorities rather than themselves. Addressing the issue of deference, the UNDP-CDB report recommends governments and financial institutions to assess host country standards and identify countries lacking the ability to implement standards or those lacking standards altogether. Based on such assessment, capability enhancing efforts can be made in the form of technical support or modest grant financing. “Defer to the host country on standards that are already aligned with best-practice standards,” the report prescribes, “but work with the host country to boost implementation, compliance and monitoring capabilities.” This approach can “substitute practices received with limited enthusiasm”, a subtle criticism by report authors of the Bretton Wood institutions’ “conditionality” methods.

Both the NRDC-Tsinghua report and the UNDP-CDB report outline how environmental and social review is embedded in the policy banks’ internal procedurals, with slight differences, as shown in the table below. Before delving into the table, one should note that neither bank currently has dedicated offices or teams to handle environmental and social standards. The safeguard is therefore scattered ( or “embedded)” in bits and pieces across the banks’ due diligence and approval processes without any overarching overseers of how green their lending is. Interviews by the NRDC-Tsinghua team also shows that Chinese bank interviewees have little comprehension of the “Environmental and Social Covenant” approach commonly practiced by international development financial institutions, which would put clients’ environmental and social commitments into loan agreement to become legally binding.

Policy Bank ESS
Source of information: UNDP-CDB report and NRDC-Tsinghua report

The above table might give the impression that safeguards are available and working at the Chinese policy banks, as the banks themselves often argue. But as report writers pointed out, the reliance on recipient country standards mean that in regions with weak governance, such as Southeast Asia, poorly-designed projects might get greenlights. And the lack of a central policy, a dedicated staff and clear project-level standards for environmental and social issues means they are at the risk of being treated as secondary concerns at each of those steps wherein their consideration is supposedly “embedded”.

Green Loan

If the bank’s safeguards seem a bit underwhelming, the Boao Forum for Asia’s “Belt and Road Green Development Case Study” report (hereafter as “Boao report”) brings to the fore interesting details of a solar mill project that CDB financed in Zambia. At Panda Paw Dragon Claw we love graphs and flowcharts that illuminate the workings of Belt and Road actors. The Boao report did a nice job of drawing the below diagram of the parties involved in the CBD solar mill loan:

Zambia Model
Source of diagram: Boao Forum report

Based on the report authors’ description, Zambia’s hydro-powered mills for cornmeal, a staple food for the country, faced curtailed power supply due to a lack of rainfall in 2014, leading to rising food prices. President Edgar Lungu launched the Presidential Solar Milling Initiative to construct 2000 solar mills around the country to ease the pressure on cornmeal supply. The initiative, with a total estimated cost of USD 200 million, was financed through a CDB loan worth USD 170 million. The rest would be paid by Zambia itself.

Despite its green merits – the mills are solar powered and have a public livelihood objectives at its core – the loan also has clear CDB features. Based on the description of the report and news reports from Zambia, the loan appears to be non-concessional (interest rate is unknown), although CDB waived all other fees associated with the loan. It is sovereign guaranteed from Zambia’s Ministry of Finance. A Chinese EPC contractor gets the contract to build the solar mills. And Sinosure, China’s policy insurer, provides mid to long-term insurance for the loan.

Touted as green finance, the loan nonetheless shows both the advantages and limitations of CDB debt financing. Zambia is considered “high risk” in World Bank/IMF’s debt sustainability assessment, and would be advised to avoid or limit non-concessional borrowing. This may restrict the country’s ability to raise funds from international lenders, making CDB’s offering highly attractive. (In cases like this, multilateral development banks would only offer concessional loans with very low or zero interest. And market rate lending will be made to private companies without sovereign guarantee.) While the solar mills may be fulfilling a genuine development need and have a viable future revenue stream (local cooperatives would pay to use the mills), a non-concessional loan inevitably adds to the overall financial stress of a country whose 2018 debt stock stood at USD 10 billion. On the China side, CDB has thoroughly risk-proofed its loan (sovereign guaranteed and Sinosure insured) and the Chinese EPC contractor will reap the benefit of a major construction deal. But Zambia has to figure out how to make the project work in the next 15 years so that the loan can be serviced.

In Zambia, there are already signs of trouble: the President has openly expressed dismay that some of the solar mills have become “white elephants” and is urging provincial officials to take action. Vandalism and theft (of solar panels) also plague the project. “Government borrowed money which has to be paid back with interest,” says Zambia Daily Mail, “Zambia cannot afford to waste resources in that manner (referring to the non-working solar mills).”

If providing financing and construction help get projects like the solar mill initiative off the ground, there is still a distance from a true “win-win” if one side bears a disproportionate risk of project failure while the other side enjoys the safety of near-term benefits.  If the latest reports collectively highlight one thing, it is the disproportional burden Chinese financing is putting on the weak shoulders of its Belt and Road partners, be it environmental governance or debt sustainability. If BRI is to be genuinely “mutually beneficial”, fine tuning that risk-benefit equation would be a first step.

Dreams and Infrastructure – Common Destiny, the first Belt and Road movie

A BRI-themed documentary movie manifests China’s infrastructure-centric concept of development

Common Destiny, a movie-documentary about the modern Silk Road, tells the story of lives transformed by dreams realised through persistence and the enabling power of infrastructure development. In many ways the movie presents the narrative of China’s materialist theory of development, led by and underpinned by infrastructure, a contrast to Western countries’ current focus on development aid.

Released in China shortly before the October National Day Holidays, the documentary was relatively high budget – in excess of 50 million RMB, according to producer Liang Yan – received some international attention at the Venice Film Festival, but was low audience, garnering only a million RMB in box office sales during its five days of screening in September, according to RFI.

The movie is a picaresque medley of five stories from across Eurasia and Africa. The stories are all real, recreated by amateur actors, in some cases the real life protagonists themselves.

The prominent presence of infrastructure through the movie reflects and participates in the creation of the “promises of infrastructure” that anthropologist Brian Larkin writes about in his key essay on the social meaning of infrastructure. In that essay, Larkin posits that infrastructure projects “are made up of desire as much as concrete or steel”. He also argues that, because they are the sites of such fluid and diverse forces as personal and societal desires and ambitions, infrastructure is “always metaphor.” If that is the case, Common Destiny is, as a film director’s response to the Belt and Road, playing an active role in constructing that metaphor.

Common Destiny
The movie poster for Common Destiny

Five journeys, one destiny

Common Destiny begins in Kenya, with what has, after being retold on a number of WeChat channels, perhaps become the most iconic of the five stories. Grace is a child in rural Kenya whose school lacks an art teacher. Their weekly scheduled art class has been replaced by an English language class, to the frustration of the students. One day whilst stacking shelves in her mother’s village shop, Grace comes across a promotional flyer for a children’s art school in Nairobi tucked away in one of the delivery boxes. It triggers an idea – to go to Nairobi, find this school and ask the teacher to come to her village to teach at the school. But how to get to Nairobi? Well, there is a new high speed train line built by a Chinese company. Grace saves up money for the train ticket and arrives at the school in Nairobi to ask the teacher to come to their village school. The teacher is sceptical, saying he cannot give up his job in the city just to teach at a rural school. No worries, says Grace, there is a high speed train, you can come just one day a week. Infrastructure has compressed space and made the impossible possible, made dreams, with a dose of dogged persistence from Grace, a reality.

The other stories focus on the road trip of Yangyang, a young Chinese artist and writer, and her father’s friend Wu Yinghua, a truck driver and secret photographer, from Guangzhou to Almaty, Kazakhstan; a journey of (re)discovery for Santos, a Spanish traditional paper maker, to a paper making village in Jiangxi province; the persistence of Ghayda, a young Jordanian woman, in finding a job against the headwinds of patriarchal tradition dictating a housewife future (after nearly 20 failed attempts she finds a job in what seems to be a Chinese company); and the dream of a young Uyghur boy Yusuf Jiang in Kashgar to win a basketball scholarship, again against the headwinds of traditional expectations.

A full deck of positive stories then. At the screening, producer Liang Yan made a point of stressing that the film is not backed by government, echoing comments made to The Economist. Beijing Silk Road Media Group, the production company behind the movie, do explicitly state one of their missions as to “enthusiastically respond to the country’s Belt and Road strategy,” however (written in 2015, when the term “strategy” was in use to describe what is now termed “initiative”). Whether or not the film has direct financial or other backing from government then, it seems likely that it set out with an intention to portray a favourable image of Belt and Road. Of course, if it did not, it would hardly get past Beijing’s movie censors anyway.

Regardless of where the money comes from and the propagandistic undertones of the movie, we can still take it seriously as a cultural response to and participation in the Belt and Road. With Belt and Road a dominant topic in Chinese mainstream (especially state) media, it was only be a matter of time before Chinese artists, literary writers or, in this case, film directors turned their attention to the initiative to offer their interpretations of it. Their interpretations are part of the creation of meaning and of the metaphor of the Belt and Road.

Personal Dreams + Infrastructure = A positive future

This is the equation that formulates the main theme of the movie. Grace’s story is the most prominent and obvious example. Infrastructure is also central to the story of Yangyang and Wu Yinghua whose journey of finding themselves – Yangyang finding her creative drive and Wu finding the confidence to become a semi-professional photographer – is written out in allegorical style as they journey across the now-tarmaced silk roads of China from Guangzhou to Xinjiang and on to Kazakhstan. Elements of that story are almost pointedly self reflective of the centrality of infrastructure to the movie. While Yangyang photographs local minority villagers going about their farming business, Wu turns his camera lens to mega-bridge projects spanning the gorges of south west China, lingering on their powerful, transformational forms.

Infrastructure features prominently throughout the movie, the camera sometimes panning slowly across infrastructure panormas. At times it even seems to perform the functions of narrative and plot device, both a scenic backdrop and a character in itself. It would be easy to mock this as a filmic representation of the financially and techno-charged dreams of state-owned enterprises and local governments, but there is, of course, an element of truth to the equation. The rapid development of infrastructure has enabled incredible things to happen in China over the last three decades and perhaps it is only natural that a creative response to the Belt and Road from Chinese film directors would view the initiative through this lens.

In this way, Common Destiny reflects China’s materialist concept of development, which puts infrastructure front and center in the process of development. Build and economic activity will follow, it proposes, a gamble that has met with both successes and failures within China.

The insistence to put infrastructure front and center in its overseas development agenda differs significantly to the shifting focus of Western development aid in the past few decades, which, according to scholars such as Debra Brautigam, has gradually moved away from earlier emphasis on infrastructure and industry. Over the years, Western donors have elevated concepts of basic human needs, “structural adjustment”, governance and democracy in the place of handing out “hardwares” to recipient countries. While infrastructure is not totally excluded from this picture, current Western theories of international development tends to place emphasis on the individual as the unit that, once empowered, will bring about economic progress. In the Marxian language China’s state planners should be familiar with, the Western theory of development proposes to tinker with the superstructure, while China proposes to remake the base.

Crazy about Infrastructure

Perhaps it is also worth pointing out here that, though an obsession with mega infrastructure projects — bigger, taller, longer, faster — might seem somewhat crude to 21st Western sensibilities, the West too had its period of rapid infrastructure development and a similar fetishisation of the structures — New York’s tallest skyscrapers, 19th century England’s gorge-spanning Clifton Suspension Bridge. Since then, however, the role of infrastructure has largely been backgrounded in the West, while in Chinese discourse of both domestic and international development it is clearly very much foregrounded.

Indeed, as the developed world grapples with post-industrial issues, China is very much embracing and celebrating its industrial might that has finally reached a level comparable with established manufacturing powerhouses like Germany and Japan. The sentiment is best manifested by the online term “infrastructure maniac” or “infrastructure devil” (基建狂魔), coined by netizens to refer to their motherland. Under a 2016 question on Zhihu.com (China’s Quora) “Why do people refer to China as an infrastructure-maniac?”, there are more than 1000 answers, many of which are first-person accounts by engineers of impressive infrastructure projects they worked on — bridges built in remote mountainous areas, highways connecting seemingly impossible destinations, and electricity grids providing millions with access to power in a matter of years. In one of the answers, the user simply posted a few pictures and typed “this says it all.” They were pictures of kids playing with mock excavators in an amusement park.

Infrastructure-maniac

The industrialist national psyche has found its way into people’s imagination about China’s involvement overseas. Common Destiny is a manifestation of that development philosophy.

The omitted variables

In the introduction to the edited volume The Promise of Infrastructure, Hannah Appel, Nikhil Anand and Akhil Gupta write “new infrastructures are promises made in the present about our future.”

In Common Destiny, the “dreams + infrastructure = development” equation works seamlessly. The question this raises, and one which brings us closer to reality, is what happens when the equation goes wrong? In reality, there are many more variables to that equation — levels of corruption, effectiveness of engagement with local communities, the attainment of a “social license”, the conduct of environmental impact assessments, and more — what in the parlance of investors would be categorised as “risk”.

A failure to take into account the many variables which can make that bright future a reality leads to a breaking of those promises and a betrayal of aspirations, a major reason why infrastructure projects — from the Lamu coal power plant in Kenya to the hydro dams of Indonesia to the Yunnan-Laos high speed rail — are so frequently controversial and politically charged. Common Destiny omits these elements and their consequences from its equation.

But through its storytelling, Common Destiny also (maybe unintentionally) acknowledges a fundamental truth to human development. No matter what you end up building — a bridge, a highway, a power grid — infrastructure is always a means to an end, not an end in itself. Grace’s dream is for her school to have an art teacher. Ghayda, the young Jordanian woman, is trying to break away from suppressing traditions. These are human pursuits that speak to desires and aspirations higher than material satisfaction. Steel and concrete may assist such pursuits, but can never replace or suppress them.

Ironically, non-materialistic values, such as the integrity of one’s cultural heritage or the love for nature, are often brushed aside as irrational or outright anti-development by infrastructure constructors and their interest groups when they get in the way of a project. In that sense, Common Destiny may have provided a window for viewers to reflect on what development is really about — the needs and desires, material and non-material, of communities around the world.

Writing the image of Belt and Road

“Infrastructures are always fantastic as well as technical objects. They are made up of desire as much as concrete or steel,” writes Brian Larkin in his essay on the anthropology of infrastructure. It is this combination of infrastructure as physical, technical object and a location of wishes and desires that Common Destiny tries to spell out, though limiting itself only to positive examples.

As sites of dreams and desires, government-to-people promises and potential abuses, the meaning of both individual infrastructure projects and a mega infrastructure project like Belt and Road as a whole is a process of creation and discourse. That discourse will include a plurality of voices from across the Belt and Road, weighing up such issues as whether or not promises of a better future have been kept or broken.

Common Destiny contributes its voice to the construction of the narrative of infrastructure. But, as in traditional Chinese paintings where blank means as much as strokes, it is in the omissions to the movie’s central equation that we can see the real challenges and controversies facing China’s infrastructure projects overseas.

Interview: Can Chinese NGOs help companies obtain “social licenses” along the Belt and Road?

As a Chinese NGO stepped outside the country for the first time, it found itself caught in between Chinese companies and skeptical local communities.

One largely untold story in the narrative of China’s Going Out, which focuses on the government, SOEs and banks, is how its own burgeoning civil society, witnessing the huge impact China is making overseas, tries to catch up with the footsteps of state actors and make their own mark in shaping the country’s footprint abroad. With the daunting constraints NGOs are facing domestically, working in a foreign country offers only further challenges. They not only have to overcome the barriers of language and culture, but are also confronted by a more fundamental reality of their delicate relationship with the Chinese state.

What is unbeknownst to many international observers of China’s Belt & Road Initiative is that a few Chinese civil society groups have already ventured out, albeit slowly and quietly, and have set up a presence in a handful of key Belt and Road countries. In this space, there are government-backed NGOs such as China Foundation for Poverty Alleviation, which has already set up development programs in 5 countries including Myanmar, Nepal and Ethiopia; professional environmental NGOs such as the Global Environmental Institute, and grassroots community development groups such as Social Resources Institute (SRI), the organization of focus in this interview.

Yue Jinfei, a young development worker had spent a few year in the Chinese countryside before joining SRI in 2014, was, in 2015, tasked with a project untried before in the organization’s history: with a few team members, he was to map the complicated web of interests around the controversial Letpadaung copper mine project in Myanmar. SRI had never had any experience working in another country.

Letpadaung was Asia’s largest hydrometallurgical copper mining project and one of the most controversial Chinese projects in Myanmar. Violent protests had disrupted the project, acquired in 2010, by Chinese state-owned company Wanbao, over issues of land acquisition and relocation of villages. The situation prompted President Thein Sein to appoint Aung Sang Suu Kyi, then the chairwoman of National League for Democracy, as the chair of an investigation commission tasked with giving a comprehensive assessment of the problems surrounding the project. The commission has since come up with a set of recommendations and rectifications that Wanbao is required to implement.

Yue Jinfei and his team made field trips to Myanmar between 2016 and 2017, talking to a wide range of stakeholders affected by the project to come up with a comprehensive report widely referenced by researchers, journalists and civil society workers taking an interest in China’s involvement in Myanmar. In a recent interview with Panda Paw Dragon Claw, he shared his reflections on the promises and limitations of Chinese civil society’s “Going Out”.

Jinfei
Yue Jinfei has worked in China’s countryside for years before joining an SRI team to map the interests around the controversial Letpadaung copper mine in Myanmar.

Panda Paw Dragon Claw (PPDC): Why did SRI decide to get involved in a Chinese overseas project like Letpadaung?

Yue Jinfei (YJF): In the early 2010s, SRI started working on poverty alleviation through sustainable agriculture in China. Within that space we did extensive research and consultancy on agricultural supply chains, including tea, coffee, tomato and cosmetic ingredients.

In 2014-15, that work brought us to Chinese agricultural investments in other countries. That’s when we first cast our sight overseas and we realized very few Chinese NGO peers had overseas experience, so there was not much we could build our work upon. It was uncharted waters. The realization made us think maybe it could be more valuable to take a broad viewpoint rather than focusing on sectoral issues. So we focused our research around how Chinese companies deal with local communities in other countries. As a first step, we were just trying to understand what’s going on, as Chinese civil society as a whole seemed to have very little clue of the situations beyond China’s borders.

We selected Myanmar as a starting point because of its complexity as a country. In 2014-15 the political transition was already under way but not quite completed. Other Chinese projects such as the Myitsone dam had already caused lots of controversy. But unlike the Myitsone dam, which was already halted, Letpadaung was still ongoing at that time. Its ups and downs provided a very good window into the dynamics of a Chinese overseas project. How it went from problem to at least partial solution is a source of knowledge and understanding that has guided us ever since.

PPDC: You adopted the Sustainable Livelihood Framework (SLF) in your report. Was it an attempt to show comprehensiveness and balance in your analysis?

YJF: The adoption of a research framework for us was also a learning process. At SRI, we were studying useful theories and tools in the field of rural development. We encountered the SLF developed by the UK’s Department for International Development (DFID) and Francis Fukuyama’s work on social capital. We felt they were very relevant for the Letpadaung case, which is a rural community affected by a major industrial project. Using the framework allowed us to capture multiple dimensions of those impacts, from human capital, natural capital to social capital, that collectively determined the quality of a rural livelihood which was really our main concern. It’s like dissecting a sparrow. And SLF provides a handy tool for doing that.

PPDC: Did the complexity of the local situation surprise you?

YJF: We picked Letpadaung exactly because of its complexity. So that was almost expected. But still I was struck by the complicated web of factors that contributed to conflicts in that case. There were dynamics between villagers who refused to move and those who agreed to relocate to Wanbao-built new villages (and therefore enjoyed new homes and new job prospects). And conflicts happened within each group. For example, in order to maintain collective leveraging power, villagers who remained would exert pressure on those who showed willingness to relocate. And in some cases, conflicts even manifested on household levels. I have seen siblings split over compensation and relocation. Someone who had nominal ownership of a piece of land might have received the compensation from Wanbao, but his or her sibling might be the person who actually occupied and worked the land and refused to vacate it.

How actors approach such complexities may reflect different (cultural) values. Chinese companies often consider household disputes a purely private matter (家务事) and refuse to intervene into the private sphere. But if you look at reports by Western civil society groups, they would point to such household disputes as the result of Chinese investment (or at least exacerbated by it): the disruption of traditional family structures by the injection of external resources.

As a Chinese NGO, how should we look at such problems? I don’t have an answer yet. But it did remind me that many phenomena that we had taken for granted in China for the past decades, such as the disintegration of family structures by external economic forces, could become problematic issues overseas.

Letpadaung mapping
SRI’s mapping of stakeholders involved in and affected by the Letpadaung project

PPDC: What did you plan to do with such an analysis of the complex community-level impact of Wanbao’s project?

YJF: As an organization we are probably too research-minded [laughs] that we were simply studying the situation for the sake of understanding it. We did not have mature ideas of how we should utilize the result of the research and apply its findings.

But we did have a general direction. In rural development work within China, the methodology of participatory community development, first introduced by Western development groups, has taken roots among NGOs. Many organizations use such methods in China to facilitate the expression of community needs and inform their response. Is it possible to introduce this to corporate community relations management? We knew that some companies had introduced stakeholder analysis into their CSR work. But their way of stakeholder communication is far from the participatory method development workers are familiar with.

Here we encountered a fundamental dilemma that is still haunting me today: the way you treat minority interest in a situation like this. I would call it the “20% problem”. If 20% of the villagers refuse to move no matter what the Chinese company does, what should we do? Wanbao in the end chose to ignore them, as their opposition to the project no longer posed a substantive threat to the operation of the plant and the majority of the community had already started over in new villages. This may be a rational decision in a business sense. But as a Chinese NGO, our years of work in this field tells us that even a small minority voice represents intrinsic human rights. So how should we play the bridging role that we set out to play in a situation like this?

PPDC: Did you have a conversation about this with Wanbao?

YJF: Our access to the company wasn’t as good as some business groups. We were not able to enter the core premises of Wanbao’s plant in Letpadaugn . But we did visit its Yangon office (which was Public Relations oriented) and interviewed them about the project. To some extent our relationship with the company was also defined by our stance on the minority issue. I was reminded not just once by my friends with close ties to the business sector that openly expressing sympathy with “the 20%” would negatively affect future communication with companies. On the other hand, we were also sometimes warned, albeit friendly, by civil society partners in Myanmar that it could alienate local communities if we appeared too cozy with Chinese companies – we’d be seen as their invited guest. We were really caught in the middle.

Wanbao was quite sensitive of how we represented its practices, so they did provide three rounds of feedback in our drafting process and provided information about what they were doing, especially in areas where they felt they were misunderstood. But on the substantive level, we didn’t think our study would make much of a difference on the project level as Wanbao was quite confident that their problems were already settled.

PPDC: Do you agree?

YJF: Maybe their Letpadaung operation is now unscathed by remaining opposition. But recently, as Wanbao has started prospecting for a new mine in the nearby region, they have met with fierce resistance from local communities. Many simply wouldn’t let Wanbao personnel in. That speaks to a continued lack of social license to operate in the wider neighborhood, despite all the work Wanbao has done.

PPDC: How did the local community and civil society groups receive you?

YJF: We were introduced to some civil society groups in Myanmar through partners and then our reach just snowballed to a wider network. Some of the NGOs were research oriented while others, such as Myanmar Alliance for Transparency and Accountability (MATA), were active on the ground. Through them we were then led to community based organizations (CBO) working on very local levels in Letpadaung and also community members.

But as a Chinese NGO our interaction with the local community was shadowed by the larger context of China as an authoritarian state. There was always the perception that, no matter whether you are a company or an NGO, you somehow represented the Chinese government. That’s why our local partners often treated us with a level of caution, as they were unsure what our real intention was. This kind of mistrust has only been exacerbated by China’s physical closeness and its assertiveness in recent years. I would even say that this misgiving towards China was much more intense than towards Japan, which actually invaded and occupied Myanmar during WWII. In Myanmar eyes, that invasion is now firmly in the past, while China’s impact is present.

When at the end of 2018 the Chinese embassy in Yangon made controversial comments about public perceptions of the Myitsone Dam in Kachin State, we immediately felt the heat while doing field work in Myanmar. We were asked a lot of questions by local contacts and some of our scheduled meetings or interviews couldn’t happen as local contacts got suspicious of us collecting information about their attitudes and perceptions at that sensitive moment.

Our acts were closely scrutinized, sometimes even when we were not physically in Myanmar. Information about a recent workshop that we held in Beijing on corporate-civil society relations in Myanmar was widely circulated in Myanmar’s NGO circles after someone probably Google translated our workshop introduction from Chinese. Criticism of us “selling information” to Chinese companies arose just because we shared our interview findings at the workshop where corporate representatives were present.

PPDC: Given this situation, do you think Chinese civil society groups can play a role in obtaining social license for China’s overseas involvements?

YJF: As individual organizations, I think it’s difficult. But collectively as a group, there is a possibility for Chinese NGOs to build the foundations of local public support for or acceptance of constructive Chinese involvement in the region.

Japanese civil society serves as a good example for us. With Japan’s deep involvement in Southeast Asia, Japanese NGOs have long ventured out into the region. On the one hand, there are Japanese NGOs doing traditional aid work such as building roads, setting up schools and digging up wells; on the other hand, there are watchdog groups like Mekong Watch, which focuses on Japan’s environmental and social impact in the region. What’s unique about the Japanese civil society presence in the region is its “depth”. It’s not rare for Japanese NGO workers to plug in a rural area of Myanmar for months or even years, learn the local language and really advocate for the local communities. How many of us have that conviction even when working in the poor countryside of China? With that kind of deep involvement, local communities associate “Japan” with generosity and benevolence.

This level of public trust cannot be built by a single NGO. It takes long term cultivation by an ecosystem of different groups. It doesn’t matter if CFPA only focuses on donations of goods in Myanmar and not on corporate accountability. As long as their work creates recognition among local communities of what “Chinese” do, other Chinese NGOs can build on this acceptance of our presence to further their areas of work. My hope is that through this collective effort, a diverse China will be more visible. People will discover that China is not a monolithic entity and that its civil society is here to help for the greater good.

 

How China’s power companies invest overseas

China’s power infrastructure investment comes in multiple forms, all of which entail different risks

By Wang Yan and Li Danqing

Over the past twenty years, China’s ‘going-out’ strategy has built Chinese companies an international role as the major suppliers of infrastructure around the world. Within the growing stock of infrastructure that China is building up, power infrastructure, especially coal power plants outside China’s borders, is attracting increasing attention both for their contribution to energy accessibility in developing countries, particularly South Asia and South East Asia, and for their climate impacts for decades to come (“carbon lock in”).

Articles, reports and academic papers have been written about this phenomenon as the world seeks a way to engage China in a dialogue about its coal build-up overseas. But before any serious conversation can happen, understanding the true nature of Chinese power companies’ operations overseas is key. Chinese companies’ role in supporting the development of coal power plants overseas comes in multiple forms, ranging from design and construction to part-ownership. Since 2013 Chinese companies have had an increasing preference for equity investments, a form of investment that entails both increased potential profit and increased risks. This blog tries to illuminate the landscape that the multiple forms Chinese coal power investments are made in.

Types of investment

A commonly overlooked aspect of Chinese – or for that matter any country’s – overseas infrastructure investments is that there are a range of investment model options available for companies and banks. Each option entails different types of contracts, partnerships, responsibilities, potential profit margins, and, inevitably, risk. To get a true understanding of how Chinese coal plant construction companies operate overseas operate, it is important for us to understand these different models.

Engineering, Procurement, Construction (EPC) was the dominant form of overseas investment for Chinese companies until 2018. An EPC contractor will carry out the detailed engineering design of the project, procure all the equipment and materials necessary, and then construct a functioning facility or asset as specified in the EPC contract. EPC+Finance (EPC+F) is one common derivative form of EPC, in which the project owner also wants the contractor to solve project financing.

Build-Operate-Transfer (BOT) and Build-Own-Operate-Transfer (BOOT) are typical types of public-private partnerships (PPP). In a BOT or BOOT project, normally large-scale, greenfield infrastructure projects, a government will grant a company the right to finance, build, own and operate the project with the goal of recouping its investment. Once investment has been recouped, the control of the project will then be transferred to the government after a specified time, normally 20 to 30 years.

Equity investment refers to companies’ investing in other projects or companies in the form of cash, tangible or intangible assets, in order to obtain an intended return in the future.

In the power sector, EPC revenues come from project payment as the plant function fulfills the contract, while BOT/BOOT rely on power purchaser’s continuous buying electricity from the plant during the project period, which is ensured by a Power Purchaser Agreement (PPA). Thus, long-term and steady project revenue is a determining factor in securing project financing.

In many cases, Chinese companies will set up a special purpose vehicle (SPV) via equity investment, registering it in the host country. The SPV becomes the project operator and engages with local and day-to-day businesses.

Chinese companies, therefore, play multiple roles in overseas power plant development – as investors, owners, designers, contractors, and operators.

From EPC to equity

Since 2013 Chinese companies have significantly increased equity investment in overseas coal power. In 2018 equity investment for the first-time outpaced EPC, the traditional investment avenue, in terms of newly-installed capacity. In the past decade, a total 10.8 GW of coal capacity had gone online with the backing of Chinese equity investment, 96% of which came after 2013 (Fig. 1). This shift from EPC contractors to equity investors with strong financing capacity appears to be the trend for future overseas coal power investments.

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Fig. 1. Coal power projects (capacity) with Chinese equity investment and EPC over the past decade.

Why the shift?

The transition from EPC to equity investment fits into the broader arc of China’s ‘going-out’ strategy, which began in 1999 and increasingly encouraged outbound investment, besides merely product and service export. The Belt and Road Initiative (BRI) has spearheaded China’s ‘going out’ since 2013, and in that time China’s outbound direct investment (ODI) in BRI countries has occupied a growing share of China’s total ODI, with 12.5% of China’s direct investment going to BRI countries in 2017. Despite a 19.3% year-on-year decrease in China’s total ODI in 2017, direct investment in BRI countries witnessed a 3% growth.

Equity investment brings more return for investors. As owners of a project, equity investors can potentially get higher returns in the long term. Equity investment also brings flexible options to investors. They can invest not just with cash, but also with current assets like materials and fixed asset. This offers both flexibility and lower cash flow risks.

In addition, equity investment, especially from state-owned companies, plays a credit checking role. It tends to enhance borrowers’ credit and lenders’ confidence and willingness, as well as attracting other types of lenders for project financing, such as seed banks and foreign capital banks. This means that equity investment can help a project to raise more money in less time, potentially lowering the overall cost. Lastly, with ownership of the project, equity investors take initiative for project management and risk control, and receive more rights to local resources, which also serves to lower the cost of the project.

In terms of coal plants, there are three key drivers underpinning the transition: global market trends, the company’s transition needs, and China’s top-down support.

1) The long-term benefits of exploring new markets, integrated industry chain and decision making power brought by equity investment. Equity investment allows companies to lock in long-term partnerships, acquire local resources in a lower-cost way, and ensure quick or steady growth in a foreign market.

Many Chinese companies are currently transitioning from EPC contractor to whole industry chain service providers. China Machinery Engineering Corporation (CMEC), one of China’s oldest and largest coal plant constructors, noted in its 2018 yearbook that the company has tried to diversify and widen its industry chain in recent years, with more projects conducted via ‘EPC+Investment+Corporation’ model. As part of this transition, the company has also formed partnerships with GE in multiple overseas equity investment projects.

2) A more competitive environment for the EPC-driven model meets the rising need for private investment in public projects. Driven by a desperate need to ease power shortages, while worried about tighter public funding and debt burdens, host countries are embracing private investment into public projects, or EPC contractors with its own financial support.

For example, in 2015 Pakistan updated its 13 year old electricity investment policy to allow for 100% foreign capital ownership of project companies, increased allowed return of investment, and “take or pay mechanisms”, an electricity payment mechanism which will ensure investors’ returns. The updates were all intended to increase potential profit margins for foreign companies, attract foreign capital, and reduce electricity generation cost.

3) Top-down financial support and policy signaling for equity investment overseas. Boosting overseas equity investment in power sector markets has been highlighted in a number of China’s diplomatic agreement and official BRI documents.

For example, in China’s new cooperation with Africa on infrastructure development, the integration of investment, construction and operation has been underlined in developing power, transport and communications projects. These investments are supported either by loans from China’s policy banks, or from commercial banks. China’s concessional loans require Chinese companies’ holding shares in overseas projects.

More equity investment, more risks?

But higher returns come with a higher risk profile. Along with the responsibilities of designers, constructors, or equipment-providers that normally come from the EPC model, the equity model also brings Chinese investors in on feasibility study, business negotiation, financing plan, construction, to long-term operation and management with a variety of foreign and domestic stakeholders. Chinese companies, along with banks and insurers who give financial support, are more attached to long-term steady returns and interlocked in multiple project stages, exposing them to complex risk patterns. Fig. 2 illustrates the risks exposed at each stage of an equity power project.

 

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Fig. 2. Stages and risks in project development (see Feb 2018 article in Infrastructure Economics 《建筑经济》

Most of China’s overseas coal power investment is in developing country markets (Fig. 3), which frequently present higher investment risks due to financial insecurity, political unrest, sovereign debt or uncertain business environment, causing uncertainties for China’s overseas investment.

PPDC-coal-3
Fig. 3. Total capacity of coal plants with Chinese equity investment in different regions. South and Southeast Asia are hotspots for China’s overseas coal investment, and together host 94% of Chinese equity-invested coal plants.

One of the most pressing challenges is changing or stricter electricity investment policies, which are already leading to project delays or cancellation. In Indonesia, for example, a gap between forecast electricity growth rate (8.3% for the period 2017-26) and actual growth rate (3.6% in 2017) has resulted in the postponement of 22GW of planned electricity generation projects.

In addition to electricity sector regulation changes, investors should not underestimate the risk posed by strengthening environmental regulations. As the principal culprit for air pollution and climate change, coal plants are in a particularly vulnerable position as governments race to strengthen their environmental regulations as they develop. This is also likely to cause project delay or cancelation, resulting in companies’ breach of agreement, economic loss or reputation loss. Meanwhile, many countries are aggressively making strides to speed up their energy transition and incubate renewables markets with ambitious policy goals, as in Vietnam for example. Public opposition, including protests and court cases, are also a major risk that can lead to project postponement or even cancellation, as happened to the Lamu coal plant in Kenya, for example.

Chinese companies’ investment in coal power plants overseas comes in multiple formats and is evolving as both domestic and international dynamics change. To become forward-looking investors, Chinese companies must raise their awareness of regional energy transitions and ongoing climate change action, and incorporate such aspects into their investment decisions. Beyond that, Chinese banks, insurers and supervisory bodies should also pay closer attention to the risks their overseas projects tie them to.

For anyone working on the issue of Chinese overseas energy investment – a “make or break” issue for global climate efforts – these types of investment arrangements and the opportunities and risks they entail are essential details. Policy makers, researchers, students and journalists should all take note.

Wang Yan and Li Danqing are both climate campaigners with extensive experience in Chinese overseas energy investment

 

Empty trains on the modern Silk Road: when Belt and Road interests don’t align

China’s provinces are sending empty freight trains to Europe. Chinese media explains why.

China is sending empty freight trains to Europe through one of its key Belt and Road Initiative (BRI) projects: the China-Europe Railway Express. The bizarre phenomenon caught the attention of Depth Paper (等深线), a Chinese online news platform. In a rare move by a Chinese media outlet in today’s media environment, Depth Paper probed critically into one of the BRI’s most visible “connectivity” projects, uncovering the perverse incentives that are luring China’s local governments and companies to create huge “bubbles” of ostensibly flourishing rail routes that run tens of thousands of kilometers across the vast landmass of Eurasia.

The revelation partly confirms what some observers have suspected all along: that China’s central government lacks the ability to keep BRI strategically tight and coordinated. Sub-national stakeholders, as they do in other policy areas, have the incentives to bend the initiative to their own narrowly defined interests and in the process undermine the overarching strategy, if such a strategy indeed exists at all. The curious case uncovers some important dynamics playing out among Belt and Road’s diverse stakeholders.

China Railway Express
Depth Paper uncovered the perverse incentives that are luring China’s local governments and companies to create huge “bubbles” of ostensibly flourishing rail routes that run tens of thousands of kilometers across the vast landmass of Eurasia.

The China-Europe Railway Express

Transporting goods between China and Europe through railroads is not a common choice for traders. Up to now, it only makes up 4.8% of the total bilateral trade volume, far behind commodities moved by sea (68%) and air (19.4%). For many years, the China-Europe rail routes were interrupted by the fragmented customs, quarantine and taxation regimes of countries along the way. As a rail transport agent in west China told Depth Paper, sending cargo to Germany through rail was unimaginable as recently as 1997. “Central Asia was as far as we could go.”

But, according to the report, things changed about a decade ago. Years before the advent of the Belt and Road Initiative, the instigator of this change was in fact the American computer company Hewlett-Packard. In 2009, as the computer giant negotiated a major investment deal with Chongqing, the city on the upstream Yangtze River with no easy access to a sea port, it included a condition that it should be able to transport its products to the European market by train: westbound directly from the city, instead of first going east to the sea. The Chongqing government accepted the condition and after two years, the Chongqing to Duisburg rail route was made navigable, allowing HP to ship to Europe in a relatively low cost (compared to air transport) and speedy way (compared to shipping by sea).

Before 2013, the year when BRI was formally announced, a few other freight rail routes were made possible by such bottom-up commercial interests. The city of Wuhan in central China, a major base for car manufacturing, developed Wuhan to Europe routes upon which half of its car outputs now depend for transportation. Similarly, Yiwu, the light industry powerhouse of Zhejiang province, opened up its own rail route to ship large quantities of small commodities, from garments to needles, to Europe. Ironically, those early trials, mostly developed by landlocked Chinese municipalities, received little central government support around that time. According to Depth Paper, China’s railway administrators even charged a fee for the extra burden those freight lines created. Its attitude toward such initiatives would make a 180 turn after BRI came into being.

2013 saw the creation of BRI and the incorporation of China-Europe rail links under the umbrella of Xi’s signature initiative as a key connectivity component. As China’s 2015 Vision and Strategy document for the BRI declared the intention of building the rail routes into a “brand name service”, the number of routes began to explode. Dozens of Chinese cities, including those on the east coast with easy access to ports, joined the bandwagon of rail transportation.

China Europe train routes
Planned train routes from China to Europe through Central Asia/Russia, source: NDRC

Growing bubble

In 2016, the National Development and Reform Commission (NDRC) laid out a five year plan for the expansion of westbound rail routes. And China’s railway planner published a blueprint document on building up the brand reputation of China Railway Express. China State Railway Group Corporation, which used to be the railway ministry, began to highlight the growth of Europe-bound voyages as a major achievement.

The elevation of the freight service in political importance created powerful incentives for players to “rig the game”. Depth Paper reveals two groups of schemers in the game:

Provincial and local governments: As the number of freight trips to and from Europe become a measurable indicator, local governments, particularly those sitting at key railway hubs, saw a clear opportunity to boost their visibility under the BRI (and probably to the leadership). At their disposal were subsidies to lower the cost of freight services and make them competitive with cargo ships.

The Ministry of Finance provides a guiding subsidy ceiling of 0.8USD/container/kilometer. But ambitious local governments circumvent it by inventing all kinds of additional rewards to lure businesses to their train terminals, sometimes even compensating for the extra mileage of truck transportation to bring containers from thousands of kilometers away. According to a chart collated by Sino Trade and Finance, many municipal government offer around 3000USD per container for a one-way Europe bound trip and a whole train could receive a total of 123,000USD worth of subsidies per trip. These local governments also use tax rebate and land use subsidies to sweeten the deal for freight service companies.

International railway service companies: Competition with each other and pressure from local governments eager for BRI visibility has incentivized the companies who actually run the numerous rail routes to Europe to increase the number of train trips. Every month these companies have to book planned trips from the railway regulators and get what is called a “route slip” that permits them to run those trains. The ratio of actual trips to the applied number is called  “realization rate” that regulators use to monitor rail capacity utilization.

The interplay of these incentives drives both groups to boost indicators that make them look good in this game, creating scenes that are outright bizarre. The government of Xi’an is one of the most active players starting from 2018. The city, 1000 kilometers to the west of Beijing and the former capital of Tang Dynasty more than a millennium ago, considers itself the “starting point of the ancient Silk Road” and strives to restore its glory in the Belt and Road era. With full support from its provincial bosses, it is the most generous with subsidies, dwarfing other provinces by a wide margin. “Subsidized per container transportation price from Xi’an is constantly below RMB 8500, while it costs over 20000 RMB from Shandong,” a trade agent told Depth Paper.

The subsidies are of the scale that they bend the gravity of trade. In the most extreme cases, traders in the far west Xinjiang Autonomous Region, which already borders Central Asia and is itself a Belt and Road rail hub, would move their cargo thousands of kilometers to the east to capitalize on the Xi’an government’s free handouts before transporting west across the Eurasian continent. Similarly, traders in coastal Shandong provinces would truck their goods all the way to Xi’an and load them onto trains, as it is cheaper even after taking into account the 5000 RMB per container transportation cost by truck (for which the Xi’an government also partially remunerates). The result is that Europe-bound freight train trips from Xi’an grew by a whopping 536.6% in just one year from 2017 to 2018.

The railway service companies, on the other hand, blow up their trip numbers even when they have very little to ship. Before Xi’an arrived on the scene in 2018, the competition between Chongqing and Chengdu, two nearby cities, was so fierce that the two cities would refuse to merge cargo loads back from Germany despite neither being able to fill a whole train themselves. When the pressure (and reward) to be the top railway service company facilitating “Belt and Road” trips to Europe becomes huge, the companies simply start loading empty containers to their trains. They must ensure that each train meets the regulator’s 40-container minimum before it leaves the station, but there is no obligation and no ability (for lack of demand) to fill those containers.

In the most extreme case, one train carried 40 empty containers and just one full container all the way to Europe. This makes the China Railway Express’s impressive growth number highly dubious, and most certainly a “bubble”. Even with all their tricks, companies can barely fulfill their promise to regulators: they have overbooked railway resources. In Q2 of 2019, Chongqing’s “realization rate” dipped to as low as 64% for some routes.

BRI undermined

Artificially enabled transportation routes are more of a disruption to than facilitation of trade, as China’s policy makers are slowly but painfully beginning to realize. Subsidies are both unsustainable and capricious: “Sometimes a city changes a Party Secretary and the new boss has other priorities for his budget.” This makes it hard for businesses to make long term plans and build China Railway Express into their logistic strategies.

Heavy subsidies also encourage opportunistic behavior that runs against the original intention of the policy. “[Subsidies] are supposed to help first-time users overcome initial transition difficulties and cultivate user acceptance of freight rail as a reliable means of transportation”, says one anonymous Liaoning provincial official to Depth Paper. “[But] what Xi’an does can hardly nurture real needs. Traders will go back to sea and air as soon as subsidies disappear.” The official also warns that such unpredictability and fluctuation would hurt the China Railway Express’s reputation overseas and permanently scare clients away.

The Ministry of Finance is reportedly determined to pierce the bubble by enforcing a schedule for phased subsidy reduction. Subsidies by local government are to be no more than 40% of a route’s total cost in 2019. The ceiling will be further lowered to 30% in 2020 and zero by 2022. The Ministry is hoping that by then the trains running up and down routes would be completely market driven and China Railway Express will stand on its own two feet.

The episode reveals the fundamental difficulties for China’s central leadership to implement its vision by reducing it to seemingly measurable indicators and supposedly workable incentives that mobilize local players to participate in a central government cause. Distortions and outright undermining of central government agenda happens with GDP numbers, air pollution targets, and other domestic issues. BRI is no exception.

It also calls into question a key underlying assumption of the BRI, that the power and “deep pocket” of the Chinese state can overcome problems that the market cannot solve when left alone. Trade flows, it turns out, are not easily bendable by the sheer will of the state. It is a rare occasion for a Chinese media outlet to so directly call out systemic problems in Xi Jinping’s signature initiative. As China embarks on other overseas adventures that premise on the ability of state capitalism to shift the center of gravity of global trade (through new ports and rail hubs), the troubles of China Railway Express should serve as a cautionary tale of the limits of state power.

Additional food for thought… when personal guanxi is more important than national strategy

CDBCaixin
Caixin’s frontpage story about the corrupt deeds of disgraced former CDB president Hu Huaibang

In another example of Chinese media exposing the “underbelly of BRI” , on August 3, Caixin Media published a frontpage story about the corrupt deeds of China Development Bank’s former President Hu Huaibang, who was recently investigated by the disciplinary arm of the Communist Party. The report, which has since been taken down from Caixin’s website, contains jaw-dropping, mind-boggling details of how recklessly senior officials of China’s largest policy bank (and a major instrument of the BRI) pursued their own interests at the expense of the bank’s financial health.

Hu’s tenure at the CDB (2013-2018) overlaps with the inception of the BRI. But according to Caixin, he was never much into the bank’s international adventures, which got expanded substantially under the leadership of Hu’s predecessor Chen Yuan. Hu reportedly shrank the bank’s international presence by cutting its commercial banking businesses overseas and only involved the bank with overseas financing when directed to by the top leadership (e.g. at deal signing ceremonies during state visits). The revelation somewhat shatters outside impression that CDB has been masterminding China’s BRI financing strategies, as one source told Caixin: “CDB almost never proactively sought overseas financing opportunities under Hu.”

Instead, Hu concentrated his political resources on two major clients: HNA Group and CEFC, both were offered exceptionally generous credit lines from CDB (at least 80 billion RMB for HNA Group, 42 billion RMB for CEFC). In both cases, Hu Huaibang rammed the deals through the bank’s internal risk management and gatekeeping mechanisms. In the face of resistance, he did not hesitate to replace officials who dared to disagree. The payback to his family members and political allies was fat, which, at one point, supported Hu’s unsuccessful bid to take the helm of China’s central bank.

As both companies later got embroiled in scandals in 2018 (CEFC founder Ye Jianming was detained in January and HNA Group’s chairman Wang Jian died in France in July), CDB faced the prospect of tremendous loss. HNA Group is reported to have accumulated 40 billion RMB of overdue loans to the bank, while the exposure to CEFC would cost CDB at least another 20 billion. Whether this will dampen the bank’s appetite for increased BRI involvement is unknown. But the Caixin report opened a rare window into the inner workings of arguably the world’s most powerful policy bank, and what it depicts is troubling.

With Belt and Road a top priority in Chinese foreign policy, space for calling out its flaws and problems is inevitably being curtailed. That makes reports such as Depth Paper’s and Caixin’s all the more remarkable, and all the more valuable for Belt and Road Watchers.

 

“Opaque, huge, ill defined, politicized”: Beijing’s foreign press corp grapples with BRI

Beijing foreign correspondents talk about the challenges of reporting the Belt and Road

In July last year this blog published a piece looking at some of the dominant narratives in international media reporting on the Belt and Road Initiative (BRI), the world’s “best known, least understood foreign policy effort.” One year on, we asked the people behind some of those stories, international media correspondents, about their own reflections on the many challenges of reporting BRI and their ideal Belt and Road stories.

The interviews show some common issues that are reflected across the BRI-engaged media, civil society and researcher space, and some obstacles unique to the demands of an international news desk. They also indicate why some of the narratives identified in our article last year have stuck around, seemingly immune to a number of challenges and more nuanced arguments they have faced.

BRIgooglesearch

Ill defined and opaque

One theme highlighted by all the interviewees when we asked about the challenges of reporting the Belt and Road was the continued lack of an agreed, singular definition for the initiative and its lack of transparency.

We noted in our article last year that outlets often take on the task of and struggle to define the BRI. One year on, journalists are still struggling with this issue. From a journalist or investigator’s perspective, digging deeper into BRI issues is also a challenge when the definition – the starting point – is so hard to fix.

As one journalist commented, “are we reporting on Chinese infrastructure deals? On smart cities? On geopolitical rivalries? On industrial overcapacity?” For newsrooms that also raises a question of staffing – should BRI be the domain of political correspondents, economy correspondents, commodities correspondents? Or, indeed, has “Belt and Road” become a catch all notion for China’s foreign relations which in reality are multifaceted and not necessarily as coordinated as the word “initiative” implies?

In addition to this lack of a clear definition, reporting the BRI is also plagued by a lack of access to important information and sources. Journalists noted that some of the key stakeholders in the Belt and Road Initiative steer well clear of media engagement, including key government ministries, the state owned companies who dominate Belt and Road construction projects, and the policy and commercial banks who are providing billions of dollars of financing. Without access to these stakeholders, it is next to impossible to understand their motivations and perspectives, leaving a large part of BRI political dynamics shrouded in opacity, and also ripe for speculation in place of facts.

Lastly, many of the deals themselves lack transparency. While it may be known which companies and banks are involved in individual projects – usually details of project construction contracts are made public on both sides – the exact terms of financing often remain unknown, information which is particularly pertinent to verifying or disproving the “debt trap” theory.

The making of “sticky narratives”

Last year we commented that one of the key narratives defining Belt and Road in the international press was that of “great power rivalry”. This is still a prevalent narrative, increasingly dominated by the notion of the BRI “debt trap”. (Panda Paw recently took a deep dive into the “debt trap” here).

We asked journalists why such narratives stick around, in spite of numerous experts pointing out holes in or weaknesses of the factual basis for some of the key arguments. Their feedback indicated that, firstly, there is a trend in Belt and Road reporting to extrapolate specific stories and case studies into macro-trends, during the process of which the highly politicized and polarized nature of the narratives coming out of Washington DC and Beijing tend to sway their influence. This can be seen for example in the debt trap narrative, which is primarily based off one case study, the Hambantota port in Sri Lanka, and a number of reports from critical DC think tanks such as RWR Advisory, as well as the speeches of Trump administration individuals such as John Bolton.

The scale, complexity, opacity and lack of data about the BRI also contributes to the problem, one journalist commented. It means that journalists tasked with writing on “the Belt and Road”, rather than stand alone case studies, become more reliant on others’ interpretations of the initiative.

In the newsroom, a Belt and Road story that ties in with some of the current dominant narratives is often an easier pitch to editors than one that digs into the contradictions and complexities of the initiative and its projects. One journalist commented that the BRI frame has actually made a lot of China foreign relations reporting more complicated because what were once seen as country-to-country deals, which could be written in detail and nuance, are now understood as part of a grand scheme, which lends itself to broad brush stroke reporting.

Another journalist commented that their perspective from Beijing is extremely limiting. As a China correspondent, they are expected to report on BRI, but realistically there is little new reporting one can do on BRI from a Beijing bureau other than on policy announcements or second hand information.

Capacity

A lack of access to voices and perspectives on the ground in Belt and Road countries was also identified as a challenge. Many outlets do not have a strong representation of reporters in Belt and Road countries, and building up contacts with fixers, commentators, local sources is a long game made more difficult by not being physically present. Interestingly, interviewees did not see access to China-based experts as a particular challenge, with one respondent commenting that it actually seems easier to speak to experts on BRI than on other topics within their beat, such as domestic Chinese politics.

For those outlets that do have people on the ground, coordination across bureaus is still not an easy task. Convincing journalists and their editors that a BRI story, macro and grand in its nature, should take priority over their daily beat can be difficulty. Similarly, for those outlets who do not have people on the ground, convincing editors to allow them the time and resources needed for on the ground reporting, substantive investigation and the process of building up contacts is a difficult sell, especially when there are so many immediate issues going on in the daily China news beat.

Dreaming of better Belt and Road reporting

Almost all of the journalists interviewed said their ideal Belt and Road report would involve visiting project sites. Such visits would include getting first hand insight into the different perspectives on the ground – community, project management, etc. – and trying to work out what has been done right and wrong at specific projects. One journalist commented that they would like to track perspectives and understanding of a specific project from both local perspectives and the perspective from Beijing.

Practically speaking, a number of interviewees responded that they are keen to have more access to less politicized data on the Belt and Road, as a means to tackle the issue of the initiative’s opacity. One journalist also commented that a database of Belt and Road experts, commentators and news outlets representing a variety of viewpoints would be a useful tool to overcome some of the challenges.

Reporting on the Belt and Road isn’t easy. Its scale, opacity, the dominance of politicized narratives and its rapid development all present challenges to international news rooms. Our interviews showed, however, that many journalists are keenly aware of these challenges and are actively searching for ways to strengthen their Belt and Road reporting. With the limited space for Chinese media to report in an honest and impactful way on BRI, how international media outlets report on Belt and Road is of critical importance to information on and global understanding of the initiative, both for local readership and for policy and strategy maker audiences in China, BRI countries and the West.

 

Assessing China’s most comprehensive response to the “debt trap”: the Belt and Road ‘Debt Sustainability Framework’

Ma Xinyue argues that debt financing along the Belt and Road is as much a “trap” for debtors as it is for China

One of the most significant and anticipated outcomes of the second Belt and Road Forum held in Beijing this April, was the Debt Sustainability Framework for Participating Countries of the the Belt and Road Initiative (BRI-DSF) issued by China’s Ministry of Finance (MOF). Developed on the basis of the IMF/World Bank Debt Sustainability Framework for Low Income Countries (LIC-DSF), the framework offered some response to the barrage of accusations of China’s use of “debt diplomacy” along the Belt and Road.

Behind the politicized and moralizing tone of the “debt trap diplomacy” narrative is a question over “debt sustainability”, a question which concerns the economic health of both borrower and lender. Before labeling China’s Belt and Road financial behavior as a “trap,” this complex issue deserves diving into.

This prompts us to ask some sets of questions. Firstly, is China actually creating debt sustainability issues? If so, what’s the scale and nature of the problem? Secondly, how does the BRI-DSF absorb and differentiate from the existing debt sustainability frameworks? How sound is this framework? And lastly, what is the implication of this framework on China’s overseas presence? Will it solve the problem and alleviate risks of debt sustainability? If not, what else does it take?

“Debt trap” or “creditor trap”?

China’s debt financing to other countries in the world have mounted since the end of the financial crisis in 2009. In the energy sector alone, China Development Bank and the Export and Import Bank of China have lent $245 billion to other countries between 2009 and 2018, based on calculation from Global Development Policy Center. A newcomer to the scene of development finance, China indeed brings striking volumes of loans and investment.

The “debt trap diplomacy” narrative interprets China’s overseas finance behaviors as state-driven political leverage to gain influence over other countries by bankrupting its partners and bending them to its will (see for example, John Pomfret’s 2018 opinion piece in the Washington Post). A “snappy phrase invented by an Indian polemicist”, as Chas Freeman, the former U.S. diplomat to China puts it, the narrative has been popularized by media and politicians, especially in the U.S., criticizing the Belt and Road (e.g. Mike Pence, 2018; John Bolton, 2018). The most frequently referred to case is the Hambantota Port project in Sri Lanka, which was handed over to a Chinese company on a 99-year lease. Concerns about Chinese loans have also been raised in regards to the Maldives, Pakistan, Venezuela, and many more.

Such arguments have been refuted by the Chinese government as well as some recipient country governments. Both the Central Bank of Sri Lanka and Government of Pakistan that these two countries’ debt to China are only about 10% of their external debt, a fair share of which are concessional loans lower than market rates. Officials from the Philippines, Uganda, and Sri Lanka – to name a few – have also publicly defended their debt from China. Some scholars have also exposed the narrative.

The Center for Global Development – a Washington D.C.-based think tank – made the first systematic attempt to assess the debt implications of the BRI. Using a list of BRI lending pipeline deals compiled from public sources, they estimated immediate marginal impact of potential BRI projects on countries’ debt to GDP ratio – a “worst-case scenario of future debt,” and identified eight countries where debt to China might push their debt to GDP ratio beyond thresholds of 50-60% of GDP. It also listed a compilation of debt renegotiation and relief given by China since 2000, which were further explored by reports from Rhodium Group and Oxford Africa China Consultancy – even though the debt cancelation is said to have only been for overdue zero-interest loans, which are part of China’s foreign aid program.

The China-Africa Research Institute at Johns Hopkins University (SAIS-CARI) and the Global Development Center at Boston University (BU-GDP Center) published similar but empirical analyses of the debts of Africa and Latin American and the Caribbean countries to China based on their debt profiles and recorded debts to China. These reports found that, in the majority of cases, debt to China takes up a small share of countries’ total public debt, although in a handful of debt troubled African countries (Zambia, Djibouti, for example), debt to China does take up a significant share of their external debt, and they are also among the biggest borrowers from China.

Xinyue Figure 1 v2
Figure 1. Changes in PPG debt by source for Bolivia, Ecuador, Guyana, and Jamaica 2004-2016, Source: Rebecca Ray and Kehan Wang’s calculations using Gallagher and Myers (2019), World Bank IDS and MDB annual reports

The shared conclusion from these reports is that BRI will not likely be plagued with widescale debt sustainability problems, even though it is also unlikely that the initiative will avoid any instances of debt problems among its participating countries. A more recent working paper published by the World Bank also attempted to evaluate the long term debt dynamics impact of China’s loans, taking BRI investment related growth into account. Availability of credible data remains a constraint for these papers. Yet of the 30 countries included in their long-term debt dynamic simulations, in only in 2 countries BRI debt financing would result in increasing debt vulnerability.

Worth noting, however, is that debt relief and restructuring is both relatively common (recorded instance of relief so far reach $9.8 billion) and tends to favor the borrower country. In this light, the “debt trap” might seem more of a “creditor trap” for China than for the borrowing countries, as Stephen Kaplan puts it when analyzing the case of Venezuela. Indeed, from a geopolitical perspective, it is strategic for China to hold leverage in security choke points in case of fundamental disruption of global stability or an outbreak of war. However, financial leverages do not automatically translate into political leverages. Venturing to confiscate its debt-financed assets would mean risking all credibility and reputation for any other international engagement.

On the contrary, China faces more risks giving away debts in financially vulnerable countries. In cases of real financial distress such as Venezuela, China’s debt renegotiation might come with more loans issued in the same country in the hope of generating revenue and recovering the previous loans. Deutsche Bank was recently reported to have confiscated 20 tons of  gold that backed Venezuelan debt, but we don’t see Chinese financial institutions making similar moves.

The Challenge for Development Finance

Public debt financing is a common practice in all countries across the world, even though typical practice of each country varies by a great deal. For example, according to IMF, as of 2017, the general government debt to GDP ratio ranges from 9% (Estonia) to 238% (Japan). As stated in the Addis Ababa Action Agenda, borrowing is an important tool for financing investments critical to sustainable development and covering short-term imbalances between revenues and expenditures. Government borrowing can also allow fiscal policy to play a countercyclical role over economic cycles.

Nevertheless, whether high debt to GDP ratios have an impact on a country’s economic performance is much-debated. Most economists agree that there are no certain thresholds or ideal levels of debt to GDP. Rather, it is the dynamics of debt that matters more. The simple logic of debt sustainability is that, as long as the rate of public debt increase does not continuously exceed the growth rate of the government fiscal balance, public debt is sustainable and will not affect economic activity in general.

Then comes the dilemma: given the urgent need to address the Sustainable Development Goals, public expenditure has to increase, but in many countries, the government’s fiscal space is cramped. Scaling up public expenditure requires debt finance, which in many cases would consume primary balance that could have been used for urgent public investment such as physical and social infrastructure development. But if done right, such financing should serve to strengthen the primary balance by facilitating economic and social development and by increasing tax revenue in the long run.

Debt Sustainability Frameworks for the Belt and Road

To “promote economic and social development of Belt and Road countries while maintaining debt sustainability”, China’s Ministry of Finance published its Debt Sustainability Framework (BRI DSF) at the April Belt and Road Forum. The BRI DSF is almost exactly based on the 2017-reviewed version of the IMF/World Bank framework for debt sustainability analysis.

As part of the IMF’s efforts to better detect, prevent, and resolve potential crises, the Fund introduced a formal DSF in 2002. To guide borrowing activities in low-income countries (LICs) in a more nuanced manner, the World Bank and IMF also launched a joint framework for debt sustainability assessment for LICs in 2005. The World Bank and IMF now jointly produce Debt Sustainability Assessments (DSA) for the applicable countries at least once every calendar year, and provide templates for these exercises. Chinese lenders could therefore use the IMF/World Bank assessments as a baseline to guide their activities.

The IMF/World Bank DSF – to which the BRI DSF is aligned – operationalizes debt sustainability management by assigning different thresholds of multiple debt indicators for groups of countries according to their debt carrying capacities, and provides risk ratings based on evaluations of the baseline projections and stress tests relative to these thresholds combined with indicative rules and staff judgment. The 2017 revision adjusted the thresholds with an effort to eliminate conservative bias. It incorporates more factors into the country classification methodology to estimate countries’ debt-carrying capacities.

All of these improvements are also incorporated in the BRI DSF. The only difference in the BRI DSF is in the stress test element. The BRI DSF includes an additional “new borrowing shock” stress test, adding greater stringency to the test.

Both frameworks adopt the same standards for identifying low income countries (based on their eligibility for concessional financial resources). As of May 31, 2019, 47 of the 131 countries that have officially signed BRI cooperation agreements with China are included in the List of LIC DSAs for PRGT-Eligible Countries. The graph below shows the distribution of debt stress risk ratings of these LICs from low to in distress. In addition, another 11 BRI countries not in risks of debt distress have been assigned suggested debt limits in General Resources Account (GRA) arrangements.

BRI Main map (v2)
Figure 2. Risk Profile of BRI Countries with IMF/WB Debt Sustainability Assessment, Source: IMF

For countries in debt stress or at high risk of debt stress, including some countries with moderate risks of debt stress, IMF and the World Bank would advise them to avoid or limit non-concessional borrowing (NCB) (or only accept in exceptional cases), and provide limits for concessional borrowing to some countries, leaving space for grants. For countries with moderate or low risks of debt distress, borrowing would be advised to be assessed on a loan by loan basis, with the option to request borrowing ceilings.

Of the 39 BRI countries subject to IMF/World Bank Group debt limits conditionality, 15 are subject to zero-NCB limit, 8 are subject to non-zero NCB limits, and another 16 are not subject to debt limits or have targeted debt limits, showing a rather balanced risk distribution. (Note that this does not represent the amount of loan granted to each group country, and thus does not accurately reflect actual risk portfolio of China’s overseas development finance.)

The Future with “Cautious Capital”

The DSF risk assessments already inform lending policies of other creditors including many Multilateral Development Banks (MDBs). With the issuance of the BRI DSF, China seems ready to adopt the mechanism too. For China, this is unequivocally a critical step in risk management for Chinese creditors and constructive response to the debt trap diplomacy theory.

According to very rough estimates using the available second hand compiled databases for the stock of China’s overseas debt finance, about 14% to 18% of China’s overseas development finance in BRI countries goes to LIC countries with debt limits, while the number of these countries (39) account for 30% of the BRI countries, indicating that those countries already receive less finance on average from China than non-LIC countries. Given that these estimates are based on flows of commitment rather than debt outstanding, some of these loans are likely to have already been paid off. Nevertheless, considering the sheer volume of China’s overseas finance, this would have been enough of a risk portfolio for China to manage, and also significant enough debt burdens for the recipient countries as well. Future credit making will require much prudence so as to gradually improve these situations.

Such caution has already been shown in the recent trend of China’s overseas development finance flows (See Figure 2 taking China’s overseas development finance in the energy sector as an example). Observers have witnessed a clear downward trend in China Development Bank and Export-Import Bank of China’s overseas energy finance since the peak in 2016. Where there is relatively reliable data, similar trends are also seen in the cases of all-sector official loans from China to Africa and Latin America. This trend also coincides with recent downward trends over all in the emerging markets and development countries, China’s stagnant FDI flows and overseas contracting activities, as well as strengthening domestic and cross-border financial and capital account regulations.

China overseas finance trend
Figure 3. China’s Annual Overseas Development Finance in the Energy Sector (million$), Source: Boston University, Global Development Policy Center, China’s Global Energy Finance Database

While the strengthening risk-management mechanism demonstrates China’s willingness for responsible engagement with the Belt and Road countries and better alignment with multilateral efforts, this trend also further stresses the inherent challenge of development finance, which carries the crucial function of correcting market failures and providing countercyclical financial resources while maintaining the ability to provide financial resources sustainability. As global financial regulation mechanisms such as the Basel Accords and credit rating agencies step up their scrutiny over development finance in the same way as commercial finance, it seems to be increasingly hard to channel sufficient financial resources to places and in times that need them the most – places where risks are also often higher.

Meanwhile, there is probably no perfect framework for debt sustainability analysis. As the effort of a DSF is to provide judgements about future macroeconomic dynamics in a scenario of debt stress, estimates of the discount factor and feedback effects of fiscal policies would inevitably be subjective, even if empirical analysis of historical data is full incorporated.

Moreover, a framework alone is far from enough. At the end of the day, what sustainable debt positions and sustainable development in general requires is nothing but soundness and sustainability of projects – financially, socially and environmentally. Risk management mechanisms cannot ignore project and social risks, as well as potential physical and policy impacts of climate change, which pose substantial risks to a bank’s carbon intensive energy portfolio

Instead of hindering the scaling up of development finance, risk management should enable development finance to strengthen vulnerable economies and generate multiplier effects over the long term to improve the status of public finance, and insure timely debt repayment. This is by no means an easy task, and requires coordination and trust between governments and the private sector.

Even though debt to China remains a relatively small share in the public debt portfolio of most countries, China has emerged as an important international creditor as the Belt and Road Initiative unfolds, and deserves to be part of the multilateral engagement in debt sustainability control. Meanwhile, given the challenges and imperfect nature of development finance risk management, a diversity of approaches could create healthy competition to get it right.

Xinyue (Helen) Ma is the China Research and Project Leader at the Global Development Policy Center (GDP Center) at Boston University. Ma has experience researching different aspects of China’s international investment with China’s National Development and Reforms Commission (NDRC), Control Risks, and China Daily. She received her Bachelor’s degree in International Politics and History from Peking University, Beijing, and her M.A. in International Economics and Energy, Resources and Environment from Johns Hopkins University, School of Advanced International Studies (SAIS), with a specialization in Infrastructure Policy and Finance.

The Cambodia Conundrum: The Belt and Road, private capital and China’s “non-interference” policy

How are China’s private companies shaping the contour of the Belt and Road Initiative? Cambodia provides an important example.

By Mark Grimsditch

Since the early 2000s, Chinese overseas investment has been driven by its formidable state machinery, financed by policy banks and developed in large part by state-owned enterprises (SOEs). China’s Belt and Road Initiative (BRI) continues this trend, and the export of a development formula dominated by state capital is a key feature of the initiative. However, China’s private capital, though historically much smaller in comparison to state players, is increasingly active overseas and is now participating in and shaping the BRI, influencing China’s diplomatic and economic involvement in those countries. In some countries, public perception of the BRI is heavily influenced by private investments from China. If state capital signals China’s strategic intentions for the Belt and Road, private capital points to its economic vitality and the complex motivations behind the controversial initiative.

Cambodia is a case in point.

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A Belt and Road poster in Phnom Penh, photo by Mark Grimsditch

Investment in Cambodia is increasing rapidly, with Chinese capital surging in recent years into the manufacturing, construction, real estate and tourism industries. This investment has generated employment and contributed to Cambodia’s continued rapid economic growth, while state-backed finance has strengthened the country’s previously fragile infrastructure. Yet this has also generated significant concern. Chinese companies have over the past decade been connected to a number of high-profile controversial projects, some of which have been linked to land conflicts, displacement of local communities and environmental harms. Over the past three years, a surge in the number of private Chinese investors has created unease among local people.

While the China-Cambodia diplomatic relationship has gone from strength to strength in recent years, Cambodia’s relations with the US and Europe became increasingly fraught in the aftermath of the controversial 2013 general elections. While China has unsurprisingly remained silent on these issues, the European Union is now in the process of considering the withdrawal of crucial trade preferences. A withdrawal is likely to have a massive impact on Cambodia’s garment industry, which is dominated by private Chinese actors and deeply intertwined with companies producing materials in China. As a result, China may now find itself in the uncomfortable position of maintaining adherence to the “non-interference” policy while also ensuring that the conditions stay in place for the industrial expansion that are a central focus of Chinese state and private capital flowing into the country.

The scale of Chinese investment in Cambodia

Chinese investment accounted for 23% of all foreign investment in Cambodia during the 2000-2017 period, making it by far the largest foreign investor. Statistics from China’s Ministry of Commerce (MOFCOM) illustrate the formidable influx of Chinese investment to Cambodia. Starting at less than US$30 million in 2003, officially recorded investment from mainland China exceeded US$744 million in 2017.

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Source: Ministry of Commerce of the People’s Republic of China (2018)

Even though Cambodia was an early backer of the BRI, announced by President Xi Jinping in 2013, Chinese investment in Cambodia has fluctuated since, due in part to uncertainty around the contested 2013 national elections, which were followed by almost a year of unrest. After stabilizing in around 2015, investment began to climb again in 2016, at a similar rate to that prior to the existence of the BRI. Concessional loans from China’s Eximbank, which mostly support public infrastructure works, also fell from 2013 and have since resumed pre-BRI rates of growth.

In Cambodia, there is a relatively clear distinction between where Chinese state funding and private investments are going. Concessional lending has supported major infrastructure works such as roads, bridges, power plants and irrigation projects, which are almost exclusively developed by Chinese SOEs. Private companies, on the other hand dominate the manufacturing, tourism and real estate sectors.

The tidal wave of Chinese private investment

In the late 2000s to early 2010s, much of China’s private investment was directed towards large-scale agriculture projects. This was facilitated by Cambodia’s investment-friendly economic land concession (ELC) mechanism, through which domestic and foreign investors could receive up to 10,000 hectares for agro-industrial plantations and processing facilities. Analysis of official documents shows that out of 273 concessions known to have been granted up to 2018, 15% were registered to Chinese companies, with Vietnamese companies holding 19%.

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Source: Licadho (2018)

The ELC system became notorious for its links to land conflict and deforestation, with villagers evicted from residential properties, agricultural lands seized and converted to private plantations, waterways diverted and polluted, and indigenous communities cut off from their ancestral lands. Various concession holders came into conflict with local people, including companies from China, such as Hengfu Group, a private company from Guangzhou, and holder of the largest sugar concession in Cambodia, which has been embroiled in conflict with local communities for over 5 years.

Conflicts around ELCs and the animosity that land encroachment and seizures created among the Cambodian population eventually led to a moratorium on the granting of new concessions in 2012 and a review of existing concessions found to be in breach of the law. This moratorium has held, and while a number of Chinese concessions have been developed, anecdotal evidence indicates that many investors abandoned or sold their concessions. Although many concessions were not developed as planned, communities were nonetheless impacted by the privatization of lands and forests that they previously utilized, as they were left cleared of forest, passed on to new investors, or reclaimed by the state.

The rapid rate at which Chinese private finance poured into these large-scale plantations, and the rate at which these concessions were then abandoned or sold is indicative of a key feature of this type of private capital: it is often speculative and sensitive to recipient country opportunities, risks and changing circumstances. Chinese investment is not unique in the sense that it responds to opportunities and risks in the same way as all private capital does. As the risks associated with these investments increased, large-scale agroindustry became a lower priority for Chinese companies. Instead of investing directly in plantations, Chinese companies are now focusing on smaller farm investments and trade in agricultural commodities, which removes investors somewhat from direct exposure to land conflicts with local communities. The bulk of Chinese private investment has now shifted from large land-intensive projects towards manufacturing, real estate, tourism and casinos, industries connected closely to a rising and more mobile Chinese middle class.

Hand in glove: The state-private nexus

China’s state capital often relies on the private sector to help achieve developmental goals such as creating manufacturing jobs in recipient countries, and SOEs also benefit from contracting work on private invested projects. Cambodia provides a useful example of how China’s state capital and private interests intertwine overseas. Although investment in real estate is driven by private investors, in many cases construction work is sub-contracted to some of China’s largest SOEs. For example, the logo of China State Construction Engineering Corporation (CSCEC), one of the largest construction companies in the world, is ubiquitous across Cambodia’s capital and Sihanoukville, where the company provides construction services for many private property developers.

Nowhere is the symbiotic relationship clearer than in the manufacturing sector of Preah Sihanouk Province. Sihanoukville, the provincial capital, has become a magnet for Chinese investors, and the sprawling property, tourism and casino projects have received extensive media coverage. However, the role of state-supported Chinese capital in the industrialization of the province has received much less attention.

Through China’s aid program, the Eximbank has provided hundreds of millions of dollars in concessional loans for a number of high-voltage transmission lines across Cambodia. Several of these projects were constructed by state-owned China National Heavy Machinery Corporation (CHMC), including new powerlines linking Phnom Penh to Sihanoukville, which pass by a number of Chinese invested power and manufacturing projects, including coal plants located along the coast.

One such coal plant is developed by a joint venture of Cambodia International Investment Development Group (CIIDG), a local company owned by a powerful ruling party senator, and Erdos Hongjun, a private company from Inner Mongolia. Once fully operational the plant will have a capacity of 700 MW and a dedicated line connecting to the Sihanoukville SEZ to ensure stable power to the factories there. This is the largest SEZ in the country, and once again, is a joint venture involving CIIDG and another private Chinese conglomerate, Hongdou Group, specialized in garment manufacturing. It began development in 2008, and despite pre-dating the Belt and Road by five years, it is referred to by the Cambodian and Chinese officials as a model cooperation project under the BRI.

Aside from this major SEZ, Chinese state-financed power and transport infrastructure runs by at least three other joint Cambodian-Chinese economic zones. This includes the Stung Hav SEZ, which in 2018 signed a cooperation agreement with state-owned Metallurgical Corporation of China. The recently commenced Eximbank financed Phnom Penh-Sihanoukville Expressway will also pass by this cluster of SEZs en route to Sihanoukville City. Beyond these specific projects, China has also supported the development of feasibility studies for new railways, and state-owned giant China Merchants Group has commenced a study to develop a masterplan for Cambodia’s port development.

This chain of projects illustrates how Chinese state and commercial interests can align, with expensive state-backed infrastructure investments opening opportunities to promote Chinese enterprises to go global, in the process exporting industrial capacity and taking advantage of lower operating costs. This serves Chinese commercial interests, as companies gain access to new markets and bases for global production at a time when domestic economic growth is slowing, but also potentially feeds into Cambodia’s industrialization process, which in the medium-term seeks to diversify away from low-tech manufacturing.

China and the “Everything But Arms” conundrum

A central motivation for private Chinese companies such as Hongdou Group to establish industrial bases in Cambodia is to access the preferential trade schemes that Cambodia benefits from as a lower income country.

Since the early 2000s, Cambodia has maintained annual GDP growth of around 7% (with the exception of the dip experienced during the 2007-2008 global financial crisis). This growth is fueled by Cambodia’s export economy, the backbone of which is Cambodia’s garment and footwear industry. In 2018 the sector employed an estimated 800,000 workers and accounted for 74% of the country’s exports. Chinese owners account for the largest share of Cambodia’s garment factories. Although exact figures are hard to come by, almost 70% of Garment Manufacturers Association in Cambodia (GMAC) members are from the Greater China region: 249 from mainland China, 111 from Taiwan and 60 from Hong Kong. Membership statistics from 2008 show how rapidly mainland Chinese companies have come to dominate the industry.

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Source: GMAC (2008, 2019)

The European Union’s Everything But Arms (EBA) and the U.S. Generalized System of Preferences (GSP) are two major trade schemes that Cambodia’s export oriented economy benefits from. Both provide tariff free market access to products made in Cambodia, and manufacturers of garments, footwear and accessories have been a major beneficiary. In 2017, Europe accounted for 46% of these exports, followed by the United States with 24%.

In October 2018, the European Trade Commissioner took the drastic step of announcing that it was sending an emergency high-level mission to review the situation in Cambodia with regards to what it termed “a clear deterioration of human rights and labour rights”. This followed on from EU missions to the country that observed “serious and systemic violations” of freedom of expression, labour rights and freedom of association, in addition to long-running concerns regarding workers’ rights and land-grabbing. In February 2019, the Commission announced it had commenced the temporary withdrawal of EBA status from Cambodia. Following on from this, the US Congress introduced the Cambodia Trade Act of 2019, which called for a review of Cambodia’s GSP status. Under the GSP, tariff free trade was introduced for luggage, backpacks, handbags and wallets, which contributed to a 25% increase in Cambodia’s trade with the U.S. in 2018.

Several of those interviewed for this article suggested that EBA withdrawal would benefit China by bringing Cambodia closer into its orbit. However, given the extent to which Chinese companies are embedded in Cambodia’s export-oriented manufacturing sector, these developments are likely to be a serious concern to China. A large percentage of Cambodian exports to Europe and the U.S. are produced by Chinese-owned companies. Moreover, companies in mainland China could also lose a lucrative export market. For the most part, Cambodian garment factories follow the “cut-make-trim” model, assembling products using materials, machines and designs that are imported from overseas. Mainland Chinese companies supply the textiles and other materials to producers based in Cambodia, and the bulk of China’s export to Cambodia is fabric and other materials destined for the garment industry.

To illustrate the extent to which this is likely to impact on Chinese investments in Cambodia, we can look again to the Sihanoukville SEZ case. At present the SEZ operators claim to employ over 22,000 workers in approximately 160 factories, aiming to increase this to 100,000 workers across 300 factories by 2020. The vast majority of tenants in the SEZ are private Chinese companies focusing on light-industry manufacturing, including garments, footwear, bags and leather goods. Among the “investment advantages” touted by the operators of the SEZ is Cambodia’s “favorable trade status”. Referring to European Union regulations, the SEZ operator states that “one of the most important conditions” is that there are no restrictions on the sources of materials, meaning that garments produced in Cambodia using fabrics from China can enjoy tariff-free preferential access to the EU market. This will end if the EU withdraws Cambodia’s EBA status.

The withdrawal process could take up to 18 months, and can be stopped, if the EU deems sufficient progress has been made in addressing the human rights concerns it has highlighted. In the meantime, it remains unclear how Beijing is responding, specifically, if it is adhering to the rhetoric of “non-interference” and observing as the situation plays out, or if it is making any behind the scenes interventions.

In April, Cambodian officials claimed they have the full support of China. On the sidelines of the second Belt and Road Forum in April, Prime Minister Hun Sen met with Chinese Premier Li Keqiang and claimed that the premier promised to support Cambodia should EBA status be withdrawn. Later that month, Hun Sen met politburo member Wang Huning, and Cambodian state media reported that Wang said China had studied the issue and found no serious impacts, and that it will find “different ways” to help Cambodia. China broke its silence on the issue in June, with a representative of the Ministry of Foreign Affairs emphasizing the principle of non-interference and stating that China would support Cambodia “in resisting any intimidation or force from the West”.

Despite these public statements and apparent attempts from Cambodia to play down the impacts of an EBA withdrawal, voices of concern are widespread. Cambodia’s National Bank, the World Bank, the Garment Manufacturing Association of Cambodia, the European, Nordic and British Chambers of Commerce, and major clothing brands that purchase products from Cambodia, have all warned of the potentially momentous impacts that EBA withdrawal could have on export-focused industries and the people they employ. The simple reality is that Chinese companies that have established production bases in Cambodia benefit hugely from these preferential trade schemes, and without them could face major losses. While China could provide additional loans and development assistance to Cambodia, it is not an alternative destination for Cambodian garment exports, and is unlikely to subsidize the over $650 million annual loss that the World Bank estimates could hit the sector if EBA is withdrawn.

In the midst of the US-China trade war, Cambodia’s strategic value as an overseas production base could become increasingly important to China. Given the massive investment that the Chinese state and state-owned entities have put into infrastructure supporting the development of Cambodia’s export-driven economy, these developments will surely be followed closely in Beijing.

If China is to continue to support the industrialization and expansion of Cambodia’s export economy, in which Chinese private interests are now deeply embedded, it may have difficult decisions to make in the coming years, and a more nuanced approach to the sacred non-interference policy may be in order – with potentially interesting implications for ongoing human rights concerns in Cambodia.

Mark Grimsditch is director of the China Global Program at Inclusive Development International. The program monitors trends in Chinese overseas investment and supports civil society groups and networks to develop the knowledge and tools necessary to increase social and environmental accountability of overseas projects.