Last week the China’s ruling Communist Party enshrined President Xi’s One Belt One Road Initiative into its constitution.[1] While the Initiative has been touted by President Xi since 2013, its elevated status led us to wonder what this might mean for neighboring countries in Southeast Asia.

China’s overseas foreign direct investment (OFDI), just like its economy, has grown at a tremendous pace over the last decade. When China introduced its “Going Global Strategy” in 2000 to promote investment abroad,[2] it ranked 20th worldwide in terms of OFDI and averaged only about $3 billion annually. By 2016, however, China had become for the first time the world’s second largest outward investor behind the United States. [3] Indeed, China is impressively unique in its recent outsized growth. Even while OFDI flows from developed countries in Europe and North America have slowed, OFDI flows from Asian nations are at their highest since 2008.[4] This is largely due to China’s sizeable surge in OFDI between 2015 and 2016, having increased by 44 % to $183 Billion. [5] China is now ranked by experts as the top most promising home economy for OFDI. [6]

China’s growth in outward investment can be attributed to a collection of policies which reflect the country’s shift towards a more globalized integration. China’s leaders signaled at the close of the 3rd Plenum of the 18th Communist Party of China Central Committee (November 2013) that they intended to further liberalize China’s OFDI policy in order to reduce government interference and streamline the process for both state-owned and private enterprises to invest abroad. This was achieved through the 2014 “Circular Concerning the Catalog of Investment Projects Subject to Governmental Approvals,” which essentially removed any approval requirements by the State Council for OFDI projects investing under $1 Billion. [7]

In 2015, President Xi announced the “One Belt One Road” (OBOR), or Silk Road Economic Belt initiative, which is a broad-reaching policy seeking to connect countries along the historic Silk Road trade routes, stretching from Europe, to Africa, to Southeast Asia.[8]  As of 2016 more than 30 countries had signed MOUs with China to express interest in collaborating on this initiative.[9]  While the initiative identifies cooperation priorities to include policy, facilities, trade, finance, and citizen relations, importantly, a lot of this international interconnectivity will come through infrastructure investment and development. Indeed OBOR is often mistaken as simply a collection of “infrastructure mega-projects” in energy, transportation, and communications. [10], [11]  With OBOR as a formal strategy, other Chinese policies have coalesced to offer concessionary loans, subsidies, tax incentives, and insurance to encourage OFDI projects across this Silk Road Economic Belt.[12]

It is clear through these efforts that China has not only grown tremendously in its OFDI, but intends to expand investment across strategic locations in Europe, Africa, and Southeast Asia.  Importantly, China has demonstrated significant financial commitment towards these policy goals. In 2015, China and 56 other nations signed an MOU to launch the Asian Infrastructure Investment Bank (AIID). With China spearheading its inception, and contributing the largest share towards the bank’s initial stock of $100 Billion, it holds significant voting influence.[13]  The AIID aims to differentiate itself from other development banks in terms of a stronger focus on infrastructure projects, including coal power projects, which other development banks have moved away from. [14] The Silk Road Fund is another financing tool launched to support OBOR. Together, AIIB and the Silk Road Fund will help China leverage $1 Trillion to provide concessionary loans for more than 900 infrastructure projects in 60 developing countries.[15] As of Jan 2017, AIIB has approved 9 projects investing a total of $1.7B. Indeed, both the AIIB and Silk Road Fund were heralded by Chinese officials specifically as a way to implement the OBOR initiative. [16] It is commonly recognized that the AIIB propels China into a position of global leadership, positioned to guide major development investments for the foreseeable future.[17]

Given China’s environmental track record, however, some worry that the OBOR initiative serves as a means for China to export pollution. [18] It is believed that OBOR was specifically designed to help Chinese enterprises access infrastructure markets that have been saturated and natural resources that have been depleted in China. [19] Previously considered “The World’s Factory,” China has shown increasing interest in addressing pollution concerns at home and pursuing green development standards through its “ecological civilization” vision. [20] China’s 12^th five-year plan, covering 2011 to 2015, acknowledges the importance of environmental and social indicators in development,[21] and this is evidenced in recent updates to the Chinese Environmental Protection Act and new logging bans in national forests. [22] Recently, particular attention has been paid to the nation’s aging and high polluting industries like cement production. While China produces 60% of all cement in the world, it struggles with overproduction. [23] As China promotes enabling policies to encourage overseas investment, and tightens domestic regulations on overproduction and pollution, it’s clear many of these high-impact industries and their pollution are destined to be exported. Indeed, China provides strong encouragement to state-owned enterprises (SOEs) that operate in sectors at domestic over-capacity to invest in projects along the Silk Road Economic Belt. [24] Many dam-building enterprises in China are similarly looking to invest overseas to escape high competition and a saturated market in China, in preference for lower production costs and access to cheap capital. [25]

Of interest to us in the OBOR initiative is the lower Mekong region – Myanmar, Thailand, Lao PDR, Cambodia, and Vietnam, which contains two out of the six identified “One Belt” corridors.[26] While infrastructure investments can improve standards of living and bring economic opportunities to host countries, they also often impose adverse environmental burdens on disadvantaged communities that do not have the capacity to advocate for their own protection. Whether true or not, Chinese-funded projects have a reputation of poor transparency and weak feasibility studies. [27] While the OBOR initiative makes a nod towards encouraging sustainable development, it doesn’t provide specific guidance on how OBOR projects should maintain environmental safeguards. [28]  Furthermore, many of these major infrastructure projects tend to be linear, which carry particular environmental risks and impacts such as sensitive habitat fragmentation, spills, and invasive species introductions. [29] Other energy projects like hydropower dams along the Mekong River can lead to massive ecosystem disruptions, downstream water shortages, and food insecurity for millions of people. [30] The combination of increased investment from OBOR incentives, and high-polluting industries escaping regulatory and market pressure in China place a high environmental burden on these receiving countries.

Chinese OFDI can be a complex field to regulate because of the numerous actors. Major players include the enterprises themselves (either state-owned or private), project financiers (including policy or commercial banks, development banks, and investment funds), and host and home country regulators.[31] Environmental safeguards and guidance, therefore, can come from a range of sources including governmental policies, banking and investment best practices, or industry-specific standards. [32]   China has achieved some progress in recent years in this realm. For example, in 2012 the China Banking Regulatory Commission (CBRC) issued its Green Credit Guidelines, which ostensibly require Chinese banking institutions to develop environmental and social risk assessment criteria to determine credit ratings and access for potential clients. Additionally, in June 2013, China’s Ministry of Commerce and Ministry of Environmental Protection issued Guidelines for Environmental Protection in Foreign Investment and Cooperation (OFDI Guidelines).

The OFDI Guidelines take a step in the right direction by encouraging SOEs, among other things, to perform environmental impact assessments prior to implementing development projects, identify and mitigate environmental risks, engage with and respect local communities impacted by Chinese-sponsored projects, and be forthright with information on the environmental impacts of their activities and the measures they have adopted to comply with local laws and policies. In fact, almost all policies, regulations, and guidelines relating to Chinese enterprise and financier behaviors require compliance with local/host country environmental laws, but few include enforcement mechanisms or grievance procedures to ensure these policies are actually followed. [33] Clearly, the efficacy of these measures is limited by their vagueness and lack of enforce-ability.

Since many Chinese enterprises are new to investing abroad, poor understanding of the host country’s regulatory and legal landscape can also be a barrier towards protecting the environment.[34] There is a strong need for coordination among ministries, and a focus on grievance and enforcement mechanisms, and policy implementation. Right now civil society has few options except leaning on vague policies and hoping that impacts reputation enough to concern shareholders. As OBOR becomes elevated into China’s national policy agenda, and China continues to rapidly expands its OFDI, it is critical that these overseas investments face stronger regulatory hurdles for environmental protection.

 

 

[1] Goh, Brenda and Ruwich, John. “Pressure on as Xi’s ‘Belt and Road’ enshrined in Chinese party charter.” October 24, 2017. Reuters. Web. https://www.reuters.com/article/us-china-congress-silkroad/pressure-on-as-xis-belt-and-road-enshrined-in-chinese-party-charter-idUSKBN1CT1IW

[2] Denise Leung and Yingzhen Zhao, in collaboration with Tao Hu and Athena Ballesteros. 2013. Environmental and Social Policies in Overseas Investments: Progress and Challenges for China. World Resources Institute Issue Brief. Washington DC. (5)

[3] United Nations Conference on Trade and Development. 2017. World Investment Report 2017: Investment and the Digital Economy. Web http://unctad.org/en/PublicationsLibrary/wir2017_en.pdf  Accessed August 17, 2017 (xi)

[4] United Nations Conference on Trade and Development. 2017. World Investment Report 2017: Investment and the Digital Economy. Web http://unctad.org/en/PublicationsLibrary/wir2017_en.pdf  Accessed August 17, 2017

[5] United Nations Conference on Trade and Development. 2017. World Investment Report 2017: Investment and the Digital Economy. Web http://unctad.org/en/PublicationsLibrary/wir2017_en.pdf  Accessed August 17, 2017  (14)

[6] United Nations Conference on Trade and Development. 2017. World Investment Report 2017: Investment and the Digital Economy. Web http://unctad.org/en/PublicationsLibrary/wir2017_en.pdf  Accessed August 17, 2017  (9)

[7] Elena F. Tracy, Evgeny Shvarts, Eugene Simonov & Mikhail Babenko (2017) China’s New Eurasian ambitions: The Environmental Risks of the Silk Road Economic Belt, Eurasian Geography and Economics, 58:1, 56-88, DOI: 10.1080/15387216.2017.1295876

[8] Elena F. Tracy, Evgeny Shvarts, Eugene Simonov & Mikhail Babenko (2017) China’s New Eurasian ambitions: The Environmental Risks of the Silk Road Economic Belt, Eurasian Geography and Economics, 58:1, 56-88, DOI: 10.1080/15387216.2017.1295876 (74)

[9] Weidong Liu & Michael Dunford (2016) Inclusive globalization:

unpacking China’s Belt and Road Initiative, Area Development and Policy, 1:3, 323-340, DOI:

10.1080/23792949.2016.1232598 (325)

[10] Weidong Liu & Michael Dunford (2016) Inclusive globalization:

unpacking China’s Belt and Road Initiative, Area Development and Policy, 1:3, 323-340, DOI:

10.1080/23792949.2016.1232598 (329)

[11] Elena F. Tracy, Evgeny Shvarts, Eugene Simonov & Mikhail Babenko (2017) China’s New Eurasian ambitions: The Environmental Risks of the Silk Road Economic Belt, Eurasian Geography and Economics, 58:1, 56-88, DOI: 10.1080/15387216.2017.1295876 (56)

[12] Inclusive Development International. 2017Safeguarding People and the Environment in Chinese Investments – A Guide for Community Advocates. (10)

[13] Chin, Gregory. The Global Forum. Asian Infrastructure Investment Bank: Governance Innovation and Prospects. Global Governance 22 (2016), (11)

[14] Chin, Gregory. The Global Forum. Asian Infrastructure Investment Bank: Governance Innovation and Prospects. Global Governance 22 (2016), (18)

[15] Priyandita, Gatra and Wijaya, Trissia. “China’s Southeast Asia Gambit: China paradoxically presents both threats and opportunities to Southeast Asia.” The Diplomat.  http://thediplomat.com/2017/05/chinas-southeast-asia-gambit/

May 31, 2017

Weiss, Martin A.  Asian Infrastructure Investment Bank (AIIB).  Congressional Research Service.  February 3, 2017

https://fas.org/sgp/crs/row/R44754.pdf (6)

[17] Elena F. Tracy, Evgeny Shvarts, Eugene Simonov & Mikhail Babenko (2017) China’s New Eurasian ambitions: The Environmental Risks of the Silk Road Economic Belt, Eurasian Geography and Economics, 58:1, 56-88, DOI: 10.1080/15387216.2017.1295876 (57)

[18] Elena F. Tracy, Evgeny Shvarts, Eugene Simonov & Mikhail Babenko (2017) China’s New Eurasian ambitions: The Environmental Risks of the Silk Road Economic Belt, Eurasian Geography and Economics, 58:1, 56-88, DOI: 10.1080/15387216.2017.1295876 (57)

[19] Frauke Urban, Giuseppina Siciliano & Johan Nordensvard (2017): China’s dam-builders: their role in transboundary river management in South-East Asia, International Journal of Water Resources Development, DOI: 10.1080/07900627.2017.1329138 (2)

[20] Elena F. Tracy, Evgeny Shvarts, Eugene Simonov & Mikhail Babenko (2017) China’s New Eurasian ambitions: The Environmental Risks of the Silk Road Economic Belt, Eurasian Geography and Economics, 58:1, 56-88, DOI: 10.1080/15387216.2017.1295876 (56)

[21] Denise Leung and Yingzhen Zhao, in collaboration with Tao Hu and Athena Ballesteros. World Resources Institute Issue Brief. Environmental and Social Policies in Overseas Investments: Progress and Challenges for China. 2013. Washington DC. (16)

[22] Elena F. Tracy, Evgeny Shvarts, Eugene Simonov & Mikhail Babenko (2017) China’s New Eurasian ambitions: The Environmental Risks of the Silk Road Economic Belt, Eurasian Geography and Economics, 58:1, 56-88, DOI: 10.1080/15387216.2017.1295876  (57)

[23] Elena F. Tracy, Evgeny Shvarts, Eugene Simonov & Mikhail Babenko (2017) China’s New Eurasian ambitions: The Environmental Risks of the Silk Road Economic Belt, Eurasian Geography and Economics, 58:1, 56-88, DOI: 10.1080/15387216.2017.1295876  (66)

[24] Inclusive Development International. Safeguarding People and the Environment in Chinese Investments – A guide for community advocates. 2017 (12)

[25] Frauke Urban, Giuseppina Siciliano & Johan Nordensvard (2017): China’s dam-builders: their role in transboundary river management in South-East Asia, International Journal of Water Resources Development, DOI: 10.1080/07900627.2017.1329138 (7)

[26] Frauke Urban, Giuseppina Siciliano & Johan Nordensvard (2017): China’s dam-builders: their role in transboundary river management in South-East Asia, International Journal of Water Resources Development, DOI: 10.1080/07900627.2017.1329138 (6)

[27] Priyandita, Gatra and Wijaya, Trissia. “China’s Southeast Asia Gambit: China paradoxically presents both threats and opportunities to Southeast Asia.” The Diplomat. May 31, 2017  http://thediplomat.com/2017/05/chinas-southeast-asia-gambit/

[28] Elena F. Tracy, Evgeny Shvarts, Eugene Simonov & Mikhail Babenko (2017) China’s New Eurasian Ambitions: The Environmental Risks of the Silk Road Economic Belt, Eurasian Geography and Economics, 58:1, 56-88, DOI: 10.1080/15387216.2017.1295876 (75-76)

[29] Elena F. Tracy, Evgeny Shvarts, Eugene Simonov & Mikhail Babenko (2017) China’s New Eurasian Ambitions: The Environmental Risks of the Silk Road Economic Belt, Eurasian Geography and Economics, 58:1, 56-88, DOI: 10.1080/15387216.2017.1295876  (75-76)

[30] Frauke Urban, Giuseppina Siciliano & Johan Nordensvard (2017): China’s dam-builders: their role in transboundary river management in South-East Asia, International Journal of Water Resources Development, DOI: 10.1080/07900627.2017.1329138 (14)

[31] Inclusive Development International. Safeguarding People and the Environment in Chinese Investments – A guide for community advocates. 2017 (18-24)

[32] Inclusive Development International. Safeguarding People and the Environment in Chinese Investments – A guide for community advocates. 2017 (27)

[33] Inclusive Development International. Safeguarding People and the Environment in Chinese Investments – A guide for community advocates. 2017 (3,28)

[34] Denise Leung and Yingzhen Zhao, in collaboration with Tao Hu and Athena Ballesteros. World Resources Institute Issue Brief. Environmental and Social Policies in Overseas Investments: Progress and Challenges for China. 2013. Washington DC. (22)