Emerging Actors in Development Finance: A closer look at China's overseas investment

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A 2014 update of this presentation is available at https://www.slideshare.net/WorldResources/sustainable-finance-china-12-dec2014

When it comes to overseas development finance, China is definitely a country to watch. Due to the country’s unprecedented economic growth, China’s overseas investments have increased exponentially in recent years. Between 2009 and 2010, two Chinese state-owned banks lent more money to other developing nations than the World Bank did. In fact, between 2002 and 2011, China’s outward foreign direct investment (OFDI) stock grew from $29 billion to more than $424 billion.

But what factors are driving all of this growth? What areas of the world are on the receiving end of China’s OFDI flows? And what sorts of social and environmental standards are in place for banks’ and enterprises’ investments? WRI answers these questions and many more in its recently updated powerpoint presentation, “Emerging Actors in Development Finance: A Closer Look at China’s Overseas Investment.”

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  • Photos: Bridge funded by the Brazilian National Development Bank, Brazil (Agência de Notícias do Acre, 2010); Kampala, Uganda (Richard Duncombe, 2011); China Development Bank Tower, Shanghai (Baycrest, 2008).
  • CDB and China Exim “signed loans of at least $110bn (£70bn) to other developing country governments and companies in 2009 and 2010, according to Financial Times research. The equivalent arms of the World Bank [IBRD and IFC, not IDA] made loan commitments of $100.3bn from mid-2008 to mid-2010, itself a record amount of lending in response to the financial crisis.” Dyer, Geoff, JamilAnderlini, and Henny Sender, “China’s lending hits new heights,” Financial Times, January 17, 2010. See also, http://www.bbc.co.uk/news/world-asia-pacific-12212936. ↩BBC, “Brazil to make $10bn loan to IMF,” June 11, 2009, at http://news.bbc.co.uk/2/hi/8094402.stm, and IMF, “IMF Signs $10 Billion Note Purchase Agreement with Brazil,” January 22, 2010, at http://www.imf.org/external/np/sec/pr/2010/pr1014.htm. ↩
  • 3. OECD Development Centre, Perspectives on Global Development 2010 – Shifting Wealth (Paris: OECD, 2010), pp. 3, 13, 15, at http://www.oecd.org/document/8/0,3343,en_2649_33959_45462088_1_1_1_1,00.html. ↩4.Formed in 1999, the G-20 is comprised of 19 countries plus the European Union: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, Republic of Korea, Turkey, the UK, and the US (http://www.g20.org.) For critiques of recent G-20 meetings, see Jeffery Garten, “The G-20 and the Future of Capitalism – Part 1,” Jonathan Fenby, “The G-20’s Uncertain Roadmap,” and David Shaumbaugh, “Beijing: A Global Leader with a ‘China First’ Policy,” at http://yaleglobal.yale.edu. ↩
  • 5. OECD, Shifting Wealth, pp. 18, 71. ↩6. Ministry of Commerce. 2010. China-Africa Trade and Economic Relationship Annual Report. ↩7. Ministry of Commerce. 2012. Status Report of China’s Foreign Trade. http://zhs.mofcom.gov.cn/aarticle/cbw/201204/20120408093758.html
  • 8. Ministry of Commerce People’s Republic of China (MOFCOM). Statistics on China’s Overseas Investment. At http://www.mofcom.gov.cn/tongjiziliao/tongjiziliao.html. September 2012. ↩
  • 9. Heritage Foundation, “China Global Investment Tracker,” at http://www.heritage.org/research/reports/2012/01/china-global-investment-tracker-2012. ↩
  • 9. Barboza, David, “China passes Japan as Second-Largest Economy,” The New York Times, August 15, 2010, at http://www.nytimes.com/2010/08/16/business/global/16yuan.html?scp=18&sq=china&st=cse. ↩10. Zhang, Yongjin, “China Goes Global,” (London: Foreign Policy Centre, 2005), p. xi, at http://fpc.org.uk/fsblob/449.pdf. ↩
  • This chart is indicative in how much money that various banks having been pumping into global development, hence influence in development, not an exact comparison of bank lending volume under the same category. China ExIm: loan approval; CDB (for cur loans): difference in outstanding loan of 2009 and 2010; CDB (RMB loans): loan approval; BNDES: disbursements11. MotokoAizawa presentation, “China’s Green Credit Policy: Building Sustainability in the Financial Sector China Environment Forum” February 24, 2011, Woodrow Wilson International Center for Scholars, available online: http://www.wilsoncenter.org/events/docs/Motoko%20Aizawa.pdf ↩
  • 12. Brautigam, The Dragon’s Gift, pp. 79-80. ↩13. The Export-Import Bank of China website, at http://english.eximbank.gov.cn/profile/intro.shtml. ↩
  • 14. China Development Bank. 2011. Annual Report. 15. KPMG. 2011. Mainland China Banking Survey.16. China Development Bank. 2011.
  • 17. MOFCOM, Statistics Bulletin of China’s OFDI. 2010.↩18. 21st Century Business Herald, “China to Explore Credit Rating in Africa,” June 13, 2010, at http://www.focac.org/eng/zfgx/dfzc/t710365.htm. ↩19. Noted in article in People’s Daily, “Sinohydro Group boosts African stakes,” October 21, 2010, at http://english.peopledaily.com.cn/90001/90778/90860/7172393.html. ↩20. Calculated from COMTRADE data compiled by Trade Law Center for Southern Africa (TRALAC) China-Africa trade data 2010 at http://www.tralac.org/cgi-bin/giga.cgi?cmd=cause_dir_news&cat=1044&cause_id=1694#china. ↩21. “SA to focus on its new biggest export markets China, India,” Business Day, September 15, 2010, posted at http://www.tralac.org/cgi-bin/giga.cgi?cmd=cause_dir_news_item&news_id=92926&cause_id=1694. ↩
  • 22. OECD, China – Encouraging Responsible Business conduct, OECD Investment Policy Review (Paris: OECD, 2008), p. 110. ↩23. UNCTAD, Economic Development in Africa Report 2010, p. 79 ↩24. Author’s calculations from COMTRADE data provided by International Trade Centre, Trade Map. ↩
  • 25. SAFE issued the Notice on Certain Issues Relating to Foreign Exchange Administration on Offshore Lending by Domestic Enterprises in June 2009. See “China Insights,” p. 3. ↩26. “China Insights,” p. 4. ↩CBRC: China Banking Regulatory Commission; CCICED: China Council for International Cooperation on Environment and Development; CIRC: China Insurance Regulatory Commission; COSC: Councilor’s Office of the State Council; CSRC: China Securities Regulatory Commission; DRCEP: Department of Resources Conservation and Environmental Protection; DRC: Development Research Center of the State Council; MCA: Ministry of Civil Affairs; MEP: Ministry of Environmental Protection; MFA: Ministry of Foreign Affairs; MHRSS: Ministry of Human Resources and Social Security; MIIT: Ministry of Industry and Information Technology; MLR: Ministry of Land and Resources; MOA: Ministry of Agriculture; MOD: Ministry of National Defense; MOF: Ministry of Finance; MOFCOM: Ministry of Commerce; MOR: Ministry of Railways; MWR: Ministry of Water Resources; NDRC: National Development and Reform Commission; NEA: National Energy Administration; PBoC: People’s Bank of China; ROSC: Research Office of the State Council; SAFE: State Administration of Foreign Exchange; SASAC: State-owned Asset Supervision and Administration Commission; SCRO: State Council Research Office; SFA: State Forestry Administration.
  • Emerging Actors in Development Finance: A closer look at China's overseas investment

    1. 1. Emerging Actors inDevelopment FinanceA CLOSER LOOK AT CHINA’S OVERSEAS INVESTMENT
    2. 2. IntroductionSouth-South financialflows are changing thenature of developmentfinance and assistance.Between 2009 and 2010,two Chinese state-ownedbanks lent more moneyto other developingcountries than the WorldBank.[1] During therecent financial crisis,Brazil invested $10billion in InternationalMonetary Fund bonds, astriking example of thecountry’s transformationfrom a debtor tocreditor.[2]Expanding South-South trade and investment provides welcome and needed sources ofcapital for countries in Africa, Asia, and Latin America. At the same time, these financialflows – coupled with the emergence of powerful financial actors from China, India, Brazil,and other economies – may pose new challenges for environmental and social sustainability.
    3. 3. TopicsThe Changing Global Landscape4China Goes Global: OFDI & Lending byFinancial Institutions7Regional Example: China in Africa15Sustainable Financing and Investment17WRI’s Work & Influence Strategy19
    4. 4. A New Geography of GrowthRelative shifts in economic power and politicalinfluence are reconfiguring the global context forsustainable development policy. We are currentlywitnessing what the OECD terms “the new geographyof growth” – “a 20-year structural transformation ofthe global economy in which the world’s economiccentre of gravity has moved towards the East andSouth.”Trends indicate that developing economies will“account for 57% of world GDP by 2030.” [3] Despitesharp differences among members, the G-20 issupplanting the G-8 as the primary vehicle for globaleconomic policy coordination.[4] Large emergingmarket economies are defining their own approachesto development cooperation, governance issues, andenvironmental and social sustainability outside ofmany existing normative frameworks.
    5. 5. Expanding South-South TradeSouth-South trade is clearly adynamic force in the globaleconomy. While world tradeexpanded four-fold between1990-2008, South-South tradegrew more than ten times.Developing countries nowaccount for around 37% ofglobal trade, with South-Southflows making up about half ofthat total (19% of globaltrade).[5] In 2009, for example,China surpassed the US asAfrica’s largest trading partner.[6] Sino-Africa trade volumesexceeded 166 billion US dollarsin 2011. [7]
    6. 6. TopicsThe Changing Global Landscape4China Goes Global: OFDI & BankingLending7Regional Example: China in Africa15Sustainable Financing17WRI’s Work & Influence Strategy19
    7. 7. China Goes Global: OFDIChina’s outward foreign direct investment (OFDI) flows increased from under $1 billion in 2000 to $74.6billion in 2011, while its stock of OFDI grew from nearly $27 billion in 2000 to over $424 billion in 2011.[8]As reported by the Chinese Ministry of Commerce (MOFCOM), China’s OFDIstock is largely concentrated in Asia, although investment has increasedsignificantly in Latin America and Africa over the past five years. However, thisfigure assigns flows through the offshore centers solely to the correspondingregion, leading to possibly an overestimation of OFDI in Asia and Latin America.Source: MOFCOM 2010 Statistical Bulletin of China’s OFDI Regional Comparison of China’s OFDI Stock (2005 -2010)
    8. 8. Chinese OFDI DataHowever, the MOFCOM figure assigns flows through the offshore centers solely to the correspondingregion, leading to possibly an overestimation of OFDI in Asia and Latin America. The U.S.-basedHeritage Foundation investigates these discrepancies by collecting information on individualinvestment projects. Whereas MOFCOM designates Latin America as the second largest OFDIdestination, Heritage ranks it behind all other regions except Africa, with high level of investment inAsia, Australia, North America and Europe. In 2010 whereas MOFCOM reports $2.11 billion in AfricanOFDI, Heritage records $7.11 billion.[9].North America: Europe: Asia: 49.16 42.66 86.69 Africa: Latin America: 37.21 Australia: 48.83 41.52 Aggregated Data on China’s Outward Direct Investments over USD 100 Million, 2005 – 2011 (USD Billion) Data Source: Heritage Foundation
    9. 9. Enabling Chinas Growing OFDI and policy driversPolicies 2009: 350 1997: May: new regulatory 2004:China’s decades-long rapid 抓大放小 framework MOFCOM releases (zhua da Implemented togrowth has made it the 300 fang xiao, Guidelines For 2001: further ease andsecond largest economy in grasping Investment in Overseas decentralize approval China joins Countries Industries;the world, surpassing Japan the large and the WTO, procedures 250 Regulatory processin mid-2010.[9] letting groof in advance Further reformed, forex A major factor contributing the small) of which controls eases in his Declaration 2006: Go Globalto China’s growth has been 200 China made speech at the 10th Nationalits integration into the Billions of dollors at CCP 15th great People’s Congress, Premier strategy Congress Progress in emphasizedglobal economy, a catalytic Wen Jiabao advocates 150 lays the liberalizing again in 11th 5 speeding up of Go Globalstep in the country’s foundation its trade, and more effective Year Planeconomic development. for the modern Financial coordination of Chinese 100China’s transformation from and investment“isolated” to “globalized” is a 1992:Dengdirect result of the 50 Xiaoping’sgovernment’s desire to spur ‘Southern 2002: Go Globaland maintain lasting growth 0 tour to strategy confirmed promoteof its economy.[10] at CCP 16th congress overseas investment’ /通用格 /通用格 /通用格 /通用格 /通用格 /通用格 /通用格 /通用格 /通用格 /通用格 /通用格 /通用格 式 式 式 式 式 式 式 式 式 式 式 式 Flows /通用格式/通用格式/通用格式/通用格式/通用格式/通用格式/通用格式/通用格式/通用格式 Stock /通用格式/通用格式/通用格式/通用格式/通用格式/通用格式/通用格式/通用格式/通用格式In 2001, China’s tenth Five-Year Plan (2001-2005) formalized the directive for Chinese companies to “Go Global,” a strategy togain access to needed resources, stimulate the export of goods, and grow China’s multinational businesses and brands. Beijing hasprovided diplomatic support, favorable tax exemptions, insurance, and, critically, access to low-cost finance.
    10. 10. China Goes Global: Bank LendingRather than seeking financing primarily through the capital markets, Chinese companies obtain80-90% of their funding from Chinese banks.[11] As part of the Go Global strategy, China’s state-owned policy banks, largely the Export-Import Bank of China (China Exim) and the ChinaDevelopment Bank (CDB), were mobilized to facilitate international capital flows and supportmergers and acquisitions of foreign companies. Although not the largest in terms of total assetsand domestic investment, China Exim Bank and CDB play the leading role in overseasinvestment. Other state-owned banks, such as the export and credit insurance company(Sinosure), have also contributed on a lesser scale. Relative lending comparison of public financial institutions 2010 /通用格式 /通用格式 /通用格式USD Millions /通用格式 /通用格式 /通用格式 /通用格式 /通用格式 /通用格式 /通用格式 WB EBRD BNDES IFC portion US UK JBIC IDB AsDB Japan France AfDB Group Germany China ExIm US ExIm EIB (outside Europe) CDB (RMB loans) CDB (for cur loans)
    11. 11. China Goes Global: China Export Import BankThe Export-Import Bank ofChina (China Exim) wasformed in 1994 along with twoother “policy banks,” the ChinaDevelopment Bank and theAgricultural Development Bankof China, “as tools of thegovernment, allowing Beijingto allocate preferential ortargeted finance through ahybrid of planning and marketmeans.”[12]As a policy bank,China Exim finances and implements the government’s trade and overseas investmentpolicies.[13] The Bank is under the direct leadership of the State Council.China Exim has exhibited phenomenal growth over the past decade. It has increasedlending volumes by 30% to 40% year-on-year – an indicator of the accelerating natureof the “Go Global” strategy. China Exim is by far the largest export credit agency in theworld. It approved over $70 billion in new lending in 2009, more than U.S.Exim, JBIC, and BNDES Exim combined.
    12. 12. China Goes Global: CDB’s Total Assets /通用格式China Development Bank /通用格式 /通用格式 Billion RMBFormed in 1994 along with China /通用格式ExIm, China Development Bank (CDB) /通用格式is a state-owned policy bank that provides /通用格式financing to key infrastructure projects and /通用格式industries in China. It also supports the /通用格式“Go Global” strategy by facilitating China’s /通用格式 /通用格式 /通用格式 /通用格式 /通用格式cross-border investment.[14] Source: CDB annual report 2011In 2008, CDB was restructured into acommercial joint stock bank, but remainsunder state control. CDB is now the fifthlargest bank in China by total assets, equalto US$810 billion in 2010.[15]CDB’s business presence has extended to116 economies across the globe. By the endof 2011, 15.86% of CDB’s outstanding loansis outside mainland China.[16] A number oflarge, international energy projects standsout in the portfolio.
    13. 13. Loan for Resources Deals Structure of Loan-for-Resources DealChina has executed a number ofresources-for-infrastructure dealsin recent years, backed not just byoil but alsobauxite, chromium, iron ore, andeven cocoa. In these deals, Chinaprovides loans for infrastructuredevelopment, which are repaid bydelivery or sales of the borrowingcountry’s natural resources. Thisstructure is used most commonlywhen a country does not have thefinancial capacity to guaranteeand/or service a loan commitmentbut has a natural resource (such asoil) to offer as repayment. Thisapproach follows a long history ofnatural resource-basedtransactions and is far from uniqueto China.
    14. 14. TopicsThe Changing Global Landscape4China Goes Global: OFDI & BankLending7Regional Example: China in Africa15Sustainable Financing17WRI’s Work & Influence Strategy19
    15. 15. Growing Chinese OFDI Stock in Africa (2010)Investment and /通用格式 /通用格式 /通用格式 /通用格式 /通用格式 /通用格式Trade in Africa South Africa NigeriaChina’s investment position in ZambiaAfrica is accelerating Algeria DRCrapidly, rising from an OFDI Sudanstock of less than $500 million in Niger2003 to $13.04 billion in Ethiopia2010.[17] Reportedly more than Angola7,900 Chinese enterprises are Egypt Tanzanianow established in Africa, with Source: MOFCOM OFDI Bulletin 2010 USD Millionbusinesses ranging from homeappliances, textiles, clothing, infrastructure, power generation, and natural resourceextraction.[18] Returns on investment by Chinese companies in Africa are reportedlyhigher than in other developing countries: from 24%-30% compared to between 16%-18%, according to the Ministry of Foreign Affairs.[19]Africa as a region has increased its rather minor share of China’s total trade from 2% in2001 to 4.5% in 2011.[20] While China’s volume of trade with other regions is far moresignificant, the opposite is true for many African countries: China has become Africa’slargest export destination and the second largest source of imported goods. SouthAfrica recently announced that it would prioritize China and India as these countriesare now its biggest export markets.[21]
    16. 16. Imports from AfricaThe bulk of China’s imports from Africaoriginate from relatively few countries.While investments are spread across 48African countries, over 70% of ChineseOFDI stock in 2008 was concentrated infive resource rich countries: SouthAfrica, Nigeria, Zambia, Sudan, andAlgeria. However, by international comparison, China’s investments in Africa’s natural resources match well-established patterns. 50%-80% percent of all FDI to Africa goes to natural resource exploitation.[22]Despite the rapid scale-up in Chinese investment in Africa, most foreign direct investment (FDI) in Africa originates from OECD countries – 91.6% of total inward FDI stock in Africa in 2008.[23]Similarly, the bulk of U.S. imports from Africa are sourced from relatively few resource rich countries; 77% of total imports in 2009 came from five countries: Nigeria (30.5%), Algeria (17.3%), Angola (15%,) South Africa (9.2%), and Congo-B. (4.9%).[24] The top three African oil exporters – Nigeria, Angola, Algeria for the U.S. and Angola, Sudan, Libya for China – provided a quarter of each country’s total imports (27.6% or the U.S., 25.1% for China).
    17. 17. TopicsThe Changing Global Landscape4China Goes Global: OFDI & BankLending7Regional Example: China in Africa15Sustainable Financing17WRI’s Work & Influence Strategy19
    18. 18. RegulatingOFDIChinese authorities havesimplified regulations tofacilitate investment abroad.Three governmental bodies –MOFCOM, SAFE, and theNDRC – have primary but notsole oversight of China’soverseas investment (separatefrom foreign assistance)regime. MOFCOM isresponsible for developingregulations for outboundinvestment and forcoordinating activities withcommercial counselors postedat Chinese embassies. SAFEissued new regulations in2009 that reducedqualification requirements for offshore foreign currency lending and expanded the sources of funds for lending (including access to government foreign exchange reserves).[25] The NDRC reviews large outbound investments to ensure they align with the country’s political interest and overall economic development policy.In addition, CBRC and SASAC also play an oversight role. Risk management guidelines issued by the CBRC in2008 opened the door for Chinese banks to provide loans for merger and acquisition purposes (previouslyforbidden under a 1996 regulation.) They require “banks to perform due diligence regardingcompliance, operational, and commercial risks relating to the parties and thetransaction.”[26] MOFCOM, CSRC, CBRC and PBoC have all worked with MEP to formulate relevant
    19. 19. Environmental and Social Standardsfor Foreign InvestmentsDomestically, strengthened environmental and information disclosure standardsInternationally, Developing guidelines for overseas lending and investments China’s Emerging E&S Standards for Banks & Enterprises’ Investment 2007 2010 2008 Proposed2004 China ExIm significantly Landmark Open GuidelinesBrief environmental expands Government for Environmentalguidelines by China environmental 2007/2008 Information Practices inExIm: guidelines Corporate Regulations and ForeignImpact assessments/ Measures for China adopts a Green social Investmentmonitoring/project Environmental Credit Policy responsibi Activitiesimpacts Information 2012review required restricts lending to polluting lity of Chinese Introduced new guidelines Disclosure went Enterprises, requiri Companies Green Credit issued into effect ng 2005 for banks compliance with Guidelines, calli Guide on Sustainable ng for improved China and Industrial Bank Chinese and host Overseas management of Development state-owned became the first country laws, greater Silviculture by Chinese environmental and Bank states it has enterprises Chinese Equator transparency, Enterprises social risks. an Principle financial community introduced standards for environment institution consultation, and activities in forest policy ecosystems grievance mechanisms 2004 2005 2007 2008 2010 2012
    20. 20. TopicsThe Changing Global Landscape4China Goes Global: OFDI & BankLending7Regional Example: China in Africa15Sustainable Financing17WRI’s Work & Influence Strategy19
    21. 21. WRI’s WorkWRI’s work on emerging actors indevelopment finance is led by theInternational Financial Flows and theEnvironment objective. The goal of thisresearch is to improve theenvironmental, social, and climate changepolicies that govern emerging actors’investments, and to ensure that localcommunities and civil societyorganizations impacted by theinvestments are able to engage with“emerging actors” more effectively. Thispreliminary research focuses on Chineseand Brazilian overseas investments andbegins to look at the growth drivers andgeographic trends of those investments.
    22. 22. A WRI Influence Strategy Three-linked Influence Strategy Engage policymakers to develop environmental and social guidelines to Investor govern overseas investments. Country Engage companies and financial institutions (China & to develop and implement environmental Inform and social risk management policies. Create Brazil) enabling decision- makers of Strategy Build the capacity of local civil society conditions potential organizations to create demand for stronger for local environme environmental and social guidelines. communiti ntal and Enhancing the roles of emerging actors in es to raise social Internationa international and bilateral investment concerns impacts on l Strategy standards setting directly the ground with Host Work with host country governments and decision- local civil society organizations to facilitate makers Country stronger environmental and social Strategy performance among foreign companies

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