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Chinese Development Finance Update

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This is an update of the 2012 presentation at https://www.slideshare.net/WorldResources/emerging-actors-in-development-finance-a-closer-look-at-chinas-overseas-investment

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 "Chinese Development Finance: A Closer Look at Chinese Sustainable Finance."

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Chinese Development Finance Update

  1. 1. A Closer Look at Chinese Sustainable Finance CHINESE DEVELOPMENT FINANCE
  2. 2. Introduction South-South financial flows are changing the nature of development finance. Starting in 2010, two Chinese state-owned banks (China Development Bank and Export-Import Bank of China) annually lent more money to overseas developing countries than the World Bank. During the recent financial crisis, Brazil invested $10 billion in International Monetary Fund bonds, a striking example of the country’s transformation from a debtor to creditor. Expanding South-South trade and investment provides welcome and needed sources of capital for countries in Africa, Asia, and Latin America. At the same time, these financial flows – coupled with the emergence of powerful financial actors from China, India, Brazil, and other economies – may pose new challenges for environmental and social sustainability. Source: WRI Sustainable Finance based on figures from United Nations Conference on Trade and Development and United States Bureau of Economic Analysis 0 100 200 300 400 500 600 1980 1990 2000 2005 2010 2013 * Adjusted for inflation Global Outward Foreign Direct Investment (OFDI) Stock from Emerging Economies (in US$ billion)* South Africa India Brazil China
  3. 3. 75% 68% 31% 18% 13% 5% 8% 23% 16% 14% 10% 2004 2013 2013 (excluding OFCs*) China Goes Global: OFDI China’s outward foreign direct investment (OFDI) flows increased from US$1.2 billion in 1990 to US$94.6 billion in 2013, while its OFDI stock grew from less than US$7 billion in 1990 to US$575 billion in 2013. As reported by China’s Ministry of Commerce (MOFCOM), China’s OFDI stock is largely concentrated in Asia, although investment has increased significantly in Latin America and Africa over the past five years. MOFCOM figures assign flows based on initial offshore destination, not final destination. This may lead to overestimation of amounts to certain regions such as Asia and Latin America. The graph at the far right excludes money initially flowing to offshore financial centers such as Hong Kong and the Cayman Islands to give a clearer picture of where money might ultimately land. Source: WRI Sustainable Finance based on MOFCOM 2013 Statistical Bulletin of China’s Outward Foreign Direct Investment Geographical Distribution of China’s OFDI Stock, 2004 and 2013 Asia Latin America Europe North America Africa Oceania *OFC=Offshore Financial Centers, including Hong Kong, Singapore, Cayman Islands, British Virgin Islands, and Luxembourg
  4. 4. Source: WRI Sustainable Finance based on 2013 Statistical Bulletin of China’s Outward Foreign Direct Investment Continental Distribution of China’s OFDI Stock, 2013 13% 4% North America Latin America 4% Africa 8% Europe 68% 3%Asia Oceania
  5. 5. Source: WRI Sustainable Finance based on 2013 Statistical Bulletin of China’s Outward Foreign Direct Investment National Distribution of China’s OFDI Stock, 2013
  6. 6. China’s OFDI Stock v. Loans to Domestic Enterprises: Comparison of Sectors, 2012 Manufacturing 27% Transportation Storage & Post 13% Information Technology 12% Environmental & Public Facilities 9% Production & Supply of Utilities 9% Real Estate 8% Other 22% Loans to Domestic Enterprises Outward FDI Stock• By the end of 2012, 90% of China’s OFDI was invested in six sectors; leasing & business services alone accounted for 33%. Part of the investments in leasing & business services were reinvested to other industries through offshore financial centers. Many major mergers and acquisitions occurred using money that initially flowed through Hong Kong. For example, China Petroleum & Chemical Corporation (Sinopec) acquired 30% of Galp Energia (Brazil) and Galp Energia (Netherlands) through its Hong Kong subsidiary. • Mining was the third largest industry receiving overseas Chinese investment, reflecting resource-seeking incentives. According to China’s industry classification standard, mining includes oil and natural gas extraction. • Compared to China’s OFDI, a large part of China’s loans to domestic enterprises were invested in the manufacturing sector, as China accounted for 22.4% of world manufacturing in 2012, the largest in the world. Source: WRI Sustainable Finance based on 2012 Statistical Bulletin of China’s Outward Foreign Direct Investment, and 2013 Almanac of China’s Finance and Banking. Leasing & Business Services 33% Finance 18% Mining 14% Wholesale & Retail Trade 13% Other 10% Manufacturing 6% Transportation Storage & Post 6%
  7. 7. Enabling Policies • China’s decades-long rapid growth has made it the second largest economy in the world after United States, when it surpassed Japan in mid-2010. • A major factor contributing to China’s growth has been its integration into the global economy, a catalytic step in the country’s economic development. China’s transformation from “isolated” to “globalized” is a direct result of the government’s desire to spur and maintain lasting economic growth. • In 2001, China’s Tenth Five-Year Plan (2001-2005) formalized the directive for Chinese companies to “Go Global,” a strategy to gain access to needed resources, stimulate the export of goods, and promote China’s multinational business and brands. Beijing has provided diplomatic support, favorable tax exemptions, insurance, and, critically, access to low-cost finance. • In 2011, China’s Twelfth Five-year Plan (2011-2015) emphasized the “Go Global” policy, especially promoting overseas investment and cooperation in energy resources, research and development, and agriculture industries. It also asked that overseas Chinese companies commit to social responsibility principles and practices benefiting local communities. • In 2014, the National Development and Reform Commission (NDRC) issued a new approval and record-keeping policy to decentralize approval procedures, further facilitating the “Go Global” policy. Companies investing overseas no longer need approval from NDRC if the investment is less than $1 billion. • Also in 2014, MOFCOM relaxed overseas investment rules for Chinese firms. Under the new rules, only investments in countries or regions and industries identified as “sensitive” will require the ministry’s approval. Other investments, regardless of size, need only file paperwork for record-keeping purposes.
  8. 8. Source: WRI Sustainable Finance based on 2012 Statistical Bulletin of China’s Outward Foreign Direct Investment and United States Bureau of Economic Analysis Note: Adjusted for inflation. 2014 OFDI flow is a projection by WRI. 0 20 40 60 80 100 120 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014* 2000: “Go Global” strategy was officially announced, and formalized in the 5th Session of the 15th CPC Central Committee Meeting. 2004: The Decision of the State Council on Reforming the Investment System changed the approval procedure of China’s outward investment. Deals less than $100 million no longer need NDRC’s approval. 2006: State Administration of Foreign Exchange removed the limit on use of foreign exchange for overseas investment. 2014: NDRC issued new approval and record keeping policy to decentralize approval procedures for overseas investment. MOFCOM also simplified its approval process, and most domestic firms no longer need MOFCOM’s approval. 2009: MOFCOM issued Measures for Overseas Investment Management to decentralize and simplify approval procedures for overseas investment Policies and China’s OFDI Flow (US$ billion)
  9. 9. 613 146 71 53 25 17 1,163 527 262 143 236 108 16 - 200 400 600 800 1,000 1,200 1,400 EIB WBG IDB AsDB EBRD AfDB China Germany Brazil Japan China Japan United States Multilateral Development Banks National Development Banks Export Credit Agencies Note: "EIB" = European Investment Bank. "WBG" = World Bank Group. "IDB" = Inter-American Development Bank. "AsDB" = Asian Development Bank. "EBRD" = European Bank for Reconstruction and Development. "AfDB" = African Development Bank. China Goes Global: Bank Lending Outstanding Loans of MDBs, NDBs, and ECAs, 2013 (USD billion) Source: WRI Sustainable Finance based on annual reports from public financial institutions Rather than primarily seeking finance through capital markets, Chinese companies obtain 80-90% of their funding from Chinese banks. As part of the “Go Global” strategy, The Chinese government mobilized state-owned policy banks, largely the Export-Import Bank of China (China Exim) and the China Development Bank (CDB), to facilitate international capital flows and support mergers and acquisitions of foreign companies. Although not the largest in terms of total assets and domestic investment compared to Chinese commercial banks, China Exim and CDB play the leading role in overseas investment. Other state-owned banks, such as China Export and Credit Insurance Company, have also contributed on a smaller scale.
  10. 10. China Goes Global: China Development Bank 1.9% 4.7% 8.8% 16.2% -6.0% -1.0% 4.0% 9.0% 14.0% 19.0% 0 50 100 150 200 250 2005 2006 2007 2008 2009 2010 2011 2012 2013 CDB’s Overseas Loans (in US$ billion) CDB's Overseas Outstanding Loans Share of CDB's Overseas Loans as Percentage of CDB's Total Loans Formed in 1994 along with China Exim, China Development Bank (CDB) is a state- owned policy bank that provides financing to key infrastructure projects and industries in China. It also supports the “Go Global” strategy by facilitating China’s cross-border investment. In 2008, CDB was restructured into a commercial joint stock bank, but remains under state control. CDB is now the fifth largest bank in China by total assets, equal to US$ 1.3 trillion in 2013. CDB’s business presence has extended to 116 economies across the globe. By the end of 2013, 15.92% of CDB’s outstanding loans were located outside mainland China. Source: WRI Sustainable Finance based on annual reports from China Development Bank
  11. 11. China Goes Global: Export-Import Bank of China The Export-Import Bank of China (China Exim) was formed in 1994 along with two other policy banks - the China Development Bank and the Agricultural Development Bank of China- to promote specific government-sanctioned policies and finance. As a policy bank, China Exim finances and implements the government’s trade and overseas investment policies. The Bank is under the direct leadership of the State Council. China Exim provides supplier credits to promote China’s export of goods and services, including overseas contracting projects and investments. The business objective of China Exim is to implement national policies (e.g. promote “Going Global”) rather than to make profits; thus, loan interest rates are much lower than those of average commercial loans. Source: WRI Sustainable Finance based on annual reports from The Export-Import Bank of China 0 10 20 30 40 2006 2007 2008 2009 2010 2011 2012 2013 China Exim Annual Actual Disbursement of Export Sellers’ Credits, 2006-2013 (USD billion) Other Export Supplier's Credit Overseas Investment and Contracting Projects
  12. 12. Chinese Banking Regulation: China Banking Regulatory Commission • In 2003, China Banking Regulatory Commission (CBRC) was formed as an independent agency to oversee the Chinese banking system, following the establishment of a separate securities regulator and an insurance regulator in 1992 and 1998, respectively. CBRC is charged with writing the rules and regulations governing banks in China. China used to have a mono banking regulation system, with the People’s Bank of China, the central bank, regulating and supervising the entire financial sector since its creation in 1984. • In 2007, CBRC issued Guiding Opinions on Credit Support for Energy Conservation and Emission Reduction (Green Credit Policy). According to the Green Credit Policy, banks cannot provide credits and loans to certain types of projects, e.g. highly polluting industries. It also recommended that banks manage environmental risk by classifying projects into three groups according to their environmental impacts. • In 2010, CBRC issued Opinions on Providing Financial Services to Further Promote Energy Conservation, Emission Reduction and Elimination of Outdated Production Capacity. Banks were given explicit instructions to support energy conservation and emissions reduction, and eliminate highly polluting and inefficient industries. • In 2012, CBRC issued Green Credit Guidelines. The guidelines provide systematic guidance for banks to manage environmental and social risks, including (1) organization management, (2) policy, system and capacity building, (3) process management, (4) internal controls and information disclosure, and (5) monitoring and examination. • Please note that these guiding opinions are not necessary consistently applied or enforced laws.
  13. 13. Regulating OFDI • Chinese authorities have simplified regulations to facilitate investment abroad. Three governmental bodies – MOFCOM, State Administration of Foreign Exchange (SAFE), and National Development and Reform Commission (NDRC) – have primary but not sole oversight of China’s overseas investment (separate from foreign assistance) regime. • MOFCOM is responsible for developing regulations for outward investment and for coordinating activities with commercial counselors posted at Chinese embassies. • SAFE issued new regulations in 2009 that reduced qualification requirements for offshore foreign currency lending and expanded the sources of funds for lending, including access to government foreign exchange reserves. • NDRC reviews large outbound investments to ensure they align with the country’s political interest and overall economic development policy. • China Banking Regulation Commission (CBRC) and State-owned Assets Supervision and Administration Commission (SASAC) also play oversight roles. Risk management guidelines issued by CBRC in 2008 opened the door for Chinese banks to provide loans for merger and acquisition purposes previously forbidden under a 1996 regulation. They require banks to perform due diligence on a number of risk factors including operations, compliance, and commercial risks. • MOFCOM, China Securities Regulation Commission (CSRC), CBRC, and People’s Bank of China have all worked with Ministry of Environmental Protection to formulate relevant policies and regulations.
  14. 14. Environmental and Social Standards for Foreign Investments 2004 2005 2007 2008 2012 2013 Brief environmental guidelines by Export-Import Bank of China (China Exim): Impact assessments, monitoring, and project impacts review required China Development Bank (CDB) states it has an environment policy, but the policy is not publicly available. China Exim significantly expands environmental guidelines China adopts a Green Credit Policy restricting lending available to polluting companies Guide on Sustainable Overseas Silviculture by Chinese enterprises introduced standards for activities in forest ecosystems SASAC* issued Corporate Social Responsibility Guide Opinion for state- owned enterprises. Landmark Open Government Information Regulations and Measures for Environmental Information Disclosure went into effect Industrial Bank became the first Chinese Equator Principles financial institution China Banking Regulatory Commission (CBRC) introduced new Green Credit Guidelines, calling for improved management of environmental and social risks. MOFCOM/ MEP issued Guidance on Environmental Protection in Foreign Investment and Cooperation, requiring compliance with Chinese and host country laws, greater transparency, community consultation, and grievance mechanisms Note: “SASAC” = State-Owned Assets Supervision and Administration Commission
  15. 15. Spotlight on Chinese Investments in Africa
  16. 16. 0 5 10 15 20 25 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 China's OFDI Stock in Africa (US$ billion) China's OFDI Stock to Africa (US$ billion) CHINA’S OFDI FLOWS AND STOCK IN AFRICA, 2004 TO 2013 China’s OFDI in Africa is accelerating rapidly; its OFDI stock on the continent increased from $1 billion in 2004 to $24.5 billion in 2013. Annual OFDI flows increased from around $400 million in 2004 to $3.2 billion in 2013. China’s OFDI in Africa was widely distributed among various sectors. Financial sector OFDI to Africa in 2012 was $-1.10 billion, meaning the net amount of Chinese investment decreased, or was withdrawn in 2012. This is partly because financial investments were influenced by market values and fluctuated significantly. Non-financial sector OFDI reached $3.61 billion, with a year-on-year increase of 24.7%. Source: WRI Sustainable Finance based on MOFCOM 2013 Statistical Bulletin of China’s Outward Foreign Direct Investment Note: In billions of inflation-adjusted US dollars and current exchange rate
  17. 17. CHINA’S OFDI STOCK IN AFRICA BY DESTINATION BY THE END OF 2013 By the end of 2013, 4% of China’s OFDI stock, or $26.2 billion, was in Africa. The top eight African recipients accounted for 61% of China’s OFDI stock on the continent. Those countries are marked in yellow in the figure to the right. South Africa alone received 22% of China’s OFDI in Africa as of 2013. The primary reasons for its popularity appear to be its relatively well-developed infrastructure, a stable political environment, and a relatively large domestic market. Source: WRI Sustainable Finance based on MOFCOM 2013 Statistical Bulletin of China’s Outward Foreign Direct Investment Note: This chart indicates the initial destination of OFDI, as reported by MOFCOM; the final destination is undetermined.
  18. 18. Mining 31% Finance 20%Construction 16% Manufacturing 15% Leasing and business services 5% Other 13% CHINA’S OUTWARD FDI STOCK IN AFRICA BY INDUSTRY BY THE END OF 2011 More than 2,500 Chinese companies have directly invested in Africa, with business including natural resource extraction, finance, infrastructure, power generation, textiles, and home appliances. Recently, the finance industry was responsible for a large portion of OFDI because of Industrial and Commercial Bank of China’s $5.6 billion deal in 2007 to buy 20% of South Africa’s Standard Bank. Returns on investment by Chinese companies in Africa are reportedly higher than in other developing countries: from 24%- 30% compared to 16%-18%, according to the China’s Ministry of Foreign Affairs. Source: China-Africa Economic and Trade Cooperation 2013 White Paper Note: According to China’s industry classification standard, mining includes oil and natural gas extraction.
  19. 19. WRI’s Work WRI’s work on Chinese sustainable finance is led by the Sustainable Finance Team. The goal of this research is to improve the environmental, social, and climate change policies governing investments, and to work with local communities and civil society organizations impacted by the investments to more effectively engage with emerging economies.
  20. 20. A WRI Influence Strategy Investor Country (China & Brazil) Strategy Engage policymakers to develop environmental and social guidelines to govern overseas investments Engage companies and financial institutions to develop and implement environmental and social risk management policies. Build the capacity of local civil society organizations to create demand for stronger environmental and social guidelines. International Strategy Enhancing the roles of emerging actors in international and bilateral investment standards setting Host Country Strategy Work with host country governments and local civil society organizations to facilitate stronger environmental and social performance among foreign companies Inform decision- makers of potential environmental and social impacts on the ground Create enabling conditions for local communities to raise concerns directly with decision- makers

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