Western Banks Financing China’s Export Import Bank: A Case of Environmental Money Laundering

Representatives of Western banks and export credit agencies frequently argue that their environmental policies are being undercut by financial institutions from middle–income countries, and particularly from China. It is ironic that the same banks miss no opportunity to provide finance to their competitors from China and other countries.

Chinese civil society and institutions such as China’s State Environmental Protection Agency have achieved impressive environmental progress in recent months. China’s Export–Import Bank has so far not been part of this progress. The world’s third–largest export credit agency continues to finance many socially and environmentally destructive projects in countries with bad human rights records.

Five large international banks – BNP Paribas, Citigroup, Goldman Sachs, HSBC and Merrill Lynch – and Bank of China International are currently arranging a $1 billion bond issue for China Exim. By doing so, they will help finance projects which they could not finance directly under their own environmental policies. If it goes ahead, the $1 billion bond issue will constitute a serious case of environmental money laundering.

This paper summarizes background information and concerns of International Rivers and Friends of the Earth–US regarding China Exim Bank and the pending bond issue.

China’s Export–Import Bank

Established in 1994, the China Export–Import Bank is China’s official export credit agency. Its financial instruments include export credits, guarantees, and concessional loans from the Chinese government. With $8.2 billion in newly approved credits and $30.4 billion in outstanding credits, the Bank was one of the world’s three largest export credit agencies in 2003.

The Chinese government is actively courting governments such as Burma, Sudan, and Zimbabwe that are rich in raw materials, have poor human rights records, and are being shunned by other governments. Through its active international economic policy, the Chinese government aims to win political patronage, boost trade and secure access to raw materials.

By extending loans and concessional credits for controversial projects, the Exim Bank plays an important role in China’s international economic agenda. This agenda pays no attention to human rights and the environment. “Business is business. We try to separate politics from business,” China’s deputy foreign minister Zhou Wenzhong said in 2004. In fact, given rising environmental and social standards among international investment banks and export credit agencies, China Exim’s financing pattern suggests that it is relying on a business model which seeks out controversial projects that the international community would otherwise avoid.

The Exim Bank’s portfolio includes projects such as the Merowe Dam in Sudan, the Imboulou Dam in Congo–Brazzaville, the Tekeze Dam in Ethiopia, the Lower Kafue Gorge Dam in Zambia, the Yeywa Dam in Burma, and the Nam Mang 3 Dam in Laos. China Exim has also signed deals for projects in other countries with human rights problems, including Nigeria (Papalanto and Omotosho power plants) and Zimbabwe (Zimbabwe Iron and Steel Company).¹

China Exim Bank and the environment

In 2003, the export credit agencies that make up OECD’s Export Credit Group adopted the Common Approaches on Environment and Officially Supported Export Credits. According to this agreement, export credit agencies must subject potential projects to environmental reviews, and benchmark them against host country law and relevant international standards. The Common Approaches apply for the export credit agencies from OECD countries, including Korea, Mexico, and Turkey.

The China Exim Bank has not committed to complying with the Common Approaches. In fact, until November 2004, the world’s third–largest export credit agency did not have any environmental guidelines at all. It recently developed an environmental guideline that, according to a Western banker, requires borrowers to submit projects to the Exim Bank for environmental review. The review purportedly assesses projects against China’s environmental standards, and stipulates that Exim Bank–financed projects must comply with host country law.

China Exim Bank’s environmental policy has serious shortcomings. The Bank has not made its new guideline available to the public, and has not even shared it with the banks that are currently arranging a large international bond offering. As the Merowe Dam Project in Sudan indicates, it is questionable whether, and how, the guideline is being implemented in practice (see below).

Like the World Bank and other financial institutions, China Exim Bank does not appear to have any policy governing human rights. This shortcoming is particularly relevant for an export credit agency that is involved in many countries and projects with massive human rights violations.

One case in point is Merowe Dam, Africa’s largest new hydropower project, which is currently being financed by China Exim. Located in Sudan, the project will create a reservoir with a length of 174 kilometers, generate electricity with a capacity of 1,250 megawatts, and displace 50,000 people. In spite of the project’s large dimensions and potential social and environmental impacts, no independent environmental impact assessment was ever carried out. One of the companies involved in the project prepared a brief environmental assessment report. In violation of Sudanese law, the technical arm of Sudan’s Environment Ministry did not receive a copy of the assessment, and was not able to review and clear the project.

International Rivers and The Corner House, a British advocacy organization, carried out a fact–finding mission, published a report and raised the problems of the Merowe Dam with China Exim Bank and other institutions in 2005. Unlike other financial institutions, China Exim Bank never responded to their concerns.²

Raising capital from international banks

China Exim Bank raises capital from the Chinese government, and on the Chinese and international capital markets. In July 2004, Citibank, Deutsche Bank, Goldman Sachs and HSBC arranged the private placement of a $750 million bond for the Bank. At the time, Friends of the Earth/US and International Rivers asked the banks not to get involved in this bond issue if they could not ensure the ensure the adherence of China Exim to international standards.

In 2004, representatives from several banks pointed out that under US law, China Exim Bank had to confirm that it would not use the proceeds of the $750 million bond for investments in countries such as Burma and Sudan that were under sanctions by the US Treasury’s Office of Foreign Assets Control. Later, China Exim reported to the underwriters that indeed it had “not knowingly” financed projects in these countries with bond proceeds. Regarding the human rights and environmental impacts of China Exim’s projects, the underwriters argued that as arrangers of a bond issue, they did not have any leverage to influence the environmental and human rights policies and practices of China Exim Bank.

On June 11, 2005, IFR Asia (a weekly journal covering Asian capital markets) announced that BNP Paribas, Citigroup, HSBC and Merrill Lynch had been mandated to arrange another bond issue of $1 billion for China Exim Bank sometime in the third quarter of 2005. One of the banks later confirmed that Bank of China International and Goldman Sachs also belonged to the group of lead arrangers.

The environmental criticisms regarding the 2004 bond issue triggered considerable internal debate within some of the Western banks involved. In conversations with Friends of the Earth–US and International Rivers, bank representatives in July 2005 again argued that the pending bond issue did not offer them any leverage to influence China Exim Bank’s environmental policy and practice. Still, Citigroup informed the NGOs that it had offered to arrange a seminar on international environmental standards for China Exim Bank. By mid–July, the China Exim had not responded to this offer.

Concluding comments

International Rivers and Friends of the Earth acknowledge the environmental progress that institutions such as China’s State Environmental Protection Agency have achieved in recent months. They support banks’ efforts to engage China Exim Bank in a similar process to strengthen its environmental standards. Although China has signed many important human rights and environmental conventions, the world’s third largest export credit agency has at this time not committed to following any internationally acknowledged standards regarding the environment and human rights. China Exim Bank should commit to a clear timetable by when it intends to comply with international standards. As a first step, the Bank should immediately adopt the Common Approaches to Environment of the OECD export credit agencies.

Until China Exim Bank has adopted international environmental and human rights standards, banks should not provide finance to the institution. By arranging large China Exim Bank bonds on the international capital market, banks will help finance projects that violate their own standards, without having any leverage to improve the Exim Bank’s environmental standards. At the same time, the failure by banks to apply meaningful social and environmental standards when arranging bonds allows institutions such as China Exim Bank to finance projects for which they could not raise capital directly. International Rivers Network and Friends of the Earth/US believe that the double standards regarding project and bond financing, regarding commercial and corporate lending, allows financial institutions to engage in environmental money laundering.

Available in PDF format

Notes:

1. For more information on China Exim Bank, see the 2004 International Rivers/FoE report, China Exim Bank and China Development Bank Case Studies, available at www.irn.org

2. For more information on the Merowe Dam Project, see the International Rivers/Corner House Report, A Critical Juncture for Peace, Democracy and the Environment, available at Clean Energy for Ethiopians, Not Damnation of River Dwellers

Michelle Chan–Fishel, Green Investments Program Manager
Friends of the Earth–US
E–mail: mchan@foe.org
Phone: +1 415–544–0790
www.foe.org