A Closer Look at Chinese Sustainable Finance

CHINESE DEVELOPMENT

FINANCE

IntroductionSouth-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

75%68%

31%

18%

13%

5%

8%

23%

16%

14%

10%

2004 2013 2013 (excludingOFCs*)

China Goes

Global: OFDIChina’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

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

Source: WRI Sustainable Finance based on 2013 Statistical Bulletin of China’s Outward

Foreign Direct Investment

National Distribution of China’s OFDI Stock, 2013

China’s OFDI Stock v. Loans to

Domestic Enterprises: Comparison

of Sectors, 2012

Manufacturing27%

Transportation Storage & Post

13%

Information Technology

12%

Environmental & Public Facilities

9%

Production & Supply of Utilities

9%

Real Estate8%

Other22%

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%

Finance18%

Mining14%

Wholesale & Retail Trade13%

Other10%

Manufacturing6%

Transportation Storage & Post

6%

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.

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)

613

14671 53 25 17

1,163

527

262

143236

10816

-

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 LendingOutstanding 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.

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

China Goes Global:

Export-Import Bank

of ChinaThe 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

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.

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.

Environmental and Social Standards for

Foreign Investments2004 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

Spotlight on Chinese Investments in Africa

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

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.

Mining31%

Finance20%Construction

16%

Manufacturing15%

Leasing and business services

5% Other13%

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.

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.

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