The China model

Ben Schiller
20 December 2005

As Chinese companies “go global”, NGO campaigners are increasingly concerned about Beijing’s model of international development.

Angola’s government, in need of reconstruction funds after the country’s long civil war, was in the process of negotiating a new loan with the International Monetary Fund in 2004. The IMF, aware of Angola’s long history of corruption and poor governance since independence from Portuguese colonial rule in 1975, was keen to include measures to cut corruption and tighten the country’s economic management. But as bank officials pushed harder for a signature, the government suddenly broke off negotiations. The Angolans had received a counter-offer: a $2 billion loan proposed by China’s export-credit agency, Exim Bank. The deal from Beijing came with minimal rates of interest, a generous payback period, and none of the IMF’s “conditionalities”. The government in Luanda accepted China’s offer.

Also in openDemocracy on Chinese business, corporate responsibility, environmental NGOs, and Africa:

Andreas Lorenz, “China’s environmental suicide” (interview with Pan Yue, China’s deputy environment minister) (April 2005)

Chris Melville & Olly Owen, “China in Africa: a new era of “south-south cooperation” (July 2005)

Agnes Chong, “Chinese civil society comes of age” (September 2005)

Simon Zadek, “China’s route to business responsibility” (November 2005)

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In February 2005, Global Witness sent a letter to the World Bank and the IMF complaining that the terms of this contract had not been made public. The London-based NGO – which has lambasted European banks for providing oil-backed loans to Angola – said the Chinese had undermined the IMF’s position, and that there was a lack of openness in the procurement process for reconstruction work, much of it carried out by Chinese companies.

A corporate responsibility manager at a large European oil firm active in Angola says the Chinese package has effectively lowered transparency standards, making it more difficult for western companies and governments to push for anti-corruption schemes like the Extractive Industries Transparency Initiative (Eiti) – which Angola has signed but has yet to implement. Others have pointed to the terms of the loan: it allows Chinese companies to bid on 70% of construction contracts, raising fears that the money will fail to develop local skills and businesses.

The journal Africa Confidential says that part of the loan is likely to be used for the government’s re-election campaign in 2006. Despite a boom in construction, “spending on education, health and sanitation is way below what is needed to cut poverty”. Angola ranks 160th out of the 177 countries in the United Nations Human Development Index.

China’s soft power

China’s Angolan loan is hardly unique. Beijing has over the past year been extending soft credit to numerous countries in Africa, Latin America and Asia, as part of its push to secure energy supplies and develop its companies’ interests overseas. The “big three” of Chinese energy companies – CNPC, Sinopec, and CNOOC – have been buying up dozens of oil and gas concessions, including those in Angola. And Chinese construction firms have been building dams, telecoms networks, railways, hotels, airports, and other major infrastructure – predominantly in Africa.

China’s aim, observers say, isn’t necessarily profits – at least in the short term – but rather to build influence in the developing world, undercutting western governments and companies.

This model of international development, which eschews any “interference” in the internal affairs of foreign states, is of increasing concern to NGOs, international financial institutions, and western companies trying to improve transparency, human rights, and develop “capacity” in poor countries. The worry is that Beijing will let nothing get in the way of its “go global” policy, turning a blind eye to the activities of its companies overseas, even as it tightens corporate responsibility standards – on corruption, worker safety and the environment – at home.

In turn, there are those who fear what this will mean for western companies trying to compete with their Chinese counterparts; whether – backed by cheap loans, diplomatic pressure, arms sales and military assistance – China’s companies will lower the bar for all-comers. “The Chinese approach – less transparent, less accountable – may be a challenge if (the companies involved) face direct competition with other companies”, says Alex Vines, head of the Africa programme at Chatham House, an international affairs think-tank in London.

China’s emerging norms

Chinese energy companies are only beginning to understand corporate responsibility (CR), according to Jonathon Berman, of Development Alternatives Inc., which advises corporations and governments operating in developing countries. “The large Chinese energy companies currently have an approach to corporate responsibility that focuses on health, safety and environment, much like early corporate responsibility programmes at many western energy companies”, he says.

Some observers believe greater engagement with institutions like the World Bank, the need for western capital (including stock-market filing requirements), as well as the reputational benefits of CR, will all encourage Chinese companies to begin to take the subject seriously. The question, however, as Berman says, is “not whether the norms will influence the Chinese, but rather whether the Chinese will influence the norms.”

An OECD report on corporate governance in China praised the government for instituting reforms to foster private-sector activity. But it noted that many state-owned companies remain unincorporated, and have to yet to create essential governance structures such as boards. The report says Chinese corporations lack independence, operating at the behest of powerful officials, government-controlled market regulators, and a whimsical judicial system.

Like companies in other post-communist societies (if that is what China is), Chinese businesses have long been responsible for swathes of social provision, building housing, clinics and recreational facilities for their workers and local communities. Mark Eadie, director of the ERM social consultancy in Beijing, says these activities are often overlooked when CR campaigners criticise Chinese firms. He emphasises Chinese progress in recent years in cutting domestic corruption – China has recently imprisoned and executed a number of corrupt businessmen – and in developing environmental-management programmes.

There has, however, been less attention paid to Chinese businesses overseas, probably because these companies are only beginning to venture beyond their borders.

China has yet to sign up to international anti-bribery initiatives like the OECD’s anti-bribery convention, and the Eiti. In 2003, it did assent to the UN’s Convention against Corruption, but that compact is seen as much weaker than the OECD treaty.

Peter Rooke, director of the Asia department at Transparency International (TI) – which recently launched its business-principles programme in the country – believes China is taking corruption seriously. But he sees the need for tougher standards overseas, and greater oversight of China’s state-owned enterprises: “As Chinese companies expand their investment into other countries, there is a need for better international standards.”

China’s oil search

The weaknesses of Chinese corporate-responsibility standards are most evident in developing world – where the majority of Chinese investment is now focused – and are frequently oil-related.

In Africa, CNPC, Sinopec, and CNOOC have struck exploration deals in seventeen states, including Nigeria, Angola, Sudan, Algeria, and Gabon. In Latin America, the big three are active in Venezuela, Peru, Ecuador, Argentina and Bolivia. In central Asia, CNPC acquired PetroKazakhstan in October 2005, while CNOOC operates in Burma. In October 2004, China agreed to invest $100 billion in Iran’s oil and gas.

Because much of the world’s prime oil supplies are already under contract, China is turning to countries which (for reasons of human rights or ideology) are currently out of favour with Washington. Chinese oil companies have invested at least $2 billion in Sudan – ignoring US sanctions, the genocide in Darfur, and a full-scale divestment campaign from NGOs. Sudan now accounts for at least 5% of China’s oil imports, and Chinese investment is said (by Human Rights Watch, among others) to be funding arms imports, and a local arms industry based on Chinese technology.

Beijing has also turned a blind eye in Zimbabwe, another pariah-state. President Robert Mugabe, whose palace is said to be clad in midnight-blue Chinese tiles, has promoted something of a Chinese cult, encouraging his followers to eat Chinese food and learn Mandarin. The state-owned China International Water and Electric has built a 250,000 acre maize farm, and Beijing has supplied fighter-jets and military trucks. In summer 2005, running out of friends elsewhere, Mugabe sold off his country’s mining concessions in exchange for Chinese loans.

China’s environmental impact

China’s environmental practices have also come under fire. A report from the International Rivers Network and Friends of the Earth in July 2005 criticised Exim Bank for funding projects such as the Yeywa Dam in Burma, Merowe Dam in Sudan, and the Nam Mang 3 Dam in Laos. It says Exim has failed to sign up to the environment guidelines adopted by many export-credit agencies from OECD countries, including Korea and Turkey.

These guidelines, known as the “common approaches”, compel export-credit agencies to subject projects to environmental review as well as relevant host country and international standards. In late 2004, Exim adopted environmental guidelines of its own; but NGOs point out that they are not available to the public, or to commercial banks that arrange funding on Exim’s behalf. The report notes that Exim also has no apparent policy on human rights, despite loaning to countries, such as Burma and Sudan, with poor human-rights records.

Meanwhile, concerns have been raised over the environmental impact of various Chinese-run mining operations in Africa, including copper mines in Zambia and Congo, and titanium sands projects in ecologically sensitive parts of Mozambique, Kenya, Tanzania, and Madagascar.

Moreover, China is a major importer of illegal timber from forests in Indonesia, Cameroon, Congo, and Equatorial Guinea. Though accurate figures are hard to access, www.globaltimber.org.uk says that up to 50% of all timber imported to China in 2004 was illegal. Chinese businesses have also been implicated in ivory smuggling, notably in Sudan and Zimbabwe. According to Care for the Wild International, Chinese companies buy up to 75 % of Sudan’s ivory.

China’s white elephants

In its rush to expand, development experts say China is reinvigorating an older, crude style of development, re-establishing an era of “white elephants” and “prestige projects” with little benefit to local people.

In Ethiopia, the Chinese state-owned Jiangxi International built $4 million worth of new housing, after a flood left hundreds destitute. But instead of accommodating the homeless, the blocks ended up being used by military officials. A Jiangxi manager later told the Wall Street Journal: “It was a political task for us and so long as Ethiopia officials are happy, our goal is fulfilled.”

Another feature of Chinese investment overseas is the use of Chinese rather than local workers. Thousands of Chinese labourers and engineers have been imported to build Ethiopia’s $300m Takazee Dam. In Sudan, Chinese workers have constructed an oil pipeline; 74,000 Chinese remain in country, 10,000 employed by CNPC. Chinese workers are also being used in Namibia, Zimbabwe, and a host of other African states.

Ross Herbert, Africa research fellow at the South African Institute of International Affairs in Johannesburg, says recruiting from China provides little long-term benefit to local people: “You end up with a stadium, but there’s no knock-on effect, no financial benefit. It all goes back to China.”

Alex Vines, at Chatham House, echoes the point: “One of the biggest demands in Africa is for jobs because much of the continent is inhabited by young people. The Chinese are bringing in their own people, and they are paying lip-service to employing Africans.”

Ben Schiller is a freelance journalist based in London. He specialises in United States politics, eastern Europe and corporate responsibility issues.

This article is also published in the December 2005 edition of the magazine Ethical Corporation

China’s learning

This aggressive push in Africa means that Chinese companies are beginning to draw fire from local people, and some local businesses. For example, a WTO ruling that has led to a flood of Chinese clothing imports has enraged textile manufacturers in South Africa (who call it China’s “textile tsunami”). As a result, local factories have been forced to close in Kenya, Lesotho, Swaziland, Uganda and Madagascar, causing thousands of job losses.

For this and other reasons, Chris Alden, lecturer in international relations at the London School of Economics, says there is growing unease about Chinese investment in parts of Africa. “The nature of its closed society and relative wealth may breed resentment and even conflict, as it has in parts of southeast Asia”, he says.

Whether Chinese companies will be able to reverse this trend is an open question. Martyn Davies, director of the Centre for Chinese Studies in Cape Town, says Chinese companies need to work harder building relationships with local groups, believing some of the tensions come down to cultural misunderstanding: “A lot of it comes down to a lack of trust. The Chinese are not doing enough to build relationships with civil society.”

Chinese companies will have to work harder if they are to establish themselves as good corporate citizens, seen not only as “can-doers”, but responsible actors on the world stage. Judging by the first chapter of Beijing’s “go global” campaign, however, China’s nascent corporate behemoths will bear watching in the months and years ahead.

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