The Environmental Implications of China’s New Bank

By Yuge Ma

December 05, 2014

Political wisdom will be needed to manage the environmental consequences of the Asian Infrastructure Investment Bank. 

On October 24 this year, 21 Asian countries signed an agreement in Beijing that signaled the launch of the Asian Infrastructure Investment Bank (AIIB), whose main backer is China. The agreement authorized $100 billion in capital for the new bank, with an initial subscribed capital of around $50 billion. But will the new bank be able to implement best practice when it comes to governance and environmental concerns?

According to the Asian Development Bank (ADB) – Japan-led and the largest existing multilateral development bank in Asia – between now and 2020 the Asia and Pacific regions will require infrastructure investment of at least $8 trillion. As China’s Xinhua news agency commented, the existing international financial system is insufficient to meet this huge demand. This gives China ample scope to play a crucial role.

While the Western world might fear losing influence in the growing Asian market or a potential challenge to the U.S.-led international order, the AIIB raises another concern: the potential threat Chinese money might represent to established international standards of foreign aid.

In her book By All Means Necessary: How China’s Resource Quest Is Changing the World (Oxford University Press, 2014), Elizabeth Economy, senior fellow and director for Asia studies at the Council on Foreign Relations in New York, and her colleague Michael Levi argue that the best way to understand the local implications of Chinese overseas investments is to observe how it operates at home, where neither the Chinese government nor companies pay much attention to environmental protection. Despite the fact that China had established a nationwide system of environmental impact assessment (EIA), in practice it is hamstrung by widespread data fraud, corruption, and political intervention from local officials. Only now is the Chinese government beginning to govern this chaotic field.

However, the authors have also observed some improvements in Chinese companies’ social and environmental awareness in recent years. The first is top down: in order to reduce unsustainable development, China’s leadership has been encouraging companies, especially state-owned enterprises, to engage in more corporate social responsibility-related international initiatives by launching a set of policy incentives that apply to both domestic and overseas investments.

The second change is coming from outside. As more Chinese companies go abroad, they are receiving more exposure to the best practices of their foreign counterparts. In addition, China’s Ministry of Commerce has encouraged Chinese companies to be more active in the United Nations Global Compact and other international rating systems to improve their international image.

Finally, the third change is from the bottom up, and refers to the growing public awareness of the negative environmental and social impact of Chinese investment and active NGO participation in pushing Chinese companies to change their behavior.

Still, none of the above motivations have been sufficient to meaningfully alter the fundamental logic of growth-at-any-cost. Without strict environmental regulations and effective enforcement from their host countries, Chinese corporations still can’t stop using the tried and tested – albeit outdated – methods they have used over decades.

When Chinese energy-related projects have entered more mature markets, such as Australia, Canada, and even Poland and Brazil, the host countries’ environmental authorities and vibrant civil society groups have forced them to accept much stricter environmental laws. As a result Chinese investors have had to pay a very high price to learn those lessons, leading to unforeseen profit losses.

Cai Jinyong, the first Chinese national to become CEO of the International Finance Corporation (IFC) said in arecent interview that Chinese overseas investment projects are generally good at construction, but weak at long-term management. The environmental impact is an important component of managing a sustainable project in terms of both financial and social consequences. Put simply, even though Chinese companies want to improve their environmental practices – not always the case in countries without de facto environmental regulations – a lack of expertise and experience remains a significant obstacle.

Xi Jinping has promised that the principles of AIIB will be equality, inclusiveness and efficiency, while Chinese Finance Minister Lou Jiwei has declared that AIIB will learn from the best practice in the world and adopt international standards of environmental protection.

Yet, infrastructure-hungry Asian countries are themselves causing severe environmental degradation – air pollution, water scarcity and soil contamination to name a few. They also suffer from weak government accountability and lack of civil society participation in environmental issues. It is unlikely they will be able to enforce “international standards” on Chinese-financed projects solely on their own.

Elizabeth Economy argued in a recent opinion article that the international world, especially the US, should see the creation of the AIIB as a chance to introduce robust environmental standards to China-led infrastructure investments in Asia. An editorial in The Hindu urged India, presumably the AIIB’s second largest shareholder, to work closely with China “to ensure that best practices are followed in projects for procurement and materials and in terms of labour and environmental standards.”

But will China readily accept involvement from the U.S., its close allies, and other emerging countries in its ambitious multilateral initiative, which aims to increase its political and economic influence in the region? One thing we can be sure about is the Chinese leadership understands very well that its long-term international influence does not solely depend on hard power; it also relies on soft power, mainly the social and environmental consequences of its extensive global presence.

As Joseph Nye, creator of the popular “soft power” concept said last year: “The development of soft power need not be a zero-sum game. All countries can gain from finding each other attractive.” Leaders from the U.S., China, and other Asian countries, developed or developing, will need political wisdom as well as professional collaboration to ensure the sustainable development of the most populous and fastest-growing region in the world.

Yuge Ma is a DPhil Candidate at the Environmental Change Institute (ECI), University of Oxford. She is co-founder of the Juxtapose Project, which focuses on interdisciplinary China-India comparative studies. Her latest book is Grow Up in India (Beijing, 2013). A longer version of this article first appeared on China-Outlook.