Chinese banks: Environmental Impacts and Opportunities

1. Chinese banks:Environmental Impacts and Opportunities Michelle Chan-Fishel Friends of the Earth – US BankTrack

2. Outline • Environmental implications of Chinese banks’ overseas financing • Overview of Chinese banking sector • Profiles of a few Chinese banks

3. Environmental Implications of Chinese Banks’ Overseas Financing Three Examples

4. Oil Palm Plantations in Borneo • World’s largest proposed palm oil plantation development scheme • 18 separate oil palm plantations with an average size of 100,000 hectares each • Most of these 18 proposed plantations will be located in the Heart of Borneo area • Headwaters of many important rivers, including Rajang, Baram Kinabatangan, Belait, Kapuas, Mahakam and Barito • Biodiversity: 200 bird species, 150 reptile and amphibian species, 100 mammal species including orang-utans, elephants and rhinos, clouded leopard, sun bear, Bornean gibbons (endemic)

5. Oil Palm Plantations in Borneo • China Development Bank • CITIC Group • China National Constructional & Agricultural Machinery Import & Export Corporation • Guangdong Foreign Trade Group

6. China International Marine Container • Logging in Suriname (South America) • Extracting hardwood resources for shipping containers and pallets • Adversely affecting a maroon community (colonies originally settled by escaped African slaves) that has already been resettled from a dam • Also logging operations in Cambodia

7. China International Marine Container • Export-Import Bank of China • Bank of Communications • China Merchants Bank • China Construction Bank • Bank of China • Nanyang Commerical Bank • Others: Citibank, HSBC, Standard Chartered

8. China National Machinery and Equipment Export-Import Corp. • A builder of the Three Gorges dam • Contracted by United Fiber Systems to build Kiani Kertas pulp mill in East Kalimantan, 80% financed by CNME • 525,000 tons/year • Will rely on Sumalindo plantations, located on indigenous territory • International NGO campaigns forced Deutsche Bank to drop UFS as a client, UFS to withdraw an application for World Bank (MIGA) financing, and a Dutch company to pull out of the mill

9. China National Machinery and Equipment Export-Import Corp. • Belinga iron ore mine (Gabon), port, rail system, and two dams; US$3 billion • Identified as a “Priority Important Area” in the Regional Action Plan for the Conservation of Chimpanzees and Gorillas in Western Equatorial Africa • Banks • Export-Import Bank of China 3 year RMB 8.28 trillion line of credit (2003) • Bank of China RMB 8 billion credit (2002)

10. Environmental Opportunities • High environmental financing standards at Chinese banks • will help banks manage credit risk and make better loans • will reduce business risks for Chinese companies, and improve their corporate social responsibility • will enhance international goodwill towards China as it helps protect people and the environment around the world

11. Overview of Chinese Banking Sector

12. Role of Banks in China’s Economy • Bank deposits represent 75% of financial stock in China, and is growing • Bank loans are prime source of corporate financing • Banks have a lot of money on hand (RMB 32 trillion, or 1.7 times China’s GDP)

13. Types of Banks • Policy Banks • China Development Bank, China Agricultural Development Bank, and China Export/Import Bank (Chexim) • Commercial Banks • State-owned banks (4): China Industrial and Commercial Bank, Bank of China, China Construction Bank, and China Agricultural Bank. Hold 50% banking assets • Joint stock banks (12) such as: Bank of Communications, China Minsheng Bank, China Merchants Bank, Guangdong Development Bank • City-owned banks (100+) such as: Bank of Shanghai

14. Banking Regulation • China Banking Regulatory Commission • Established 2003 • Mission: to protect depositors & consumers, maintain market confidence, reduce financial crime • Introduced loan categorization system: normal, special mention, substandard, doubtful and loss loans

15. Banking Regulation • People’s Bank of China • Sets benchmark interest rates • Sets capital reserve requirements • Supervises the inter-bank market • Creates credit policies to influence lending to particular sectors (e.g. tightening loans to overheated sectors like steel or real estate)

16. Key Problems in the Sector • Non-performing loans • The result of politically-motivated lending (e.g. to support ailing state-owned enterprises). Government estimates NPL rate at 8-9%, while others estimate it at 20-25% • Transparency and corporate governance • Accurate and reliable information and accounting figures are few. Corruption is a concern, and governance changes at the top may not trickle down to local branches.

17. Banking Sector Reform: Main objectives • Bank restructuring • purge non-performing loans inject ailing banks with capital, particularly in the Big Four commercial banks (RMB 3.6 trillion since 1998) • Financial liberalization • gradually allow prices to be determined by the market, and open the sector to foreign competition • Better governance • Strengthen financial regulation and supervision, improve risk management, corporate governance, and disclosure; adopt international standards

18. Foreign Bank Involvement • Foreign banks are opening more local branches • 71 foreign banks from 20 countries operating in China (end of 2005) to make loans mostly to businesses • A few foreign banks are locally incorporating their branches as subsidiaries • Strategic ownership stakes in Chinese banks • Foreign ownership capped: 20% for a single investor, 25% maximum foreign owned • Examples: RBS and Bank of China; Bank of America and China Construction Bank; Citigroup and Guangdong Development Bank

19. Profiles of A Few Chinese Banks China Export-Import Bank China Development Bank China CITC Group Industrial & Commercial Bank of China

20. China Export-Import Bank • Specializes in aiding Chinese companies overseas • Credits for export sellers: • 35% high tech; 33% offshore construction & overseas investment projects; 17% ships; 12% mechanical and electronic products • Lending • Transportation 39%; municipal construction 20%; 11% electric power; industry 10% • Reportedly has environmental standards, but no one has seen them

21. China Development Bank • CDB beginning to expand into overseas investments, for example • Kazakhstan: cooperation with Kazakhstan Development Bank for oil-related investments • Zimbabwe: loans in exchange for minerals • Uzbekistan: 20 million USD credit line for national Bank for Foreign Economic Activity • Indonesia: energy investments, one of the key investors in Indonesian oil palm development • Russia: developing dams, pulp mills, and oil pipelines in Russian Far East. • CDB has environmental policy in which projects must be on SEPA’s approved list before receiving financing

22. China CITIC Group • Large financial conglomerate which owns CITIC Bank • Financing profile: • Financial sector accounts for 81% of total assets. • Industry (information, infrastructure, energy, real estate) accounts for about 18% • Foreign joint-ventures • CITIC Pacific (HK) is involved in: power generation, communications, aviation, civil infrastructure, steel manufacturing • CITIC Resources Holdings (HK) is involved in: plywood, aluminium, coal, oil and base metals in China, Australia and other countries • CITIC Australia focuses on resources and primary industries. It has significant investments in Portland Aluminum Smelter and Australian Coal Industry. • CITIC Canada invests in pulp mills, lumber mills, and owns Sundance Forest Industries Ltd, a logging and lumber processing company.

23. Industrial & Commercial Bank of China • Big Four bank, publicly traded • Goldman Sachs 6%; Dresdner/Allianz 2.5% • #1 lender in China, 100 overseas branches • Lending profile: 50% to corporations • 20% manufacturing; 11% transportation & telecommunications; 9% power, gas & water • Within China: 22% Yangtze River Delta, 20% Bohai Rim, 14% Northeast, 13% Central