Chinese banks:Environmental Impacts and

Opportunities

Michelle Chan-Fishel

Friends of the Earth – US

BankTrack

Outline

• Environmental implications of Chinese banks’ overseas financing

• Overview of Chinese banking sector

• Profiles of a few Chinese banks

Environmental Implications of Chinese Banks’ Overseas

Financing

Three Examples

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)

Oil Palm Plantations in Borneo

• China Development Bank

• CITIC Group

• China National Constructional & Agricultural Machinery Import & Export Corporation

• Guangdong Foreign Trade Group

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

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

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

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)

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

Overview of Chinese Banking Sector

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)

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

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

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)

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.

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

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

Profiles of A Few Chinese Banks

China Export-Import Bank

China Development Bank

China CITC Group

Industrial & Commercial Bank of China

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

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

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.

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