How to protect the environment with the help of the stock exchange

This image was taken from the Living Asia website where this article was originally published.

How and based on which principles are the projects being implemented by the Chinese side under the Belt and Road Initiative?

The other important question is how the economic cooperation with foreign partners is carried out? Often the Kazakhstani environmentalists and specialists from other spheres cannot recognize it behind the vague concept of “China.” And this makes it challenging to analyze the results of implemented and ongoing projects, let alone the possibility of influencing them.

To change this state of affairs, a webinar named “Chinese state actors: banks, regulators, ministries that oversee overseas financing” was organized. In my opinion, the speakers managed to provide the participants with a rather complex idea of this vast topic. Its relevance was illustrated by Niva Yau, a representative of the OSCE Academy in Bishkek:

One of these days, the second ministerial meeting “Central Asia – China” was held in China. It has been the first event of such kind since the pandemic, which demonstrated the region’s importance to China. As Xi Jinping had previously mentioned, Central Asia will be the first region where China will direct its investments towards the recovery from the pandemic. It looks like a substantial flow of money from China will go to Central Asia in the next five years, so we need to learn how to interact with the Chinese financial players.

Types of financing from China

China uses various types of financing for overseas projects, for example, loans from the Chinese government. Usually, they are targeted. For instance, construction loans are issued for long periods. There are also concessional loans which are typically given at a symbolic interest rate, sometimes even at 1 percent. In addition to this, there are non-concessional loans that are issued at the market rate or even higher. Another type of loan is grants or loans without interest, usually provided by the Ministry of Commerce, but other ministries can also supply them. However, it is only possible to obtain these loans if the Chinese side is interested in a project. For example, in 2011, the Chinese Development Bank allocated $ 1.3 billion at a very low interest rate for 15 years to a project designed to modernize a copper plant in Aktobe, Kazakhstan. Niva Yau thinks that this is one of the success stories of bilateral cooperation with the involvement of Chinese investments.

Banks in China

There are three primary players involved in financing external projects in China: The China Development Bank, the Agricultural Development Bank of China, and the Export-Import Bank of China. In their cooperation with foreign countries, they use the industry development model practiced in the Celestial Empire itself. However, it isn’t easy to obtain detailed information about these operations. The contracts are typically secret; they can only be found if the recipient country decides to make their content public.

These banks usually operate in developing countries, where China has a competitive advantage, which it uses to transfer some outdated technology. For instance, not a very high-tech cement plant in the countries of Central Asia. But at the same time, loans are pledged either by physical assets, for example, infrastructure facilities in the form of pipelines or deposits of natural resources. These banks operate within a wide range of objectives that are not known to external partners. An important point: they are helping the Chinese government intensify operations that are not of commercial interest. Such projects may not bring any money, like the Sino-European Railway through Central Asia countries, which has not brought any profit in five years. The funds provided by these banks are coming from the government. This is how the Chinese authorities are pursuing their non-commercial goals.

However, speaking about Kazakhstan, she underscored that we could witness a shift away from this lending system in its economic relations with China. Now Chinese loans are provided on a commercial basis. Niva Yau also noted that some of the projects in which China participates are very important for the region’s countries. For example, a project for the production of plastics is being implemented with Chinese assistance in Western Kazakhstan. Kazakhstan has been supplying low-grade oil to China for many years, and the Chinese have been processing it into plastics and exporting the finished product back to Kazakhstan. But today, the situation is dramatically changing.

Cooperation with China is beneficial

This example clearly demonstrated the fact, which is often hidden behind the multitude of phobias prevailing in society, that the economic cooperation of Kazakhstan and the countries of the region with China is objectively beneficial for everyone. The ground for all sorts of phobias arises from the unprofessionalism or unethical attitude of the officials and business people from the post-Soviet countries. The presentation of the International coordinator of the Rivers without Boundaries Coalition, Eugene Simonov, was devoted to this problem.

I am mainly involved in projects that can have significant negative socio-economic consequences. Unfortunately, the experience of improving these projects lags far behind the experience of their selective destruction. In other words, it is easier to cancel some harmful projects rather than to redirect efforts in a constructive direction.

Eugene’s speech about the successful experience of NGOs in the Belt and Road projects in Russia and Mongolia sounded encouraging. The non-governmental sector can indeed effectively influence even the projects involving renowned companies. Eugene shared one of the know-how of his organization:

Stock exchanges, where a significant part of Chinese companies place their shares, are an underutilized resource for influencing Chinese investments. However, companies are very vulnerable to qualified criticism: most stock exchanges have strict requirements for comprehensive disclosure of risks, and many projects, which we have not been able to learn anything about for years, are forced to publish a large number of details regarding their technical and financial solutions and legal circumstances. … Moreover, this is done publicly, with great attention from the side of society, media, decision-makers, which gives us additional opportunities to influence all these audiences.

This technique was first tested in 2011, when a subsidiary of the famous China Three Gorges Corporation, in cooperation with a Russian company, created a joint venture (JV) and decided to hold an IPO on the Hong Kong stock exchange. Then several Russian NGOs and the Rivers without Boundaries Coalition issued a special appeal to the stock exchange, where the main complaint was the lack of transparency of the IPO.

“They managed to declare 10 gigawatts of hydroelectricity, without specifying on which rivers the hydroelectric power plants will be built and what risks it entails,” Eugene explained. The horrified management of the stock exchange replied that they would demand clarification from the company. After that, the start of the shares’ sale was postponed several times, and then it was canceled entirely.

We were most concerned about the financing by the Chinese side of new hydroelectric power plants in the Amur basin, where they have already caused significant damage. These fears were well justified. For many decades, there has been a project to create joint dams on the Amur river, and we continuously had to prevent the destruction of this great river. In 2016, we were able to do so once again using the stock exchange information, said the expert.

Mr. Simonov also shared some practical advice.

Actions to expose environmentally hazardous projects should begin with the first announcements of upcoming IPOs, entailing very uncomfortable questions and demanding disclosure of information. Today, most exchanges have requirements for compliance with the principles of a sustainable development model, environmental, social, and managerial responsibility. Fortunately, they will no longer remain indifferent to such problems. But it is also crucial to cover public actions at the international level to demonstrate the ability to attract audiences that are important for the investor and the stock exchange.

This article was originally published on Living Asia in Russian.