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Chinese Overseas Investment and Its Environmental and Social Impacts

Yale University School of Forestry and Environmental Studies
New Haven, CT
4 April 2015
The Environmental Impact of China’s Investment in Africa
David H. Shinn
Elliott School of International Affairs
George Washington University

My remarks are confined to the environmental impacts of China’s
foreign direct investment (FDI) in Africa. There is a lot of confusion as to
what constitutes China’s investments; my definition is limited to China’s
equity investments in Africa. I don’t include aid projects, the impacts of
trade, or infrastructure projects performed on a commercial contract basis.
FDI constitutes a fairly narrow range of Chinese activity in Africa.
Protection of the environment has never been a particularly high
priority for African governments. A recent study by the Pew Research Center
of 44 countries, including nine from Africa, looked at five of the greatest
dangers facing the world. Pollution and the environment was one of the five
dangers and it ranked as least important by all but one of the nine African
countries. By contrast, persons in China ranked pollution and the
environment as the most important threat.
Until about five years ago, however, China had a disengaged approach
to the environmental practices of Chinese companies operating overseas.
There is growing evidence that China is now encouraging its companies as
they invest in Africa and elsewhere to follow better environmental practices.
In 2013, China’s Ministry of Commerce and the Ministry of Environmental
Protection issued voluntary guidelines for the first time that encourage
companies investing overseas to follow local environmental laws, assess the
environmental risks of their projects, minimize the impact on local heritage,
manage waste, comply with international standards, and draft plans for
handling emergencies. But if companies choose to ignore the guidelines,
there is no penalty.
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Chinese companies are also showing a greater interest in signing on to
the UN Global Compact, which contains provisions aimed at protecting the
environment. More than 200 Chinese private and state-owned businesses
have signed the Compact. But again the Compact is voluntary and a
relatively small percentage of Chinese companies operating in Africa have
signed it so far. Chinese companies most reluctant to improve their
environmental practices are small private ones and medium-sized ones
affiliated with Chinese provincial and municipal administrations.
It is useful to look briefly at Chinese environmental law and practice
because that is what China is most likely to pursue overseas. In 2012, the
18th National Congress of the Communist Party adopted “ecological
civilization” as one of the five pillars driving policy. By the end of 2012, the
National People’s Congress approved 10 environmental laws and 30 resource
protection laws.
As China’s environmental challenges have become more serious, there
has been growing interest in the use of the court system to deal with
polluters. There has been a rapid growth of environmental courts in China
following a pollution crisis in parts of the country. It is too early to judge if
the pollution courts will result in significant improvement of the environment.
China’s environmental legislation is now strong on paper, but its
implementation tends to be weak. Much depends on the efforts of local
governments, which have considerable autonomy, and other state agencies.
One of the most important Chinese environmental organizations concluded
that Chinese enterprises appear to be 15 to 20 years behind their Western
counterparts when it comes to the adoption of modern social and
environmental approaches to their outward FDI.
There is a new concern that China will address its domestic industrial
pollution by relocating some of its highest polluting facilities such as steel,
cement, and tanneries to places like Africa. In 2014, Hebei Iron and Steel
announced that it is building a plant in South Africa capable of making five
million tons annually. This is good for South African jobs, but potentially bad
for the environment. China has become a major investor in the leather
industry in Ethiopia and owns numerous tanneries, which are well known for
their pollution potential. Some of their practices have been criticized. Of
course, Western companies also increasingly export high pollution
manufacturing activities.

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African environmental law and practice, to the extent you can
generalize about 54 different countries, leave much to be desired. Africawide and sub-regional environmental initiatives have suffered as a result of
slow policy implementation, inadequate environmental legislation and
institutions at the national and sub-national levels, poor legal enforcement,
and insufficient financial and human capacity to implement the agreements.
The approach of individual African countries towards protection of the
environment varies enormously. Some countries have impressive legislation
in place while others are lagging behind. In all countries, however there are
serious shortfalls in funding and human capacity to implement programs to
protect the environment. In most African countries, the environmental laws
and standards are much lower than accepted international norms.
When evaluating the impact of Chinese FDI on the environment in
Africa, it is important to put it in the context of global FDI entering Africa.
China provides a relatively modest amount of the global FDI that has gone to
Africa so far. According to Chinese official figures, the cumulative FDI figure
at the end of 2012 was just over $21 billion. The actual amount may be
twice that figure. By comparison, however, at the end of 2012, American
companies had cumulative FDI in Africa of more than $61 billion.
Like most global FDI in Africa, Chinese FDI is concentrated in sectors of
the economy that are especially vulnerable to environmental concerns such
as energy, mining, fishing, and forestry. Chinese companies have invested in
mines that are sometimes located in ecologically fragile areas where there is
a higher risk of environmental degradation. They also often generate
greenhouse gases, solid and liquid waste, including hazardous products such
as cyanide and mercury.
Chinese fishing vessels have been criticized for worsening food
insecurity among Africans because they catch small species that are the
main source of food and income for small-scale African fishermen.
China is the largest importer of Africa’s tropical wood. While much of
this activity constitutes only trade, some of it involves FDI by Chinese
logging and timber trading companies. Chinese companies have a tendency
to violate local forestry laws together with African counterparts. The illegal
practices include abuse of permits and concession licenses, bribery,
operating without management plans, under-reporting export volume,
smuggling raw logs, and harvesting and transporting undesignated species.

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The government of China is sensitive to criticism of its companies in
the forestry sector. In 2009, the State Forestry Administration and Ministry of
Commerce issued voluntary guidelines which encourage Chinese companies
to manage, utilize, and protect overseas forests in order to play a positive
role in sustainable development of global forest resources.
The environmental issue for which China has attracted the most
criticism is the importation of products taken from African endangered
species, especially elephant ivory and rhino horn. Most of this activity falls,
however, in the category of illegal trade and not FDI.
Another controversial activity from the standpoint of environmental
implications is the construction of dams in Africa, but these are done as
commercial contracts and not as FDI. While they may have negative
environmental implications, they provide clean power. China has also
become a leader in wind and solar power that have minimal environmental
downsides. Africa is a small but growing market for these Chinese exports.
There is widespread agreement that Chinese companies, more than
Western companies, need to improve their environmental practices as they
invest in Africa. Several case studies illustrate the point.
The China National Petroleum Corporation has a 40 percent stake in
the umbrella organization that developed the oil fields in Sudan and South
Sudan. Seismic surveying created hundreds of kilometers of bulldozed
tracks, destroying farmland and increasing deforestation. Road construction
disrupted water flows, which damaged irrigation systems and forced the
evacuation of several communities. The most damaging impact has been
the discharge of contaminated “produced water” from oil reservoirs and the
improper disposal of drilling mud and other waste. Sudanese government
officials were more interested in advancing the oil industry than enforcing
environmental laws.
In Chad, the China National Petroleum Corporation purchased the
shares related to a permit held by a Canadian oil company. Known as the
Rônier project, the Chinese company solicited $1 billion in Chinese financing
to build a 311-kilometer pipeline connecting the oil fields to a refinery.
Construction began in the oil fields and along the pipeline route before
approval of the environmental assessment. Once construction was
underway, residents complained about traffic noise and air pollution caused
by the company’s trucks.

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In 2012, the Chadian oil minister suspended all operations of the
Chinese company for flagrant violations of environmental regulations while
exploring for crude. The minister alleged the company did not have the
equipment for cleaning up oil spills and intentionally allowed it to spill. in
2014, Chad withdrew five exploration permits after the company refused to
pay a fine of $1.2 billion for “unacceptable practices” that led to oil spills
around drilling sites.
In 2002, Gabon designated a quarter of its territory as nature reserve
in an effort to protect mainly pristine rainforest that hosts a variety of flora
and fauna. Environmental concerns over Chinese practices first arose when
SINOPEC began prospecting for oil in the Loango National Park. In 2006, the
government of Gabon ordered SINOPEC to halt its exploration activities.
The problems with SINOPEC occurred as the China National Machinery
and Equipment Import and Export Corporation and Sinosteel Corporation
were at an early stage of developing a multi-billion dollar iron ore concession
in the Belinga Mountains. The project included construction of a major dam
to provide power. The infrastructure work in connection with the dam
threatened a national park and caused massive deforestation. The Chinese
company had to abandon the project.
China is the largest importer of Mozambique’s hardwood timber; an
estimated 80 percent of all logging in Mozambique is illegal. A huge percent
of the timber exported to China, therefore, has been harvested illegally.
Chinese companies in Mozambique traditionally emphasized quick returns by
purchasing indigenous timber rather than investing in processing facilities
and sustainable forest management. Increasingly, however, Chinese
entrepreneurs began to acquire their own concessions in order to ensure
access to timber supply. The most common illegal activity in the timber
trade involved harvesting in excess of licensed amounts, harvesting without
a license, and harvesting in an area other than the licensed one. At the end
of the day, Mozambicans were primarily responsible for this environmental
tragedy. They allowed the abuses by corrupt companies.
While the perception of China’s environmental performance in Africa is
more negative than the reality of the situation, there is plenty of room for
legitimate criticism. Part of the problem stems from the fact that critical
accounts get more attention than positive ones and negative stories tend to
be replayed year after year. There have been improvements in the

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operations of Chinese companies that are slow to be acknowledged by
environmental groups or fail to be covered in the press.
The government of China has become more sensitive to criticism of
overseas investment by Chinese companies and has made a concerted effort
to improve environmental guidelines and encourage their implementation. It
also encourages Chinese companies to apply Chinese laws and standards in
their overseas operations. But all of the guidelines that apply to Chinese
companies operating overseas are voluntary. Chinese environmental policy,
lending institutions, and companies investing in Africa are playing catchup.
Many African countries attach a low priority to environmental
protection, have understaffed environmental bureaucracies, and have even
worse records for countering corruption than does China. Numerous African
officials are also reluctant to call out Chinese companies that engage in
unacceptable environmental practices because they do not want to
jeopardize Chinese investment or good relations with the government of
China. Consequently, it will often be up to the Chinese company to take the
initiative in ensuring better environmental practices.
In the final analysis, it is in the interest of both China and the African
countries to pursue sound environmental practices and sustainable
development.

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