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China needs urgent oversight of investments

In an in-depth interview, lawyer Zhang Jingjing says China needs legal requirements for overseas investment, not guidelines

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Workers at the Chinese-funded Coca-codo Sinclair hydroelectric plant in Ecuador (Photo: Agencia de Noticias Andes)

With the advent of the Belt and Road Initiative, China’s ever-increasing overseas investments have been attracting more attention. In Latin America alone, China has direct investments worth over US$110 billion, and in countries such as Brazil, China’s investments rank alongside those of the US and Spain.

Accompanying this, and due to weak environmental and social awareness, there have been frequent failures in how Chinese companies deal with communities in the host countries. Recent years have seen various government bodies publish guidance on environmental and social performance in overseas investment, but the international image of Chinese companies has not improved.

Chinese environmental lawyer Zhang JingjingZhang Jingjing, an environmental lawyer and visiting scholar at the Environmental Law Institute in Washington DC, has been studying the environmental and social risks associated with China’s overseas investments since 2010. Over the past year she has visited Chinese-backed projects in Latin America, Africa and Asia that have caused social and environmental conflict to learn about the cultural and political basis for opposition, how companies and communities are communicating, and how conflicts can be resolved.

Diálogo Chino met with Zhang Jingjing in Beijing for an in-depth interview. She was frank, arguing that rather than providing information on best practices, China’s government and legislative bodies should be focusing on oversight and accountability to set a clear bottom line for the performance of Chinese firms overseas.

You’ve been investigating the environmental risks of China’s overseas investments. What have you learned from this past year? How do the locals you met regard you, a public interest lawyer from China?

Zhang Jingjing: China’s overseas investments have led to many cases of environmental damage and infringed rights. Meanwhile, Chinese firms are very bad at handling community relations overseas.

In my research in Latin America, Africa and Asia this year what I heard most often in affected communities and from local NGOs [non-governmental organisations] is that Chinese companies are not transparent and are hard to communicate with. Many large extractive and infrastructure projects are joint investments by companies from lots of different countries, but when things go wrong public opinion blames China as their environmental image is weak and they’re bad at communicating. I often heard that these companies didn’t deal with problems in the same way as local companies. Often they’d tell those complaining to go and talk to the government, as it was the government that had brought them in.

In the north of Sierra Leone I visited a
Chinese iron ore mine. The UK partner had gone bust so the Chinese company had to buy them out, becoming the sole owner of the project.

When I went there, accompanied by a local NGO, the children in the village were excited and they kept on saying one word over and over. I asked what it was and was told it means 'white'. I was the first Chinese person they’d ever seen, so they thought of me as white.

Clearly, none of the Chinese staff at the mine had visited this nearby village. The villagers here in the mountains had never seen a Chinese person before. When we met with the district chief later, he told me that in the entire process, from prospecting to the start of mining, he’d only met with two local managers employed by the Chinese firm, but never a Chinese manager.

There is no doubt the mining has affected local life; three villages nearby were relocated, and drinking and irrigation water in those that were not relocated has been polluted, and there’s noise pollution from the opencast mining. The river near the village I visited, downstream of the mine, had a rusty red colour. The pollution was obvious. The district chief reported the pollution and land issues to the company on behalf of the locals but the response was that the project had been arranged by the Sierra Leone government and any problems should be taken up with the government. That evasiveness and lack of communication was a major feature of that particular dispute.

In 2002, a decade-long civil war ended in Sierra Leone; the country is still rebuilding, and confirmation of land ownership is still ongoing. The land issues in this case were all settled by verbal agreements: relocations, how land was acquired, how buildings were constructed, it was all verbal. There’s no documentation to specify who owns land. That leaves a risk of conflict between the mining company and the community.

Due to the Ebola outbreak the mine hasn’t actually been running for very long and the water and soil pollution isn’t severe yet. But this is an opencast mine and there’s a lot of rainfall in the tropics. The heavy metals in the mine are easily washed into the rivers and soil. If appropriate measures aren’t taken to prevent that, we can expect the pollution will get worse and affect the lives and health of the villagers, making conflict hard to avoid.

Colombia has become a new destination for Chinese investment following the signing of the peace deal between the FARC and the Colombian government. But the mining locations China is investing in are often remote and possibly under the control of armed groups. What have you learned about reducing the risk of conflict between investors and local communities that could be applied to this context?

I’ve not heard of any very good examples. The corporate social responsibility
guidelines from the China Chamber of Commerce for Minerals, Metals and Chemicals Importers and Exporters could be used as a reference, but that’s a particularly high standard. That’s also aimed at the mining industry, it wouldn’t work for infrastructure, for example. Maybe you could take some of the principles and use those. More practical would be communication on environmental and labour law between China and Colombia, introducing China’s more advanced legislative and enforcement experiences (such as the Environmental Protection Law, Chapter 5, on openness of information and public participation) to the Colombians, for reference by their legislators and administrative bodies. This is something China is already doing. Many Chinese NGOs are (in accordance with that section of the law) acquiring environmental information, organising hearings and bringing lawsuits, and Chinese communities and individuals are using this to protect their rights. That’s more practical, and something the Chinese firms can understand.

Chinese NGOs are acquiring environmental information, organising hearings and bringing lawsuits, and Chinese communities and individuals are using this to protect their rights.

Do you have any advice for Chinese firms considering investing in Colombia?

First, you need to have an open approach, to go and communicate with the communities and individuals affected, and with local NGOs. You can’t only talk to the government. You need to be open. A lot of problems can be resolved by negotiation, for example by offering a bit more land (or money), or helping the community improve its buildings, building a good rood – these are all very effective. Sometimes it can be as simple as reducing dust pollution.

I’ve studied two cases where disputes arose over mining projects where the villagers' complaints were actually very simple. The trucks carrying the ore were huge and the road the company had built wasn’t very good so there was a lot of dust and noise as they passed through the village. That’s a very simple issue, there’s no need for a dispute to arise, for the police to get involved and even for people to be injured or killed. But in Peru there was a case where a villager was killed in such a
clash.

If there’s the will then the company can solve issues like this. I think Chinese managers should realise that it’s not enough just to talk to the government, they should talk to the locals, to environmental groups, even unions. You can’t hide from the issues.

The Green Finance Committee and several industry associations relevant to overseas investments have recently published an initiative on managing these environmental risks. What’s your view of that? What do the people you’ve met in investment destinations think of these kinds of documents?

I’ve seen an English version of it, and while it’s been drafted by different bodies the aims and effects are similar to a 2015 document on social responsibility in mining investment from the China Chamber of Commerce for Minerals, Metals and Chemicals Importers and Exporters and the July 2017 revision of its guidelines for due diligence in mineral supply chains. The intentions are very good but when it comes to implementation there’s no specific legislation ensuring it actually happens.

In fact what’s more worthy of attention is that Chinese firms overseas, environmental NGOs in the host nations, communities and individuals often misunderstand the nature of Chinese law and policy on overseas investments.

Those NGOs and communities often discuss several documents: the 2012 China Banking Regulatory Commission’s Green Lending Guidelines; the 2012 China International Contractors Association’s Social Responsibility Guide for Chinese Contractors; the 2013 Ministry of Commerce and Ministry of Environmental Protection’s Environmental Protection Guidelines for Overseas Investment Partnerships; and the previously mentioned two documents from the China Chamber of Commerce for Minerals, Metals and Chemicals Importers and Exporters. These are all guidelines from administrative bodies and industry associations, rather than laws. There’s currently no single law overseeing the environmental and social impact of Chinese companies working overseas, just regulations scattered amongst administrative regulations and ministerial rules.

There’s no single law overseeing the environmental and social impact of Chinese companies working overseas, just regulations scattered amongst administrative regulations and ministerial rules.

In my research this year I found that NGOs and communities in host nations have a confused understanding of this – they don’t see that these documents are distinct from Chinese law.

The China Chamber of Commerce for Minerals, Metals and Chemicals Importers and Exporters produced its Social Responsibility Guidelines for Chinese Mining Investment Overseas and included the principles of the UN guidance on human rights for businesses and some other international good practices, such as [International Labour Organisations’ convention 169 on] “free, prior, and informed consent.” These standards are very high. If Chinese mining firms choose to use that document then conflict with local communities would be greatly reduced, environmental risks controlled, there’d be less infringement on labour rights, and so on.

But as things stand those lofty standards are too hard for the majority of Chinese firms to implement. Although there have been huge steps forward in openness of environmental information and public participation over the least ten or more years, and these advances have been made concrete in the Environmental Protection Law, if you compare Chapter 5 of that law on openness of information and public participation with those guidelines, you find major differences. The same is true if you compare the guidelines and the environmental law of the host nations.


Both Chinese and host nation law set a minimum standard for the company. The guidelines represent something higher, a best practice the company can opt to apply. It’s pointing the way, rather than something to be immediately implemented. It’s the direction Chinese companies should be moving in.

In theory, guidelines produced by industry associations only apply to companies that are members of that association. The parent companies of the firms investing overseas are members of the China Chamber of Commerce for Minerals, Metals and Chemicals Importers and Exporters, but overseas subsidiaries, the joint ventures, the companies they have a stake in or buy outright, which are registered in the host nation, aren’t members. This is a limitation of industry guidelines produced by membership bodies.

When some overseas NGOs read these guidelines they regard them as equal to Chinese law, they think they can use these to apply pressure to the companies. The guidelines will specify that they are non-binding, but as they haven’t understood the difference between the guidelines and the law, as they don’t understand how the Chinese political and legal system works, communities and individuals affected by the work of the Chinese firm think this is a document that the Chinese company must abide by, and that if they don’t, they should be held to account and bear responsibility.

Some overseas NGOs have called for guidelines like these to be given 'teeth'. These guidelines are standards for corporate social responsibility. If you want to give them the teeth to be enforced, that stops being social responsibility, it’s legal responsibility. Corporate social responsibility is a higher and voluntary undertaking, after a company has done the legal minimum.

If you want to give them the 'teeth' to be enforced, that’s stops being social responsibility, it’s legal responsibility.

You mentioned that China’s regulations on the environmental and social impact of Chinese companies overseas are scattered through administrative regulations and ministerial rules, that there’s no specific law on this. Could you explain what actual oversight China’s overseas investments are subject to?

For Chinese companies, at home they’re constrained by Chinese law, overseas by the law of the host nation. Apart from that, you need to look to bilateral investment deals.

There’s a certain degree of oversight of overseas investment and business activities at the domestic stage when approval to send funds overseas is sought: the company has to get approval from the Ministry of Commerce before it can go to the State Administration of Foreign Exchange and transfer the funds. But it’s mainly the laws of the host nation that control the environmental and social risks of projects with Chinese investors.

But when it comes to overseas environmental and social risks, the Chinese government approach is one of guidance rather than oversight. I mentioned policy documents such as the Environmental Protection Guidelines for Overseas Investment Partnerships earlier, most of the articles there use language like 'encourage', even if something like 'shall' is used there are no legal consequences for failures to comply.

Can China, as an exporter of capital, avoid the responsibility of oversight? It has to be recognised that in a globalised world, a business’s activity is no longer confined within the borders of one country. One of the authors of the UN Guiding Principles on Business and Human Rights, John Ruggie of the Harvard Kennedy School, pointed out in an article written this year that under globalisation many multinationals, such as Apple and Alibaba, have more economic influence than some small countries. But there’s no single legal system governing the environmental actions of these actors. These companies have the very best lawyers and accountants, who can help them take advantage of grey areas in the law. Different countries take different legal approaches to the same matter, and the companies use those gaps to maximise profit. There’s no difference between companies headquartered in China, or those such as BP and Shell in the EU and US, when it comes to the pursuit of profit.

However, multinationals from the EU and US are, at home, subject to more powerful legal systems and can be sued by environmental NGOs and citizens, and so have been forced to develop ways to handle environmental risks and community relations. Meanwhile, Chinese firms don’t have a good environmental reputation at home, and overseas are responsible for environmental problems and avoid communicating with communities and NGOs – and so easily become the targets of public anger.

A responsible major economy should exercise some degree of oversight of the business activity of its firms overseas, and China should not shy away from that. It is a very high standard. We need to persuade our government to take up that responsibility. It’s in China’s interests as it’s part of our image as a major power; and it’s in the interests of the businesses as it’ll reduce the loss of assets through environmental risks and conflict.

A responsible major economy should exercise some degree of oversight of the business activity of its firms overseas

China is a signatory to the UN International Covenant on Economic, Social and Cultural Rights, and has obligations under it. In July the Committee on Economic, Social and Cultural Rights told signatories that when a company infringes on economic, social or cultural rights, the home nation’s obligations under the covenant should not stop at national borders.

China has also made commitments to global action on climate change. In Kenya and Mongolia I saw fierce opposition from locals and NGOs to coal-fired power stations, funded by China, built by China and to be operated by China. Local environmental NGOs have already taken various legal actions against these projects. If the Chinese government does not exercise oversight over these companies, its commitments to the world are greatly undermined.

Since reform and opening up last century, the government has encouraged overseas investment, with the One Belt, One Road initiative now pushing Chinese firms to work around the world on an ever-larger scale. But if the government does not provide oversight, China will fail to fulfil commitments it has made as a sovereign nation to international society.

However, the government has indicated it is willing to exercise some degree of oversight. The National Development and Reform Commission has solicited public opinion on a draft of its Method for Management of Company Investments and is drawing up a list of sensitive sectors which will require extra approval processes for overseas projects.

Some observers hold that Latin American countries seem to have lowered environmental standards for Chinese firms and should better enforce their own laws. What’s your view?

I don’t think you can say they’ve just done it for Chinese firms, but for all overseas firms. It’s not hard to see why – they want more investment. But Chinese companies do what they usually do at home, which is to very obviously strive for good relations with local governments in the hope that when conflicts arise with local communities the government will protect their interests.

Some of the African and Latin American environmental and human rights NGOs I’ve talked to say that when Chinese firms are working in their countries their bribery of local officials leads to land, environmental and labour disputes later on. They didn’t have evidence to support this, but it’s something you hear a lot.

Corruption in multinationals is a common problem, in particular when they’re working in developing nations where the rule of law is weak. The US used the Foreign Corrupt Practices Act to control corruption in companies with US links to reduce the likelihood of corruption in deal-making. China doesn’t have a specific law like that yet, just a crime listed in the Criminal Law, Article 164: bribery of a foreign civil servant or official of an international organisation. So far we haven’t seen any prosecutions for that crime.

How well Chinese companies do on the environment, labour and transparency is determined primarily by the degree of legal oversight from the host nation. In Canada, the US, Australia and South Africa, Chinese firms usually follow the laws, as the legal system is sound and local environmental and human rights groups have many years of experience in taking legal action against polluters. And Chinese companies are happy to work in those countries as there are fewer risks.

Do you have any advice for the overseas NGOs?

Learn a bit more about the characteristics of civil society action in China. African and Latin American countries are democratic and have elections, and that’s the environment their NGOs are used to working in. But China has an entirely different political system, and the environmental movement here has been both a top-down and a bottom-up process, using government power. For example in
environmental crackdowns, many NGOs worked alongside the environmental authorities. Foreign NGOs that understand this can choose appropriate methods and Chinese partners. Of course currently there aren’t many Chinese environmental or labour NGOs to choose from. China’s own NGOs are still surviving in the cracks, there aren’t many with the vision and capabilities to look at issues outside China’s borders.

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