Higher Standards for Chinese Companies - and a Risk for Africa?

We can report good news from China, and need to watch out for a potential downside. On January 24, China’s State Environmental Protection Agency (SEPA) introduced the Equator Principles – the environmental guidelines of leading private banks – into its green credit policy. The green credit policy was established in August 2007 as an incentive for companies to comply with environmental laws and pollution standards. In November, SEPA showed that the policy has teeth by withholding loans for twelve companies that violated environmental rules.

By adopting the Equator Principles, China’s environmental watchdog breaks new ground in three respects. In October 2006, the World Bank’s short-lived president Paul Wolfowitz chastised Chinese banks for not following the Principles. The Chinese government does not take public criticism lightly, and after Wolfowitz’s critique, the Equator Principles were off the table in Beijing for some time. SEPA’s decision demonstrates that Chinese officials have swallowed their pride, and don’t let prestige overrule the interests of the environment.

NGOs including International Rivers have criticized the Equator Principles because they lack any kind of enforcement or compliance mechanism. SEPA is not known as a political heavyweight in Beijing’s power apparatus. Yet by integrating the Equator Principles into China’s green credit policy, SEPA has for the first time given them some clout. No other national government is sanctioning companies that don’t comply with the Principles.

SEPA has so far only sanctioned mid-sized companies which violated domestic environmental rules under the green credit policy. Yet the Equator Principles are clearly global in scope. Their adoption offers SEPA the opportunity (and challenge) to reign in environmental malfeasance of large, globally active companies such as Sinohydro. (Watch out for more updates about the environmental track record of this big global dam builder on our website.)

The rapid pace with which SEPA has strengthened its regulatory instruments in recent months deserves respect. There is however a potential downside. Many Western companies have moved their production to China in order to evade stricter environmental controls at home. As China now strengthens its environmental regime, these companies may move on to regions with weaker environmental standards such as Africa. And Chinese companies may move with them.

Already there is some evidence for such an environmental race to the bottom. When China outlawed logging in old-growth forests, Chinese logging companies quickly moved to Burma, Russia and other countries. According to Stellenbosch University’s Centre for Chinese Studies, Chinese companies will build a large aluminum smelter in Egypt in response to tightening pollution standards at home. And last September, South Africa’s Deputy President Phumzile Mlambo-Ngcuka announced that her government was talking with China about moving polluting Chinese companies to South Africa. “China needs to send some of its polluting industries elsewhere because it is choking on them”, Mlambo-Ngcuka said. “We have the capacity to manage emissions and want to regulate that agreement.”

Mlambo-Ngcuka’s announcement reminds me of a memorandum in which the World Bank’s chief economist Lawrence Summers argued in 1991 that “under-populated countries in Africa are vastly under-polluted”, and that the World Bank should be “encouraging more migration of the dirty industries to the [Less Developed Countries]”. Larry Summers had to resign from the World Bank after his cynical remarks. Let’s see what happens with the South African proposal.

South Africa’s civil society responded quickly. “Don’t sell away our lives to Chinese businesses whose production output is for the over-consuming public in the North”, Desmond D’sa of the South Durban Community Environmental Alliance urged in a letter to South Africa’s Business Report. Civil society networks will have to monitor internationally how companies respond to stricter environmental standards in China.

Peter Bosshard is the policy director of International Rivers. His blog appears at www.internationalrivers.org/en/blog/peter-bosshard .