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Development of Chinese Overseas Investment Standards

Photo: Chinese Xiaomo Highway bridge under construction between Lao border town and Yunnan, China (By Stanley Dullea)

China’s overseas investment increased rapidly from around 2004. Since then, Chinese companies and financiers have faced a steep learning curve. Many companies with limited or no experience operating overseas became involved in major projects in countries with which they were not familiar. While some have implemented overseas projects without major problems, others were unprepared for or unable to deal with issues that emerged. In some cases, this has led to social and environmental harms, conflict with local people and other problems, all of which have caused reputational—and sometimes financial—damage to Chinese investors and the state.

In response, Chinese regulators and government-affiliated industry associations have taken steps to develop standards for companies and financiers operating overseas. So far, there are no laws governing overseas investment by Chinese companies, but a regulatory system is developing. There are several binding administrative rules that apply to Chinese overseas investment, although provisions on social and environmental protection are often basic and non-binding. State-owned enterprises need to follow additional regulatory procedures.

Currently, the policies with the greatest administrative weight governing overseas investment are mostly departmental rules made by ministries, commissioned under the State Council, along with other agencies with administrative functions directly under the State Council. These regulations are supported by a large number of normative documents, such as “guiding opinions” or “guidelines” issued by government departments. Many of them include important principles such as pursuing mutual benefit, complying with local laws and regulations, protecting the rights of employees and the environment, and fulfilling social responsibilities. There is an increasing emphasis on managing environmental and social risks, encouraging companies to reference international standards and good practice. The emphasis on preserving China’s corporate image and reputation reflect concerns regarding reputational risk. Although most of these normative documents are not mandatory and contain no enforcement mechanisms, some of them do contain provisions that have binding force and must be observed by investors, depending on supporting articles of enforcement.

These normative documents, especially those issued by high-level authorities, reflect the concerns and political will of Chinese policy makers. In some cases, guiding opinions and guidelines can be the start of a process of building a regulatory system, and mandatory policies may be developed later to support their implementation.

An emerging trend in China’s governance of overseas investment is that the focus has shifted from pre-investment approval to post-investment monitoring and regulation. The Chinese government is strengthening its systems of reporting and monitoring, which could potentially create openings for community advocates to provide information from the ground to feed into such monitoring.

Sector-specific guidance has been issued by industry associations for sectors including mining and minerals and forestry and agriculture. These guidance documents are less influential than government guidelines, as the issuing bodies are not state institutions, but they usually include more detailed and higher standards than government policies. Recent government policies signal an increasing role of “self-regulation” by industry associations based on sector-specific codes of conduct in strengthening the overall governance of Chinese overseas investment.

The following sections describe some of the main overarching standards and guidelines currently in place that apply to Chinese overseas projects and highlight key articles relevant to ensuring respect for community rights and environmental protection.

All the guidelines and policies referred to can be found here.

Practical Advice: Using Chinese standards

Many of the environmental and social standards included in this guide are basic, have limited provisions for enforcement and do not include grievance mechanisms. This means they cannot be used alone to hold stakeholders accountable.

But that does not mean the standards are not valuable. The development of these standards indicates that there is some level of commitment within the Chinese state and industry associations to improve the quality of overseas projects and the image of Chinese investors. Importantly, there is an increasing focus on project monitoring.

These standards also provide legitimacy and channels for community advocates to report non-compliance and grievances to Chinese authorities. In the long term, this may in turn inform the ongoing development of the regulatory system and future policies.

By familiarizing yourself with these standards, you will be able to get a better sense of what issues are priorities to the Chinese state, which issues various state institutions are concerned with, what kind of language they use, and what is expected of Chinese companies and banks when they are involved in overseas projects. Referring to these documents strategically in your engagement with Chinese stakeholders could help strengthen your messaging.

If you find that a Chinese company, investor or financier has failed to follow the relevant guidelines or policies:

  • You can refer to the standards when raising your concerns directly with the company or bank to them.
  • You can refer to the standards in communications with the relevant Chinese state institutions.
  • If you do not get an adequate response, you could consider publicizing the information through the media or a report to draw public attention to project harms and the failure of actors to respect the standards.
Remember that these standards are not a substitute for Chinese companies following host country laws and regulations. In fact, companies may be subject to additional penalties from Chinese authorities if they violate laws or regulations of the host country. For this reason, it is very important to analyze project compliance with the laws of the host nation. If you can clearly demonstrate that a project is in violation of local regulations, you will be in a stronger position to get the attention of Chinese stakeholders and advocate for concerns to be addressed.