The paper is presented in five sections. The first provides an overall introduction; the second describes recent changes in capital flows to China in terms of total volume, contribution to China's economic growth, and characteristics by source, sector and regions. Section three highlights the World Bank as an investor in China's economic development. Section four focuses on the role of foreign capital in China's energy sector and analyzes related institutional changes in this sector and their effects on the natural environment. Section five identifies the key targets for environmental advocacy and training, and priorities for policy researchers.

China's investment landscape has changed rapidly in the 1990s as the economy has been transformed from a planned to a market economy. Foreign direct investment has dominated foreign capital flows into China since 1992, comprising three-quarters of foreign capital flows in the years 1993-96. Investment has been dominated by Hong Kong (45.4% of all foreign capital flows), Japan, Taiwan, the U.S. and the World Bank and has been clustered in industry, real estate, public utilities and consultancies. Foreign capital has also had geographic targets within China: Guangdong province has attracted a full 24% of foreign flows and the relatively underdeveloped provinces and autonomous regions of middle and western China have received a meager portion.

The author chose to examine the environmental impacts of the World Bank's investments in China because there is abundant data compared, for example, to the data on foreign direct investment. The WB has been involved in extending loans to support infrastructure construction and poverty alleviation and providing technical assistance in specific projects or through independent research. While the Bank's loans comprise only a small percentage (3-4%) of foreign capital flows to China, they are significant for the ideas, concepts, management patterns, and other ‘software' accompanying them. Also World Bank loans have gone to sectors that have attracted relatively little other foreign capital: agriculture, energy, transportation, environmental protection. The author credits the Bank with financing efficiency-enhancing technology, supporting environmental investments and channeling other capital flows toward them, introducing environmental management concepts, and providing technical capacity-building to government personnel.

The power sector was one of the first sectors to attract foreign investment, and promises to rely on it more than other sectors in the near future. In part because of China's heavy use of coal to fuel power plants, the sector has been a major contributor to China's SO2 emissions. China has lacked "end of pipe" pollution control, and the technology employed in the power sector is seriously out of date, with low energy efficiency. There is a lack of domestic private capital to finance the needed retrofits, so by necessity China must rely on foreign capital. While China by law requires environmental assessments of foreign power proposals, in the rush to receive foreign capital, some local governments have overlooked the regulations. The author approves foreign companies' importation and dissemination of advanced technologies and management techniques, and writes that by increasing efficiency, these imports may reduce fossil fuel use for power generation.

The author goes on to argue that institutional changes within the Chinese government accompanying the transition from planned to market economy may have negative impacts on the environment by weakening the government's ability to monitor environmental quality, design pollution control devices and provide training. Specifically, as the management and share-holding functions of state-owned enterprises are transferred from the state to private actors, the industrial ministries or bureaus in government will shrink and perhaps disappear. The power sector has been singled out as a pioneer for the separation of government and enterprise, with the regulatory, service provision and construction functions of power generation split between four separate entities. At this stage, among the many changes occurring, and given the potential positive and negative environmental impacts of private international capital flows to the sector, it is impossible to predict the net environmental effects.

The author proposes that environmental advocacy organizations target local governments because of their significant responsibility for the environmental character of investment decisions, and conduct further research on the interactions between international financial flows and the domestic policy environment. A related proposal is to increase environmental awareness among government investment planners. The author proposes broader alliances between environmental groups and other kinds of public interest groups for sustainable development goals.