Chinese overseas investments are rapidly increasing. As of 2011, China’s outward foreign direct investments (OFDI) spread across 132 countries and regions and topped USD 60 billion annually, ranking ninth globally according to U.N. Conference on Trade and Development statistics. A significant amount of this increasing OFDI goes to the energy and resources sectors—much of it in Asia, Africa, and Latin America.

But there are two sides to China’s OFDI coin. On the one side, these investments can benefit China and recipient countries, generating revenue and improving quality of life. However, like any country’s overseas investments, without the right policies and safeguards in place, these investments can fund projects that harm the environment and local communities.

WRI‘s new issue brief surveys the progress and challenges China faces in regulating the environmental and social impacts of its overseas investments. I sat down with WRI senior associate and China expert, Hu Tao, to talk about China’s overseas investment landscape. Before joining WRI, Tao worked as a senior environmental economist with China’s Ministry of Environmental Protection (MEP). Here’s what he had to say:

1) How have China’s overseas investments grown in recent years? What are some trends you’re seeing?

Although China’s outward foreign direct investments (OFDI) reached $60 billion and only ranked ninth in the world in 2011, its growth rate has been much higher than other countries. As China’s GDP and foreign trade volume grow very quickly – jumping over the past decade from number six to number two and from number seven to number one, respectively – I am sure that China’s OFDI will catch up soon.

2) What opportunities does this growing investment bring to China and to the countries in which it invests?

These investments distribute economic resources worldwide and increase the efficiency of the global economy. They create profits for China’s investors and benefit host countries in ways such as job creation, infrastructure improvement, and economic development. For example, Ethiopia, as one of the fastest-growing economies in Africa, benefits in many ways, including economically and socially, by hosting China’s investments.

3) But there are also social/environmental risks associated with these investments. Can you elaborate on how China’s OFDI creates these risks?

Every investment project has its social and environmental externalities. Like other countries’ OFDI, China’s OFDI definitely has significant social and environmental impacts, especially in countries with poor social and environmental governance systems. As an investing country, China faces investment risks. For example, China has invested in several Nile River dam projects. These projects inevitably have implications—and potential risks—for the river ecosystem and the communities that rely on and live near the Nile. Ideally, these risks should be fully evaluated and considered before an investment is made, and should be taken into account for the duration of the project. WRI is currently examining case studies that will illustrate the environmental and social risks posed and faced by Chinese companies.

4) What are the biggest challenges that China faces in addressing the environmental and social effects of its overseas investments?

In my view, there are 3 major challenges:

  • Poor governance systems in host countries, for example in some Least Developed Countries in Africa. Weak governance systems fail to protect communities and the environment from potential harm;

  • Some Chinese companies, especially some small- and medium-sized companies, who do not heed social and environmental responsibility within China, are now taking those negative practices abroad.

  • Lack of coherence between international investment/trade treaties and environmental agreements. From an international legal perspective, this is a grey area.

5) China’s Ministry of Commerce (MOFCOM) and Ministry of Environmental Protection (MEP) recently issued Guidelines on Environmental Protection and Cooperation, which apply to China’s overseas investments. What are the biggest opportunities and limitations of the guidelines?

The current guidelines are voluntary. There are no mandatory guidelines. These are guidelines that companies may feel a moral obligation to follow, but do not face any repercussions for failing to do so.

When my former MEP colleagues and I were working on the guidelines (before I joined WRI), we tried very hard to make them mandatory. We wanted MEP to have the authority to manage the Environmental Impact Assessments (EIA) and environmental standards of companies doing business overseas. After negotiating with MOFCOM, we had to make some compromises, so we started with voluntary guidelines first. In the future, we may have mandatory guidelines. Even though the current guidelines are voluntary, they will have positive impacts on the large companies that pay attention to their public image, such as state-owned interprises. Implementing the guidelines will be important for the corporate social responsibility of these companies.

In China, the current EIA Act only covers companies within the Chinese border. One possibility is to extend the EIA Act beyond the border to include companies doing business overseas. During the last National People’s Congress in March, we provided technical support for a bill submitted by one of the delegates of the Chinese People's Political Consultative Conference (CPPCC) that would authorize the National People’s Congress (NPC) to extend MEP’s oversight to Chinese companies overseas. The draft bill is still being considered, and relevant ministries from MEP and MOFCOM are being asked for feedback. While we want mandatory guidelines in the future, we currently don’t have a legal basis to do this. We are now hoping NPC can authorize ministries to do more regarding the environmental management of Chinese companies overseas.