Written by Pieter Jansen.
The new Chinese leaders have launched a plan this year for a pilot program to allow new banks to be established by private-sector companies.
If the government is considering a privatization and accompanying deregulation of the banking sector, civil society organizations might have to play a bigger part in monitoring and assessing the banks’ performance of their social and environmental responsibility. At least, this is what environmentalist Yu Xiaogang is stating. I stayed with his organization Green Watershed in recent months as part of the EU-China NGO twinning program, organised by Stiftung Asienhaus and funded by the German Robert Bosch Foundation.
To better be able to grasp the historical meaning of the Chinese leaders plan and our bank monitoring work as civil society, let’s refer at some earlier decisive moments in Chinese banking history first, before returning to Yu’s point.
I start with an anecdote about a Dutch bank in the Chinese past, that I discovered when I wandered a bit around in the old part of Guangzhou. The name of unknown Netherlands An Da Bank is written on a plaque from 1870, together with the company D. Sassoon and Swire Co. You find it on the facade of Shamian street number 50 in Guangzhou. Sassoon and Swire traded opium for tea and tea for textiles between India, China and England.
Maybe An Da did for Sassoon and Swire what the Hong Kong Shanghai Banking Corporation (HSBC) did in Hong Kong and was founded for in 1865: banking for the opium-dealers. An Da probably is the pin-yin word for big safety. However, An Da has disappeared in history and cannot be found on the nowadays internet.
It might be that the Chinese name An Da had been invented by a Dutch bank, to attract local clients. Foreign banks as the time borrowed money to local Chinese banks who took the role of financial intermediary and borrowed it again to Chinese merchants to make them able to buy commodities and other tradable goods from western merchant houses.
China had its own long history of banking. The history of the mentioned local Chinese banks goes all the way back to the Song dynasty and was similar to European banking history connected with rich families’ merchant houses. The Imperial Bank in 1897, was actually the first Chinese bank that provided credits to customers, in a way that modern banks do in the western capitalist world. New money was given out based on the expectation of future returns out of profitable entrepreneurship. Senior bankers from HSBC and other foreign banks learnt the Chinese bankers to do the trick.
The new money was needed to meet the demands of the Chinese Qing empire at that difficult time in history to catch up with western powers and build up national industries and infrastructure works for trade. As well, after two Opium wars and ( later a) Boxer rebellion China had been obliged by foreign powers to pay indemnity for the losses that had occurred out of these events. For both mentioned reasons China had to lend money from western banks and pay interests.
For example, the French Banque de l’Indo-Chine, with a branch in Shamian, Guangzhou, represented the interests of the French government in handling indemnities. The Bank of China dealt with the debt settlements at Chinese site.
Probably the pretty unequal Versailles-like colonialist treatment triggered Mao Zedong in 1939 to write in ‘The Chinese Revolution and the Chinese Communist Party ‘ about this period in Chinese banking history, “that the imperialist powers monopolized China’s banking and finance by extending loans to the Chinese government and establishing banks in China.”
So as consequence in the Mao-era itself there was no major borrowing from banks. Banks it selves became instruments in accordance with administrative commands. The loans from banks to state owned enterprises served as an incentive to meet production targets and objectives, which were the outcome of political struggles within the Party bureaucracy.
The only major foreign loans China received were from the USSR in exchange for agricultural crops. In 1949 at the founding of the People’s republic it was proclaimed that opium would be replaced by food crops to generate the revenues needed for building up its national industries. In 1958 Mao insisted that the communes had to produce more grain for the cities and earn foreign exchange from exports.
Let s slowly turn back to our present day now. A Chinese government considering deregulation and privatization of the banking sector is not new but part of a longer running ‘go global’ scheme. In 1980 Deng Xiaoping invited economist Milton Friedman to tutor the Communist party about free-markets and after becoming member of the WTO in 2000 the Chinese finance sector very slowly opened up to western foreign bank companies. International commercial banks since 2003 – 2004 hold minority shares in Chinese banks, at the same time Chinese banks listed at the stock market still operate as an instrument of the state. Also, directors of large banks are appointed by the Communist party and rank as vice-governors in the government.
The banking history turned full-swing back from China’s full dependency on colonial bankers to a fencing off from international finance. Actually until now the Communist party has been very eager to maintain control over its banks and finance. As a result China did not have the indebtedness that the former USSR was growing into since the 1960s and it avoided the financial Asian crisis in the 1990s. However, since the visit of Friedman in the 1980s China cashes in on foreign investment of companies as the sweatshop of the world and more and more Chinese banks go global and invest worldwide.
Let me turn back to Yu Xiaogang’s point now about civil society organizations role to play in the monitoring and assessing of banks’ social and environmental responsibility.
The Chinese investors active abroad have not adequately addressed social costs and environmental impacts of their expansion and have triggered tremendous outcry of local community and wide criticism from international civil society. To become a well- respected player in the international world of finance and not to lose face, some Chinese banks are eager now to adopt the green credit policies set in place by its own government and to follow the international voluntary policies of corporate responsibility.
Green Watershed for five years now has been tracking and monitoring Chinese listed banks on their implementation of environmental responsible banking. Chinese green credit policies, that are since 2008 in place, originally aimed at diverting bank investments in China away from heavy polluting sectors and projects in to a more green direction. Green Watershed research findings show that Chinese banks to a different degree indeed work with social and environmental policies, unfortunate though in the case of most banks implementation is lacking.
For some banks it is found that they merely repeat the government’s policy and slogans, and that their green credit policy and measures are basically conceptual instead of concrete rules. Some banks highlight the green measures they take, but keep silent about their environmental unfriendly loans to highly polluting sectors. As well most banks fail to meet the international standards for information disclosure.
Yu question about the role of CSOs to play in monitoring and assessing the banks’ social and environmental performances proves to be not solely a Chinese one but a global one. China might very well realize that global banks have a tendency to mould themselves in a Chinese economic model instead of the other way round. The nowadays linking up of Chinese banks with the global trend of working with policies of corporate social responsibility fits very well with its own model of banking control.
Institutions like the World Bank are in a review process of their environmental and social safeguards and want to make them less rules based, and more principles based and flexible in their implementation. This kind of flexibility already exists in China, where human rights are mentioned in the constitution, but can be treated flexible so to say.
Flexible safeguards neither do stop the global wide banking culture of loan approval: Banks are pressured to continually lending out money as quick and possible as they can and this is overriding all environmental and social considerations. Safeguards are in place as criteria for banks how to furnish loans and services to clients.
In this way Corporate socials responsibility easily turns social and environmental problems, into a technical governance issue. Existing legal norms might get substituted by so-called flexible forms of regulation, and management and business models, which work with indicators, targets, procedures of evaluation, auditing etc. Societal choices to make, in a democracy to be debated between citizens and interest groups, changes into a technical question about the governance of the bank.
China civil society so far has been not too much privileged where it concerns democracy, and it more aware of the dangers involved with flexible rules than we do. It might sometimes even know better than western CSOs how to treat flexible governance rules that are nowadays introduces at the international level. So in some respect we might learn from them what the best approach is in holding banks publicly accountable. Here might lay the bigger part for Chinese CSOs a role to play.
About the author
Pieter Jansen has been working for Both ENDS for more than a decade, focusing on international financial institutions, such as the World Bank and the Asian Development Bank. In 2008, he visited Yunnan province to learn more about Chinese highway investment.