"What we've been reading" Article / June 21, 2013

How to engage Chinese companies in EITI

This article is written by Dr Guo Peiyuan, SynTao General Manager and based on his presentation at 2013 EITI Global Conference

The Extractive Industry Transparency Initiative (EITI) has been expanding rapidly in recent years, particularly among African and Southeast Asian countries. Within these regions, China has made a significant number of investments into extractive industries. Consequently, engaging Chinese companies in EITI affairs is important if they are to be more compliant with the standards of the organization. However, many find it difficult to communicate with Chinese firms on EITI issues. This article aims to provide several recommendations on how best to approach businesses within China on the transparency of extractive investments.

When discussing China’s compliance with international agreements on responsible business practice, it is important to keep in mind the country’s political and social context. Overall, China is more open than before, and the government has attempted to project a positive image internationally. This is reflected in the country’s stated desire to be a peaceful partner rather than a hostile actor in the international community while its role in the areas of trade and global governance grows. The government, and in particular the new leadership, also now pays much closer attention to environmental and transparency issues domestically, and in recent years has allowed civil society to grow faster than ever before. As a result, China is now willing to be an active participant in international negotiations on matters such as climate change, so long as such agreements do not have a negative impact on the growth of the Chinese economy.

The recent history of China’s rapidly growing private sector is also important to consider, as the number of large and successful private enterprises has grown significantly. Previously more domestically focused firms like LENOVO and Alibaba have since become world-class players. Though State-owned enterprises (SOEs) are still playing a large role in the economy, many have reduced their roles in certain sectors that are not as strategically important to the country. In turn, SOEs have sought out global investors to broaden their appeal internationally, and are now listed in either Hong Kong or other overseas financial exchanges. China, therefore, has been successful in building a modern market economy whereby companies have to respond to global market dynamics rather than relying on support solely from different components of the Chinese government.

Keeping all this in mind, the first recommendation for EITI and its member countries in engaging China is to demonstrate the benefits that increased involvement in the Initiative can provide. Like their global peers, Chinese companies care both about investment risks and financial returns. They will only comply with EITI standards should they prove useful in reducing exposure to market risks and can generate increased returns on their assets. In regards to risk, the Security and Exchanges Commission in the U.S. and the European Commission have all recently adopted new rules on disclosure for resource-based industries. Some Chinese companies, like those listed on the New York Stock Exchange, will be affected by these regulations and be forced to divulge details of financial transactions with foreign governments. Firms engaged in such activities will face higher compliance costs when dealing with state clients, or will otherwise run the risk of being singled out and reviewed by regulatory bodies overseas. Participating in EITI and adopting its standards may provide Chinese businesses the opportunity to find the organizational practices needed to reduce compliance costs in the future.

On the return side, EITI participation can be useful to Chinese companies involved in merger and acquisition (M&A) activities, and may even generate greater returns on their existing investments. Certain industries are now facing resource and labor constraints in China, and have become very active in global M&A activities. Concluding business deals of this nature can be difficult due to the national security anxieties of host governments and the environmental and social concerns of their citizens. The consensus amongst many overseas is that Chinese companies are not well managed, do not invest in value-building operations, and do not abide by publically acceptable human and environmental standards, and are therefore not welcome within their communities. If the case can be made that becoming a part of EITI and its standardized process can alleviate such concerns and create a better corporate image, many would be much more willing to join the organization.

The second recommendation is to localize all communications related to EITI. The right language and correct terminology has to be employed in order for the organization’s practices to be more easily understood by Chinese companies. One of the first and most straight-forward steps to take is to translate all EITI materials, standards, annual report, etc. into Chinese. This would allow senior-level decision makers within the public and private sector that lack technical English skills to be able to fully understand what EITI participation can offer them. Of course, localized communication goes beyond providing a simple translation. It also means promoting public advocacy activities and collaborating with national universities by sponsoring research papers and organizing local stakeholder workshops. By doing so, stakeholders drawn from Chinese companies, government, media, and NGOs can begin to recognize these issues on their own terms over time. A successful example of this is Transparency International’s work with Tsinghua University, one of the China’s leading universities, which allowed the group to establish a focal point in Beijing.

The third recommendation is to make better use of political dialogue with the Chinese government in order to affect broader change to Chinese companies. Although the economy can operate largely without state interference, the government still plays a central role in determining which international bodies are allowed to operate within the country. China’s private-sector will be much more open to adopting EITI standards should it be recognized, and no longer prohibited, by the national government. Much can be learned from the UN Global Compact’s (UNGC) entry into China, as the organization approached and involved a wide-range of different government bodies that were able to assist in its plans to operate in the country. The Ministry of Foreign Affairs formally recognized UNGC after the Global Compact agreed to host its 2005 summit in Shanghai. The event helped encourage large Chinese companies such as COSCO, SinoPec, Petro China, and Chalco to join the Global Compact. Based on this experience, EITI may be able to pursue a similar strategy as to that of UNGC. Though it may be a difficult task at the moment to ask the government to formally recognize EITI, it may be possible to utilize existing inter-governmental relationships and bilateral political dialogues to discuss EITI standards at the national level. Taking advantage of China’s existing CSR programs and relationships would also be a good fit for this. Currently, China has CSR related programs with the United Kingdom, Germany, Netherlands, Sweden, Switzerland, etc. and extractive transparency standards could become a core part of these programs.

The above suggestions may shed more light on how best to engage Chinese companies with the Extractive Industry Transparency Initiative. Keeping the experiences of other multilateral agreements in mind, such as the GRI G3 Guideline and Equator Principles, Chinese companies will most likely need to first join as observing members before they are able to actively participate in them. It will likely take time for firms to fully abide by the Initiative’s standards, and patience is therefore required in order to insure that China becomes a much larger part of the organization.