(September 8, 2010) As China continues to invest in major infrastructure projects abroad, a new reports says it’s quickly learning that the rules outside of its borders aren’t the same as those within it, writes Brady Yauch.

Chinese State Owned Enterprises (SOEs)—a growing source of capital and investment in the developing world, and especially in its own Southeast Asian backyard—are provoking increased scrutiny and criticism from local populations affected by Chinese foreign investment. Now, a Beijing-based economic think tank, is offering more criticism in the way SOEs conduct their business abroad.

Writing in the mainland Chinese business publication, Business Watch, Transition Institute researcher Wu Aoqi says China’s “Going Out” strategy of sending large state-owned enterprises into Southeast Asia to invest in mineral extraction and infrastructure investments is harming China’s reputation, the environment and ultimately, its own strategic interests.

In an attempt to use “soft power” to win friends and influence its neighbours, China, he says, has lavished development aid and state financing on projects such as large power dams, mines, roads, bridges and the like. In response, Southeast Asian leaders, particularly Myanmar, Cambodia and Laos, are welcoming Chinese leaders with open arms.

“Shanghai Construction, I love you!” exclaimed Cambodian Prime Minister Hun Sen, at the 2009 ceremony inaugurating the Prek Tamak bridge, financed by a preferential loan from the China Import Export Bank.

The people of Cambodia—on the receiving end of such investments—however, don’t agree with the government’s enthusiasm and are protesting a Chinese scheme to forcibly resettle over 4,000 people from the magnificent Boeung Kok Lake in the capital Phnom Penh in order to fill it for a commercial development. Cambodian citizens groups are seeking information and justice but have met a brick wall, describing the Chinese investors as “very difficult to get in touch with.”

No wonder. According to the respected history scholar, Qin Hui of Tsinghua University, domestically, Chinese state companies interact primarily with government officials in their business dealings, and rarely with citizens or communities. And when they invest in projects abroad, they follow the same model, he says.

Compound this unaccountability of Chinese state enterprises with the absence of Cambodian state statistics on foreign investment and it is inevitable, according to Dr. Hossein Jalilian, director of research at the independent think tank, the Cambodian Development Resource Institute (CDRI), that virtually no one can get details of Chinese investments, including the media.

And, as the weak political, environmental and regulatory capacity of these countries is not able to effectively manage the rapidly increasing influx of trade and capital from China, Mr. Wu says, “the result is widespread corruption.”

This, he warns, is likely to push frustrated citizens to, “focus on Chinese investors and may create a deeper discontent with China.”

Chinese state firms are particularly interested in the hydropower sector and have moved in to fill the vacuum left by the World Bank and other western state financiers who withdrew by the late 1990s after receiving heavy criticism for funding ecological disasters. Unimpressed by concerns regarding dams at home, Chinese state investors attach no conditions for environmental protection or compensation for those forcibly displaced by their dams in other countries.

Southeast Asian governments have been keen to obtain this investment from Chinese SOEs—free from environmental and social obligations—despite the fact that Chinese loans are more expensive than western loans.

The fact that hydrodams are risky has also not dampened the Chinese enthusiasm for dam building, says Mr. Wu.  Concerns over water availability, the rise of public protests and the looming glut of electricity that could emerge as a result of China’s breakneck dam construction, has also not deterred Chinese state dam builders.

According to one official, state enterprises are proceeding with “seemingly illogical investment patterns,” for what he calls “non-economic” reasons. More simply: Chinese political leaders want these projects to proceed for geopoliticial or strategic purposes, economics be damned.

Mr. Wu warns that this approach has a very real potential to backfire. If China truly desires to be a leader in integrating Southeast Asia, and to constructively participate in the regions’ development, he says, Chinese policy makers “must seriously consider the problems that Chinese investment are causing throughout the region.”

More specifically, says Professor Qin, Chinese state investors need to understand the local context they are operating in, respect the rights of citizens there and avoid bringing domestic practices from China to their overseas investments. As an added bonus, he says, they will develop better practices to be used back home too.

Read the full report, Worries Related to China’s “Going Out”

Brady Yauch, Probe International, September 8, 2010