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August 19, 2004
US Banks Criticized for Involvement in China State Bank Bonds
    by William Baue

Nongovernmental organizations and socially responsible investing firms criticize US banks for selling Chinese bonds that fund socially and environmentally problematic projects.

On July 30, 2004, the China Development Bank (CDB), a policy-oriented financial institution owned by the People's Republic of China, registered a $500 million bond sold by Morgan Stanley (ticker: MS) with the Securities and Exchange Commission (SEC). Earlier that month, the Export-Import Bank of China (Chexim), another policy-oriented bank owned by the Chinese government, issued $750 million in 144a private placement notes (named after the SEC rule governing them) sold by Citigroup (C) and other banks.

Nongovernmental organizations (NGOs) and socially responsible investment (SRI) firms criticize the domestic banks for attempting an end-run by indirectly supporting projects that they would not directly finance due to social and environmental concerns. These NGOs and SRI firms have been working with the banks to promote improved social and environmental policies and practice for bank financing since the late 1990s.

Their advocacy focused primarily on the Three Gorges Dam (3GD), which the World Bank refused to finance due to social and environmental concerns, according to the advocates. In the absence of this funding, 3GD became the largest funding project for CDB. CDB has already provided almost $4 billion to the project so far and will continue to supply financing. Similarly, Chexim financing supports socially and environmentally problematic projects such as the Nam Mang 3 Project in Laos, the Merowe Dam in Sudan, and the Yeywa Dam in Myanmar (formerly Burma), according to a June 2004 report by one of the NGOs. All three countries are governed by undemocratic and repressive regimes, according to the NGOs.

"Here we are years later--many of the US banks have environmental and social guidelines and people who work exclusively on these issues, they have joined onto codes of conduct and formed associations on corporate responsibility and have moved far along," said Julie Tanner, corporate advocacy coordinator for Christian Brothers Investment Services (CBIS). "But yet again, bond issues that include Three Gorges Dam and other large infrastructure projects including dams in Sudan and Burma are again being financed by US financial institutions such as Citigroup and Morgan Stanley."

Citigroup is a signatory of the Equator Principles, a voluntary set of social and environmental guidelines for project financing that do not directly apply to these bond issues. Citigroup has also established a strong environmental policy covering its own operations and financing.

"I'm not ready to say involvement in these bond offers definitely violates the Equator Principles or these banks other environmental commitments, but CDB and Chexim have track records that trouble us," said Steve Lippman, senior social research analyst at Trillium Asset Management. "For instance, Chexim has failed to endorse the Common Approaches on Environment and Officially Supported Export Credits policy that the OECD's Export Credit Group adopted in 2001, which many export credit agencies from non-OECD countries have also adopted."

"Given this, we think the burden of proof is on the banks helping Chexim and CDB raise funds to demonstrate that these transactions don't violate their new environmental safeguards, so we've asked them to explain whether and how those new policies applied to these funding decisions," Mr. Lippman told "How are things different than they were in 1999, before any of these policies were in place?"

Citigroup has promised to respond to the SRI advocates in the next two weeks, but Morgan Stanley has not yet replied to their inquiry. Rule 144a of the Securities Act of 1933 bars underwriters from publicly commenting on these transactions that are geared toward "sophisticated" investors. Citigroup spokesperson Joseph Christinat therefore issued a "no comment" response to's request for commentary.

The quasi-political status of the CDB and Chexim raises concerns for the NGO and SRI advocates, who wonder if the domestic banks are wary of embarrassing the government of one of the largest emerging markets on social and environmental issues.

"By using financial intermediaries as a way of raising money for these projects, the Chinese government is trying to dissipate any sense of responsibility that underwriters and investors may feel for bankrolling environmental and social destruction," said Michelle Chan-Fishel, director of the green investments program at Friends of the Earth.


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