German automakers currently do not have an easy time in China. On the one hand, there is the Xinjiang risk: Although VW, in particular, has been assuring for months that none of its suppliers is involved in the human rights violations by the Chinese state against Uyghurs, a new study nevertheless identifies prison and internment work in the supply chains of German carmakers in China.
Our authors Christian Domke Seidel and Marcel Grzanna also spoke to managers at German automotive brands who – contrary to conflicting claims by their respective boards of directors – confirm: It is, in fact, simply not possible to audit every step and every branch-out of supply chains in China. On the German end, no one is able to definitively assess the quality of proof provided by Chinese contractual partners.
At the same time, the business prospects of German automakers no longer look rosy either. In the booming market for EVs, VW, BMW and Mercedes lead a miserable existence in the Chinese car market, writes Christian Domke Seidel in his Feature.
The actions of VW & Co. in the Middle Kingdom are likely to become even sharper in the course of the debate about a German China strategy. The outcome is not yet known. However, one thing is already certain: The boardrooms in Wolfsburg, Stuttgart and Munich will no longer be able to afford to bury their heads in the sand.
Steel, aluminum, copper, rare earths – according to a study, China’s manufacturers of industrial metals are closely involved in human rights violations in Xinjiang. The findings of the study by the British University of Sheffield Hallam also put German automakers under pressure. Volkswagen, BMW and Mercedes-Benz are directly or indirectly supplied by numerous companies in these sectors.
When asked by Table.Media, all three manufacturers deny any knowledge of human rights violations in their supply chains and affirm their sincerity in trying to get to grips with the problem. But the question is how closely they actually see through their supply chain.
The explosiveness and relevance of these issues are currently increasing rapidly. Both the drafts of the German China strategies and the EU Supply Chain Act provide for much stronger ethical components in trade policy. Companies face business risks and loss of reputation if they operate in a way that is unclean in terms of human rights.
However, a Mercedes insider with detailed knowledge of the China business tells Table.Media that public statements by the company about the thoroughness of its inspections are “all lies”. “For us, the only thing that matters is profit. The ethical discussion plays no role,” says the man, who wishes to remain anonymous.
In fact, it is simply not possible to audit the supply chains. Suppliers of contractors would present “any certificates” whose credibility no German manager in China could judge. And not all Chinese employees can be trusted. Some “play us there,” the manager says. But he also claims that Mercedes-Benz is by no means the only carmaker to make public misrepresentations about its assessment of the situation in Xinjiang. “They’re all lying,” he says, without, however, being able to provide concrete evidence for this assessment.
However, the Sheffield study, titled “Driving Force – Auto Supply Chains and Uyghur Forced Labor,” suggests that foreign automakers are indeed deliberately looking the other way when it comes to their suppliers’ involvement in forced labor systems in Xinjiang.
The authors evaluated publicly available logistics data and company financial reports, journalistic articles, government propaganda, remote sensing data from satellites, and maps. Their conclusion: “From the extraction of raw materials and their processing to the production of car parts, we found that virtually every part of the car must be subjected to closer scrutiny to ensure that it is free of Uyghur forced labor.”
The companies claim that they conduct such audits. However, they fail to provide transparent and comprehensible conclusions. At Volkswagen, part of the management is even “completely annoyed” that they want to “ruin” the lucrative China business and the associated annual bonuses, says an analyst with good connections to Wolfsburg, who also does not want to speak publicly.
Yet the suspicions weigh heavily. The authors of the study see the manufacturers as being exposed to a considerable risk of profiting from the oppression of the Uyghurs because of their entire procurement network in China. Especially since, according to a McKinsey study, automakers work with an average of 250 direct suppliers and up to 18,000 indirect suppliers.
The authors of the Sheffield study see the partnerships and connections with several companies in the Toutunhe zone near Urumqi, an industrial area with thousands of factories the size of the city of Cologne, as highly problematic. At least since 2016, they said, the district has provided government support for job placement programs. “Any enterprise in the park could be the recipient of these dislocated workers, indicating significant exposure to forced labor in the auto industry.”
They explicitly mention, among others, after-sale supplier Xinjiang Fenghua Shenzhou Auto Parts, whose products are destined for BMW, Volkswagen, Mercedes, as well as Opel, Audi, and Japanese and Korean brands.
According to the study, the risks affect virtually all parts and raw materials needed to build cars. For example:
The general complexity of supply chains helps Chinese suppliers disguise forced labor in their value creation. Raw materials leave the region for other parts of China, where they are further processed. There, they are either supplied to international brands or exported to other parts of the world.
However, the study’s authors conclude, “Companies can no longer make excuses that supply chains are simply too complex, or allow part of their supply chains to remain in the dark. The risks to the people of the Uyghur region are too high.” Collaboration: Christian Domke Seidel
German automakers are increasingly taking on the role of spectators in the Chinese car market. In the booming market for EVs, Volkswagen has just a 2.4 percent market share. BMW and Mercedes have less than one percent, figures from the state motor insurance company show. The problem is self-made, a high-ranking Mercedes insider tells Table.Media. The joint ventures with competitors from the People’s Republic were a mistake in the long term and the technical lead of Chinese manufacturers in e-mobility can no longer be made up.
For a long time, German automakers only had access to the Chinese market if they entered into a joint venture with a partner from the People’s Republic. While this allowed them to sell their vehicles on the world’s largest market, it also led to an enormous transfer of knowledge. The automakers don’t deny that either. “Joint ventures were known to be obligatory in China until a few years ago – including the development of certain central components in the country. Of course, China gained development and production know-how as a result,” a BMW spokeswoman tells Table.Media.
Accordingly, a Volkswagen spokesman takes a positive view of the abolition of the joint venture obligation at the beginning of last year: “We welcome the further opening of the Chinese automotive market, which enables foreign companies not only to operate component plants independently but also to set up their own vehicle production. We are convinced that a level playing field is the key to the further positive development of the Chinese automotive industry.”
The question is whether this step is not too late. Chinese manufacturers produce vehicles that are hardly inferior to German models. The EV boom makes it clear that they have even built up an enormous lead in some areas. For example, in software integration, driving assistants and autonomous driving. In January 2023, for example, Mercedes announced that it had become the first manufacturer to receive Level 3 certification for automated driving on US roads in the state of Nevada. In Shenzhen, Chinese vehicles have long been collecting test kilometers at Level 5.
Asked about the technological advances, a BMW company spokeswoman asks the counter question, “Where do you see the competition on par?” She points out that the Chinese market is a volume market and customers are very price-sensitive. Mercedes also emphasizes to Table.Media that it is primarily focusing on premium products. “The EV segment in China is still at the beginning of a promising development, especially for cars priced above ¥1 million.” That’s about €100,000. “The biggest growth in the EV segment in China is currently in the price segment around ¥300,000.” Mercedes sees its opportunity in the top-end EV segment, they said.
But even in the low-cost segment, some technologies are far from common among premium manufacturers. For example, the Dolphin electric small car from BYD (the equivalent of €14,000) has an 800-volt electrical system. This technology is currently becoming the new standard in China. German competitors only have it in the Porsche Taycan and Audi E-Tron GT.
Officially, the German providers dismiss the risks. “We are taking a long-term and strategic approach; short-term developments are perceived and analyzed. Currently, no risk is discernible from our point of view,” says the BMW spokesperson.
An opinion that the Mercedes insider views skeptically. “The knowledge transfer was foolish. In the long term, the German manufacturers have dug their own grave with it.” Because he doesn’t believe German manufacturers will manage to catch up.
“They’re light years ahead of us in taking into account the habits and desires of customers. We’re trapped in regulations and processes.” Chinese manufacturers would implement customer requests immediately, they said. One example, they said, is the sleeper function. In this, the car puts the seats in a horizontal position, and the car preheats and filters the air. Chinese customers could then briefly sleep in the car for 30 minutes during their lunch break. Although this is nothing more than a combination of existing technologies, German manufacturers in China have to go through months of internal coordination processes to achieve this. Chinese OEMs simply implement something like this.
Volkswagen responded by setting up new structures. “The central element of the reorganization is a regional China Board headed by Ralf Brandstaetter, Volkswagen Group Board of Management member for China, which makes key decisions in the region across brands and in close exchange with the joint venture companies,” the VW spokesperson said. Volkswagen calls its strategy “in China, for China”.
VW placed a lot of hope in Cariad’s partnership with Horizon Robotics, one of the leading providers of computing platforms for smart vehicles. This would “accelerate regional development of advanced driver assistance systems (ADAS) and autonomous driving (AD) systems for the Chinese market.”
However, experts have long doubted the benefits of these efforts – at least for the German economy. Asked about this, a BMW spokesperson tells Table.Media: “The Chinese market is the BMW Group’s strongest in terms of sales, and we see further potential. Our local production on the ground for the domestic market also secures jobs in Germany.” While external observers also see the growth potential, they doubt that the China business will secure jobs in Germany. According to a study by the China Research Institute Merics, the economy of the People’s Republic has long benefited significantly more from investments than the German economy.
Even in the run-up to this year’s National People’s Congress (two sesions/liang Hui), there was eager speculation about what constitutional amendments would be forthcoming this time to further consolidate presidential power. Despite the multiple tensions in the country that drive thousands to the streets – such as the systemic banking crisis, the massive “white paper” protests that eventually won the relaxation of COVID policies, or the economic downturn – the two sessions came at an opportune time this time. At least from a financial perspective.
That’s because the World Bank is in the midst of a fundamental reform process (“Evolution Roadmap”) and, due to the sudden resignation of World Bank chief David Malpass, who was still nominated by Donald Trump, also in a nomination process. Biden’s nominee, Ajay Banga, a former Mastercard executive, is making trips around the world, including to China, over the next three weeks to drum up support. As recently as winter 2022, Trump-nominee Malpass and International Monetary Fund chief Kristalina Georgieva met with Li Keqiang and only reproaches hailed down. Now, as China rebuilds itself in financial regulation and de-escalation is urgently needed for the two adversaries, perhaps this trip is a building block of détente.
From a climatic point of view, however, this development is quite questionable.
In the run-up to the NPC, the CP leadership still announced a restructuring in the financial sector. The plan was to replace the existing banking supervision with a new financial supervisory authority with expanded powers. The financial sector was to be placed further under central party supervision, and the State Council was to be further disempowered.
At the end of the NPC on Monday, however, it was announced that the expected replacement for the top central bank post with Xi loyalist Zhu Hexin will not take place. Zhu is chairman of the powerful financial conglomerate Citic Group Corp. Yi Gang will remain central bank chief – for now. Apparently a pragmatic decision for more expertise in this post. Nevertheless, the new post of party secretary of the People’s Bank of China will probably be taken over by He Lifeng.
As Urgewald reports, Guo Shuqing, head of the China Banking and Insurance Regulatory Commission (CBIRC, located in the State Council), and Yi Gang, the current head of the central bank, were extremely innovative and intransigent in monetary policy and banking regulation. In 2021, for example, the “Catalogue of Green Bond Support Projects” was revised, from which “clean coal” projects were excluded. In addition, Chinese banks must publish their CO2 savings (carbon reduction tool) for their climate loans. A number of financial regulatory reforms have been implemented in recent years, including the establishment of a new regulatory coordination mechanism. The reforms are still ongoing, and several key banking laws are being revised.
China’s overarching policy framework for decarbonization calls for banks to strictly limit lending to so-called “dual high” industries. These are industries that consume a lot of energy and produce high carbon emissions.
However, the new personnel could mean a softening of the “green” credit guidelines. The focus of the central bank’s incoming party secretary, He Lifeng, has been on local infrastructure projects. A report published in February 2023 shows that the coal lobby is winning the day within China: 106 gigawatts of new coal-fired power capacity were approved in 2022 (compare that to 106 times Datteln IV in North Rhine-Westphalia). For many of these projects, approvals were fast-tracked, allowing construction to begin within months. Hundreds of brand-new coal-fired power plants will make it more difficult and more expensive to achieve China’s climate targets, as plant owners have an interest in protecting their assets and avoiding a rapid coal phase-out.
China’s energy regulator declared in early 2022 that no new coal-fired power plants would be permitted for the sole purpose of bulk power generation. However, the provinces where most new coal-fired power plant projects are underway hardly meet this requirement, as they are among those that rely on coal for most of the increase in their electricity demand.
To that end, President Xi is considering reinstating the Central Financial Work Commission (CFWC, 1998-2003). The CFWC would be headed by a member of China’s powerful seven-member Politburo Standing Committee, Li Qiang or Ding Xuexiang. Ding is chairman of the leadership group on climate change. He stands for both aggressive expansion of renewables globally and new sources of financing for fossil. The CFWC would have a “strong influence on the entire financial system, including appointments to key positions,” according to King’s College’s Xin Sun. The CFWC would be a purely partisan body.
In the coming years, bank regulation will be crucial not only for climate action but also for the new development offensive “Global Development Initiative”, the progress of the Belt and Road Initiative and the debt problem. The central bank People’s Bank of China (PBoC) as financial supervisor and the China Banking and Insurance Regulatory Commission located in the State Council, the China Securities Regulatory Commission with the Financial Stability and Development Committee, would be disempowered if the CFWC is re-established.
The Banking and Insurance Regulatory Commission (CBIRC), until now the top government agency regulating banking and finance, will in fact be dissolved altogether and absorbed into the newly established National Financial Regulatory Authority (NFRA), which will be a separate agency within the State Council. The NFRA will be responsible for supervising the entire financial industry. The highest financial regulatory body will thus be more closely tied to Xi Jinping’s decision-making power.
Potential new World Bank chief Banga’s trip to China and the decision to tie China’s financial regulation more closely to President Xi could produce synergy. Ajay Banga is a board member of Temasek, a global investor based in Singapore. Temasek Holdings also has stakes in two major Chinese banks, Bank of China (11.7 percent) and China Construction Bank (5.1 percent), and its stake in Bank of China is the second largest by a foreign company in one of China’s major banks.
Banks make the construction and profitability of power plants possible. Public banks can influence tariffs and incentivize the construction of renewable or fossil fuel power plants. Urgewald’s case study on Pakistan showed how the World Bank helped the government in Pakistan develop the largest coal mining area in the world without labeling the financing for this as fossil support.
The World Bank is facing fundamental reform – in part because it has failed to live up to its mandate of reducing poverty and meeting the Paris climate change targets. Urgewald research found that between 2016 and 2020, over $12 billion in direct financing was provided to fossil fuel projects in 38 countries.
China’s new financial regulatory personnel hint: If the World Bank more decisively exits coal, China’s banks could step in. In particular, if indirect support for fossil fuels via the World Bank were to continue, this could create a fatal “win-win” situation for global fossil fuel finance.
Nora Sausmikat has a habilitation in sinology and is head of the China desk at Urgewald, which does campaign work on the Asian Infrastructure Investment Bank and the Asian Development Bank. In addition to focusing on the two banks, she analyzes China’s global role, particularly in the areas of climate and human rights policy.
As few panda pictures as possible – that is the consensus at China.Table. However, these ladies and gentlemen enjoying their afternoon feast in the zoo of Chongqing are so funny to look at, the editor in charge of today’s issue just could not help themself. This picture just speaks for itself!
German automakers currently do not have an easy time in China. On the one hand, there is the Xinjiang risk: Although VW, in particular, has been assuring for months that none of its suppliers is involved in the human rights violations by the Chinese state against Uyghurs, a new study nevertheless identifies prison and internment work in the supply chains of German carmakers in China.
Our authors Christian Domke Seidel and Marcel Grzanna also spoke to managers at German automotive brands who – contrary to conflicting claims by their respective boards of directors – confirm: It is, in fact, simply not possible to audit every step and every branch-out of supply chains in China. On the German end, no one is able to definitively assess the quality of proof provided by Chinese contractual partners.
At the same time, the business prospects of German automakers no longer look rosy either. In the booming market for EVs, VW, BMW and Mercedes lead a miserable existence in the Chinese car market, writes Christian Domke Seidel in his Feature.
The actions of VW & Co. in the Middle Kingdom are likely to become even sharper in the course of the debate about a German China strategy. The outcome is not yet known. However, one thing is already certain: The boardrooms in Wolfsburg, Stuttgart and Munich will no longer be able to afford to bury their heads in the sand.
Steel, aluminum, copper, rare earths – according to a study, China’s manufacturers of industrial metals are closely involved in human rights violations in Xinjiang. The findings of the study by the British University of Sheffield Hallam also put German automakers under pressure. Volkswagen, BMW and Mercedes-Benz are directly or indirectly supplied by numerous companies in these sectors.
When asked by Table.Media, all three manufacturers deny any knowledge of human rights violations in their supply chains and affirm their sincerity in trying to get to grips with the problem. But the question is how closely they actually see through their supply chain.
The explosiveness and relevance of these issues are currently increasing rapidly. Both the drafts of the German China strategies and the EU Supply Chain Act provide for much stronger ethical components in trade policy. Companies face business risks and loss of reputation if they operate in a way that is unclean in terms of human rights.
However, a Mercedes insider with detailed knowledge of the China business tells Table.Media that public statements by the company about the thoroughness of its inspections are “all lies”. “For us, the only thing that matters is profit. The ethical discussion plays no role,” says the man, who wishes to remain anonymous.
In fact, it is simply not possible to audit the supply chains. Suppliers of contractors would present “any certificates” whose credibility no German manager in China could judge. And not all Chinese employees can be trusted. Some “play us there,” the manager says. But he also claims that Mercedes-Benz is by no means the only carmaker to make public misrepresentations about its assessment of the situation in Xinjiang. “They’re all lying,” he says, without, however, being able to provide concrete evidence for this assessment.
However, the Sheffield study, titled “Driving Force – Auto Supply Chains and Uyghur Forced Labor,” suggests that foreign automakers are indeed deliberately looking the other way when it comes to their suppliers’ involvement in forced labor systems in Xinjiang.
The authors evaluated publicly available logistics data and company financial reports, journalistic articles, government propaganda, remote sensing data from satellites, and maps. Their conclusion: “From the extraction of raw materials and their processing to the production of car parts, we found that virtually every part of the car must be subjected to closer scrutiny to ensure that it is free of Uyghur forced labor.”
The companies claim that they conduct such audits. However, they fail to provide transparent and comprehensible conclusions. At Volkswagen, part of the management is even “completely annoyed” that they want to “ruin” the lucrative China business and the associated annual bonuses, says an analyst with good connections to Wolfsburg, who also does not want to speak publicly.
Yet the suspicions weigh heavily. The authors of the study see the manufacturers as being exposed to a considerable risk of profiting from the oppression of the Uyghurs because of their entire procurement network in China. Especially since, according to a McKinsey study, automakers work with an average of 250 direct suppliers and up to 18,000 indirect suppliers.
The authors of the Sheffield study see the partnerships and connections with several companies in the Toutunhe zone near Urumqi, an industrial area with thousands of factories the size of the city of Cologne, as highly problematic. At least since 2016, they said, the district has provided government support for job placement programs. “Any enterprise in the park could be the recipient of these dislocated workers, indicating significant exposure to forced labor in the auto industry.”
They explicitly mention, among others, after-sale supplier Xinjiang Fenghua Shenzhou Auto Parts, whose products are destined for BMW, Volkswagen, Mercedes, as well as Opel, Audi, and Japanese and Korean brands.
According to the study, the risks affect virtually all parts and raw materials needed to build cars. For example:
The general complexity of supply chains helps Chinese suppliers disguise forced labor in their value creation. Raw materials leave the region for other parts of China, where they are further processed. There, they are either supplied to international brands or exported to other parts of the world.
However, the study’s authors conclude, “Companies can no longer make excuses that supply chains are simply too complex, or allow part of their supply chains to remain in the dark. The risks to the people of the Uyghur region are too high.” Collaboration: Christian Domke Seidel
German automakers are increasingly taking on the role of spectators in the Chinese car market. In the booming market for EVs, Volkswagen has just a 2.4 percent market share. BMW and Mercedes have less than one percent, figures from the state motor insurance company show. The problem is self-made, a high-ranking Mercedes insider tells Table.Media. The joint ventures with competitors from the People’s Republic were a mistake in the long term and the technical lead of Chinese manufacturers in e-mobility can no longer be made up.
For a long time, German automakers only had access to the Chinese market if they entered into a joint venture with a partner from the People’s Republic. While this allowed them to sell their vehicles on the world’s largest market, it also led to an enormous transfer of knowledge. The automakers don’t deny that either. “Joint ventures were known to be obligatory in China until a few years ago – including the development of certain central components in the country. Of course, China gained development and production know-how as a result,” a BMW spokeswoman tells Table.Media.
Accordingly, a Volkswagen spokesman takes a positive view of the abolition of the joint venture obligation at the beginning of last year: “We welcome the further opening of the Chinese automotive market, which enables foreign companies not only to operate component plants independently but also to set up their own vehicle production. We are convinced that a level playing field is the key to the further positive development of the Chinese automotive industry.”
The question is whether this step is not too late. Chinese manufacturers produce vehicles that are hardly inferior to German models. The EV boom makes it clear that they have even built up an enormous lead in some areas. For example, in software integration, driving assistants and autonomous driving. In January 2023, for example, Mercedes announced that it had become the first manufacturer to receive Level 3 certification for automated driving on US roads in the state of Nevada. In Shenzhen, Chinese vehicles have long been collecting test kilometers at Level 5.
Asked about the technological advances, a BMW company spokeswoman asks the counter question, “Where do you see the competition on par?” She points out that the Chinese market is a volume market and customers are very price-sensitive. Mercedes also emphasizes to Table.Media that it is primarily focusing on premium products. “The EV segment in China is still at the beginning of a promising development, especially for cars priced above ¥1 million.” That’s about €100,000. “The biggest growth in the EV segment in China is currently in the price segment around ¥300,000.” Mercedes sees its opportunity in the top-end EV segment, they said.
But even in the low-cost segment, some technologies are far from common among premium manufacturers. For example, the Dolphin electric small car from BYD (the equivalent of €14,000) has an 800-volt electrical system. This technology is currently becoming the new standard in China. German competitors only have it in the Porsche Taycan and Audi E-Tron GT.
Officially, the German providers dismiss the risks. “We are taking a long-term and strategic approach; short-term developments are perceived and analyzed. Currently, no risk is discernible from our point of view,” says the BMW spokesperson.
An opinion that the Mercedes insider views skeptically. “The knowledge transfer was foolish. In the long term, the German manufacturers have dug their own grave with it.” Because he doesn’t believe German manufacturers will manage to catch up.
“They’re light years ahead of us in taking into account the habits and desires of customers. We’re trapped in regulations and processes.” Chinese manufacturers would implement customer requests immediately, they said. One example, they said, is the sleeper function. In this, the car puts the seats in a horizontal position, and the car preheats and filters the air. Chinese customers could then briefly sleep in the car for 30 minutes during their lunch break. Although this is nothing more than a combination of existing technologies, German manufacturers in China have to go through months of internal coordination processes to achieve this. Chinese OEMs simply implement something like this.
Volkswagen responded by setting up new structures. “The central element of the reorganization is a regional China Board headed by Ralf Brandstaetter, Volkswagen Group Board of Management member for China, which makes key decisions in the region across brands and in close exchange with the joint venture companies,” the VW spokesperson said. Volkswagen calls its strategy “in China, for China”.
VW placed a lot of hope in Cariad’s partnership with Horizon Robotics, one of the leading providers of computing platforms for smart vehicles. This would “accelerate regional development of advanced driver assistance systems (ADAS) and autonomous driving (AD) systems for the Chinese market.”
However, experts have long doubted the benefits of these efforts – at least for the German economy. Asked about this, a BMW spokesperson tells Table.Media: “The Chinese market is the BMW Group’s strongest in terms of sales, and we see further potential. Our local production on the ground for the domestic market also secures jobs in Germany.” While external observers also see the growth potential, they doubt that the China business will secure jobs in Germany. According to a study by the China Research Institute Merics, the economy of the People’s Republic has long benefited significantly more from investments than the German economy.
Even in the run-up to this year’s National People’s Congress (two sesions/liang Hui), there was eager speculation about what constitutional amendments would be forthcoming this time to further consolidate presidential power. Despite the multiple tensions in the country that drive thousands to the streets – such as the systemic banking crisis, the massive “white paper” protests that eventually won the relaxation of COVID policies, or the economic downturn – the two sessions came at an opportune time this time. At least from a financial perspective.
That’s because the World Bank is in the midst of a fundamental reform process (“Evolution Roadmap”) and, due to the sudden resignation of World Bank chief David Malpass, who was still nominated by Donald Trump, also in a nomination process. Biden’s nominee, Ajay Banga, a former Mastercard executive, is making trips around the world, including to China, over the next three weeks to drum up support. As recently as winter 2022, Trump-nominee Malpass and International Monetary Fund chief Kristalina Georgieva met with Li Keqiang and only reproaches hailed down. Now, as China rebuilds itself in financial regulation and de-escalation is urgently needed for the two adversaries, perhaps this trip is a building block of détente.
From a climatic point of view, however, this development is quite questionable.
In the run-up to the NPC, the CP leadership still announced a restructuring in the financial sector. The plan was to replace the existing banking supervision with a new financial supervisory authority with expanded powers. The financial sector was to be placed further under central party supervision, and the State Council was to be further disempowered.
At the end of the NPC on Monday, however, it was announced that the expected replacement for the top central bank post with Xi loyalist Zhu Hexin will not take place. Zhu is chairman of the powerful financial conglomerate Citic Group Corp. Yi Gang will remain central bank chief – for now. Apparently a pragmatic decision for more expertise in this post. Nevertheless, the new post of party secretary of the People’s Bank of China will probably be taken over by He Lifeng.
As Urgewald reports, Guo Shuqing, head of the China Banking and Insurance Regulatory Commission (CBIRC, located in the State Council), and Yi Gang, the current head of the central bank, were extremely innovative and intransigent in monetary policy and banking regulation. In 2021, for example, the “Catalogue of Green Bond Support Projects” was revised, from which “clean coal” projects were excluded. In addition, Chinese banks must publish their CO2 savings (carbon reduction tool) for their climate loans. A number of financial regulatory reforms have been implemented in recent years, including the establishment of a new regulatory coordination mechanism. The reforms are still ongoing, and several key banking laws are being revised.
China’s overarching policy framework for decarbonization calls for banks to strictly limit lending to so-called “dual high” industries. These are industries that consume a lot of energy and produce high carbon emissions.
However, the new personnel could mean a softening of the “green” credit guidelines. The focus of the central bank’s incoming party secretary, He Lifeng, has been on local infrastructure projects. A report published in February 2023 shows that the coal lobby is winning the day within China: 106 gigawatts of new coal-fired power capacity were approved in 2022 (compare that to 106 times Datteln IV in North Rhine-Westphalia). For many of these projects, approvals were fast-tracked, allowing construction to begin within months. Hundreds of brand-new coal-fired power plants will make it more difficult and more expensive to achieve China’s climate targets, as plant owners have an interest in protecting their assets and avoiding a rapid coal phase-out.
China’s energy regulator declared in early 2022 that no new coal-fired power plants would be permitted for the sole purpose of bulk power generation. However, the provinces where most new coal-fired power plant projects are underway hardly meet this requirement, as they are among those that rely on coal for most of the increase in their electricity demand.
To that end, President Xi is considering reinstating the Central Financial Work Commission (CFWC, 1998-2003). The CFWC would be headed by a member of China’s powerful seven-member Politburo Standing Committee, Li Qiang or Ding Xuexiang. Ding is chairman of the leadership group on climate change. He stands for both aggressive expansion of renewables globally and new sources of financing for fossil. The CFWC would have a “strong influence on the entire financial system, including appointments to key positions,” according to King’s College’s Xin Sun. The CFWC would be a purely partisan body.
In the coming years, bank regulation will be crucial not only for climate action but also for the new development offensive “Global Development Initiative”, the progress of the Belt and Road Initiative and the debt problem. The central bank People’s Bank of China (PBoC) as financial supervisor and the China Banking and Insurance Regulatory Commission located in the State Council, the China Securities Regulatory Commission with the Financial Stability and Development Committee, would be disempowered if the CFWC is re-established.
The Banking and Insurance Regulatory Commission (CBIRC), until now the top government agency regulating banking and finance, will in fact be dissolved altogether and absorbed into the newly established National Financial Regulatory Authority (NFRA), which will be a separate agency within the State Council. The NFRA will be responsible for supervising the entire financial industry. The highest financial regulatory body will thus be more closely tied to Xi Jinping’s decision-making power.
Potential new World Bank chief Banga’s trip to China and the decision to tie China’s financial regulation more closely to President Xi could produce synergy. Ajay Banga is a board member of Temasek, a global investor based in Singapore. Temasek Holdings also has stakes in two major Chinese banks, Bank of China (11.7 percent) and China Construction Bank (5.1 percent), and its stake in Bank of China is the second largest by a foreign company in one of China’s major banks.
Banks make the construction and profitability of power plants possible. Public banks can influence tariffs and incentivize the construction of renewable or fossil fuel power plants. Urgewald’s case study on Pakistan showed how the World Bank helped the government in Pakistan develop the largest coal mining area in the world without labeling the financing for this as fossil support.
The World Bank is facing fundamental reform – in part because it has failed to live up to its mandate of reducing poverty and meeting the Paris climate change targets. Urgewald research found that between 2016 and 2020, over $12 billion in direct financing was provided to fossil fuel projects in 38 countries.
China’s new financial regulatory personnel hint: If the World Bank more decisively exits coal, China’s banks could step in. In particular, if indirect support for fossil fuels via the World Bank were to continue, this could create a fatal “win-win” situation for global fossil fuel finance.
Nora Sausmikat has a habilitation in sinology and is head of the China desk at Urgewald, which does campaign work on the Asian Infrastructure Investment Bank and the Asian Development Bank. In addition to focusing on the two banks, she analyzes China’s global role, particularly in the areas of climate and human rights policy.
As few panda pictures as possible – that is the consensus at China.Table. However, these ladies and gentlemen enjoying their afternoon feast in the zoo of Chongqing are so funny to look at, the editor in charge of today’s issue just could not help themself. This picture just speaks for itself!
