Unless its concerns are alleviated, Human Rights Watch/Asia, New York, is asking investment banks and institutional investors to pass up any bond offerings by China to help finance construction of Three Gorges Dam.
While construction of the huge central China hydroelectric project is expected to cost $17 billion, China faces a $3 billion shortfall and may issue international bonds to close the gap.
So far, nothing has been issued. But Human Rights Watch/Asia has taken pre-emptive action. According to Richard Dicker, associate counsel, the organization issued a report on the situation - "The Three Gorges Dam in China, Forced Resettlement, Suppression of Dissent and Labor Rights Concerns" - and it has contacted a number of financial organizations, mainly in the United States.
Specifically, Mr. Dicker said letters have gone out to seven investment banks, 10 U.S. public pension funds, several insurance companies and several financial management companies apprising them of the "prospect of massive human rights violations" associated with creation of the dam and asking help in avoiding "the potential for a human rights disaster."
As the organization sees it, construction of the dam is expected to force more than 1 million Chinese from their homes - a process that could lead to social turmoil and repressive responses from the Chinese government. HRWA executives say some related violence already has been recorded in China.
In addition, the group anticipates abuses in labor practices relating to construction of Three Gorges Dam. The report states in part that "given a well-established pattern of abuses against China's migrant workers, the dam's construction will depend on labor conditions of unregulated cruelty. And to the extent that materials used in construction are provided by labor camp enterprises, some materials will be furnished through forced labor."
Human Rights Watch/Asia's initial letters went out in mid-February to Merrill Lynch & Co. and Morgan Stanley & Co., both in New York. The letters asked the two investment banks to avoid involvement in the syndication of any international bonds for the project "unless the Chinese government can provide verifiable guarantees that the rights of more than 1 million Chinese scheduled to be forcibly relocated in its construction will be protected," said Mr. Dicker. He said Merrill and Morgan were contacted first because "they have been publicly identified by China as involved with negotiations and discussions about financing the dam," said Mr. Dicker. While press reports also have said officials of Goldman Sachs & Co. have been involved in discussions about bond issuances for the dam, Mr. Dicker said his group wasn't able to confirm that report. (However, Goldman Sachs was sent a letter making the same request.)
James Wiggins, a spokesman for Merrill Lynch, said the firm was "not involved in any fund raising to do with Three Gorges Dam, nor does it have any mandate to do so."
One Morgan Stanley official, who asked not to be named, confirmed reports the firm would be holding a "road show" on China in March in New York, Chicago and Boston. But he said the program "has nothing to do with Three Gorges Dam specifically." Instead, the program is to educate investors broadly about China, so that when deals did come to market, investors could then hone their "questions to the specific deals."
As for the dam project itself, the source said it was "very early in the decision-making process, and there is renewed doubt that this project will even take place." However, The New York Times reported in December construction of the dam had begun.
Most of the 10 pension sponsors that HRWA executives said they contacted hadn't yet received their letters, when contacted by Pensions & Investments. But most said they wouldn't be interested in or be eligible to invest in Chinese sovereign bonds.
Patrick Hill, assistant public affairs officer of the $78 billion California Public Employees' Retirement System, Sacramento, said the Three Gorges Dam issue would be a moot point for his fund because it is not allowed to invest in China.
Jon Lukomnik, New York City's deputy comptroller for pensions, said the New York City funds have no emerging markets debt as a policy matter.
Roland Machold, director of the $43 billion New Jersey Division of Investment, Trenton, held that "with all the economic problems and tensions between governments (the U.S. and China), China will never sell $3 billion of debt in this country. It will never get (an investment grade) rating from Moody's." He said China doesn't meet New Jersey's minimum investment standard of a AA credit rating from at least one agency, and Mr. Machold doubted others in the United States would be interested either. "It's now clear that people going into ventures in China are at great risk legally and contractually. China doesn't honor contracts, and the government is not particularly interested in helping investors."
According to Mr. Dicker, other public funds contacted by his organization were the Colorado Public Employees' Retirement Association, the Minnesota State Board of Investment, the Teachers Insurance Annuity Association, Oregon Public Employes' Retirement System, the Alabama Retirement Systems, the Iowa Public Employees' Retirement System and the Pennsylvania Public School Employes' Retirement System.