Documentation:Open Case Studies/FRST522/2022/Forest Ecology Bank in Shunchang county, Fujian Province of China: history, successes and challenges

Theme: Community Forest

Country: China

Province/Prefecture: Fujian

City: Shunchang county, Nanping city

This conservation resource was created by Norah Ge.

Summary of Case Study

In response to Chinese President Xi Jinping's declaration that “lucid waters and lush mountains are invaluable assets” (绿水青山就是金山银山) and his flagship campaign on poverty alleviation, different levels of government in China have proposed and implemented various innovative practices on ecological and environmental protection. Launched in 2018, Shunchang county’s Forest Ecological Bank (FEB) is one of the leading examples of practices combining ecological protection and poverty alleviation through finance (Zhang, 2020). It represents an innovative and sustainable model which could be promoted across the country, despite some aspects which need to be further improved.

This case study aims to introduce the model, covering its background, tenure arrangement, institutional arrangements and stakeholders, evaluating the model by examining its successes, challenges and power analysis, and providing recommendations.

Keywords

Forest Ecology Bank, Shunchang, Poverty Alleviation, Ecological Finance, Natural Resources Management

Introduction

Shunchang county, Nanping city, Fujian province

Located in Fujian province of China and administrated by Nanping city, Shunchang county is renowned for its forestry industry as “the only hometown of fir trees in China” and “the hometown of the Bamboo and National Timber Strategic Reserve Base County” (National Forestry and Grassland Administration News, 2020). As of 2022, the existing forest area of Shunchang County is about 2.5 million mu, and the forest coverage rate is 80.34% (Yan & Liu, 2022).

Historical Background

For a long time, a large number of forest farmers in China have always been troubled by issues such as difficulties in obtaining forest rights, and around 20 years ago, the reform of the national collective forest tenure system has changed the situation (Chen, 2019). However, how to facilitate the tenure transfer process and help forest farmers to manage forest tenure became urgent issues faced by different levels of government in China, especially in regions with dependence on the forestry industry, such as Shunchang county.

In 2018, guided by Chinese President Xi Jinping's declaration that “lucid waters and lush mountains are invaluable assets” (绿水青山就是金山银山) and his instruction to “explore government-led, enterprise and social participation, market-oriented operations, and sustainable paths to realize the value of ecological products” (探索政府主导、企业和社会参与、市场化运作、可持续的生态产品价值实现路径), Shunchang county, administrated under Nanping city of Fujian province, first adopted the “ecology bank” model in China (Cui, Li & Cheng, 2019).

Forest Ecology Bank (FEB) in Shunchang county

Opened on December 3, 2018, Forest Ecology Bank (FEB) is not regarded as a traditional commercial bank, but a forest resource operation platform run by Shunchang Lvchang Forestry Resource Operation Co., Ltd. (顺昌绿昌林业资源运营有限公司) that was established by Shunchang County State-owned Forest Farm (Chen, 2019).

The purpose behind FEB’s founding was aimed at dealing with 1) the fragmentation, decentralization and risks faced by forest resources after forest tenure reform, and 2) problems such as high operating costs and low incomes for single household operations (Chen, 2019).

The bank is designed according to the following four principles: “established by government”, “participated in by farms”, “operated by the market” and “dominated by private sectors” (Cui, Li and Cheng, 2019).

The bank is not entirely for profit, having a certain public welfare nature as well (Chen, 2019). As Wei, Kong, Wang and Gao (2022) concluded, the government is the main driver behind the FEB project.

Although FEB is a newly established bank, it has made major achievements. As suggested by Zheng (2021), by November 2021, Shunchang FEB had completed land purchase and storage, forest land mortgaged by forest right loans and the provision of funds directly to forest farmers. In addition, he highlighted that forest farmers can also obtain forest tenure mortgage loans through FEB.

Tenure Arrangements

History of Forest Tenure in P.R.C

Summary of the history (FAO, 2021)

The history of forest land ownerships in P.R.C is generally divided into three phases: the post-1949, post-1978, post-2003 periods.

According to a report by the Food and Agriculture Organization of the United Nations [FAO] (2021), among China’s 304 million ha forest lands, collective ownership accounts for nearly 60 percent, with the government controlling the remaining 40%.

Due to various issues generated by collective ownership, such as ambiguous ownership, policy inconsistencies and lack of trust, the government first launched a land tenure reform in pilot provinces, including Fujian, in 2003 and then implemented the reform nationwide in 2008 (FAO, 2021). After this reform, each household of forest farmers were allocated a small piece of collectively owned land with a certificate for 70 years of ownership, and the forest famers were allowed to transfer the tenures such as “through a lease, subcontract, mortgage or joint venture” (FAO, 2021, p.17). As of 2015, the government had assigned about 180 million ha of collective forests to the households of forest farmers (FAO, 2021).

Forest Tenure in Shunchang county

According to a report by the Fujian provincial government (2021), nearly 85% of the forest land in Shunchang Forest Farm is collectively owned by all 12 towns and streets in Shunchang County. More specially, the existing forest land area of ​​the forest farms is 23,799.03 hm2, among which the mountain rights belonging to the state-owned land area account for 7,507.56hm2, and the collective land area is 16,291.47 hm2 (Fujian provincial government, 2021). According to Cui, Li and Cheng (2019), as of 2019, it has been confirmed that the entire county has forest tenure certificates covering 2.018 million mu of forest land, accounting for 80.9% of the total forest area.

Issues such as unclear ownership of mountain forest rights, unclear rights and responsibilities, unreasonable distribution of benefits, heavy burdens on forest farmers, unsmooth management system, and non-standard transfer of property rights have significantly restricted local forestry development, as indicated in the report by the Fujian provincial government (2021) and the news report by Jiang and Chi (2022).

Administrative and Institutional Arrangements

Administrative Arrangement

Summary of administrative arrangement of FEB (Cui, Li & Cheng, 2019)

The bank is initiated and governed overall by the Nanping municipal government, and more specifically, Nanping Financial Holdings Co., Ltd. which holds an 80% share, while Wuyishan Urban Construction Investment Co., Ltd. holds a 10% share and the State-owned Forest Farm of Shunchang County holds a 10% share (Cui, Li & Cheng, 2019). The Shunchang county government provided capital of 30 million yuan (Shunchang Forestry Bureau, 2019).

Institutional Arrangements

As introduced by Guo and Zhang (2022), the bank is divided into three offices. The front office is mainly responsible for clarifying property rights, accurately measuring forest resources, and confirming the rights of forest resources; the middle office is mainly composed of big data platforms and forestry assets assessment; and the back office is responsible for project development (Guo & Zhang, 2022). The Shunchang Forestry Bureau (2019) described the bank as consisting of “two centers and three companies”, which includes a forestry asset evaluation storage center and data information management center as well as a forest management company, resource trusteeship company, and forestry financial service company.

In addition to its main structure, the bank also covers the financing side (forestry financial service companies and risk prevention and control centers) for capital introduction and services such as guaranteed and low-rate loans to collective and forest farmers (Guo & Zhang, 2022).

Business Operations

According to Huang, Wen, Fan and Luo (2020), the bank mainly operates through the following:

1. A variety of contract methods for centralized collection and storage: FEB has four ways of participating, namely leases, purchases/redemptions, shareholding cooperation and custody modes. The majority of the methods are purchases/redemptions.
2. Professional evaluation: FEB relies on state-owned enterprises or professional asset appraisal companies carrying out dynamic surveys and detailed appraisals of forest resources.
3. Information management: FEB can use remote sensing images to thoroughly analyze the ecological resources within the county.
4. Improvements in quality and efficiency

More specifically, according to the willingness of forest farmers to work, FEB has introduced four ways of transferring forest rights as outlined by the National Forestry and Grassland Administration (2020).

1. If there is a willingness to jointly operate, the forestry assets will be used as shares, and the forestry farmers will become shareholders and share the development benefits.
2. Those who are unable to manage the forest but are willing to jointly manage its resources can entrust the management of the forestry assets.
3. If there is idle forest land, it can be leased to obtain rental returns.
4. Those who wish to change production can sell the forest tenure at one time to obtain start-up funds for the conversion (National Forestry and Grassland Administration, 2020).

Xie and Liu (2019) further introduced “one-click wealth management”, an innovative model adopted by FEB, which includes the following four types of services as indicated below. According to Xie and Liu (2019), the model is effective and simplifies the process for forest farmers to obtain low-interest loans from the bank.

1. Forest tenure mortgage loan
2. Shared cooperative operation
3. Redemption purchase and storage
4. Custody operation

Stakeholders and Power Analysis

Power Analysis of Stakeholders

Stakeholders of FEB in Shunchang county

In the case of Shunchang FEB, the key stakeholders include local government officials, the bank and bank-affiliated companies’ senior management, the bank and bank-affiliated companies’ staffs, investors (in the future), local forest farmers and experts from think tanks and consulting firms. No stakeholders from civil society have been identified from this case.

Interested versus Affected Stakeholders

Stakeholders are divided into two categories: interested and affected. In a class lecture, Bulkan defined interested stakeholders as “[a]ny person, group of persons, or entity that is linked in a transaction or an activity relating to a forest area, but who does/do not have a long-term dependency on that forest area”, and affected stakeholders as “[a]ny person, group of persons or entity that is or is likely to be subject to the effects of the activities in a locally important or customarily-claimed forest area” (personal communication, October 21, 2022).

Based on Bulkan’s definitions, local government officials, bank and bank-affiliated companies’ senior management, bank and bank-affiliated companies’ staffs, investors (in the future) and experts from think tanks and consulting firms are categorized as interested stakeholders, and only local forest farmers are defined as affected stakeholders. Some staffs or local government officials may also own local forest land tenures, but since they do not have long-term dependency on forests, they are not categorized through their jobs as affected stakeholders.

Power Analysis

All stakeholders except local forest farmers and staffs have high influence, while all stakeholders except experts from think tanks and consulting firms are considered to be of high importance. The level of stakeholders’ importance and influence are categorized into weak, moderate and strong, and details are summarized in the table below.

Table of Detailed Stakeholder Power Analysis

Stakeholders	Category	Reasons
Local government officials	Moderate to high influence Weak to high importance	Local government officials have strong influence on the decision-making process, and the bank’s operations are also relevant to officials’ political achievements.
Bank and bank-affiliated companies’ senior management	Strong to high influence Strong to high importance	Local government officials have strong influence on the bank’s operations and related decision-making that are also significantly relevant to their performances and incomes.
Bank and bank-affiliated companies’ staffs	Weak to low influence Strong to high importance	Implementing the policies made by the senior management, staffs have relatively less influences on the bank’s operations and related decision-making. However, since they directly engage in the bank’s operations, they can access the senior management to make changes. In addition, the operations are significantly relevant to their incomes.
Investors (in the future)	Weak to high influence Moderate to high importance	The future investors have relatively high influence on the bank’s operations as they will not directly engage with its internal affairs but can have strong influence on the senior management to make changes. Although the bank’s operations are important for gaining returns from their investment, they are not dependent on the single investment and thus are of moderate to high importance.
Experts from think tanks and consulting firms	Weak to high influence Weak to low importance	Although experts are consulted by government officials and the bank’s senior management, they do not directly engage with daily operations. Though they receive consulting fees, experts do not have long-term dependency on the region and bank’s operations.
Forest farmers	Moderate to low influence Strong to high importance	Local forest farmers have relatively little power to influence the bank’s operations or related decision-making. They also have less channels to access the senior management to express their concerns. However, since they are forest-dependent and have strong emotional and residence connections to the region, they are categorized as “strong to high importance”.

Evaluations

Goals

The bank was established to achieve the three goals of “poverty alleviation, rural revitalization and forest resource protection and forest quality improvement” (Yu, 2020, p.70).

In general, the bank has realized a positive performance in terms of achieving these goals.

Achievements

Overall, FEB is an innovative natural resource capitalization financing model (Cui, Li & Cheng, 2019). It has achieved a strong track record in Shunchang in terms of addressing longstanding problems that emerged after the forest tenure reforms and alleviating poverty in the region, and its best practices should be promoted nationwide (Mei & Peng, 2021). Yu (2020) highlights three major achievements, which include the construction of a diverse management system, effective integration of resources and project management and optimization of the innovative development model of industrial institutions. By the end of 2018, “[the business department] has completed the redemption of 22 households with an area of 453 mu, 2 trusteeships with an area of 13 mu, and processed 11 forest tenure mortgage loans with an amount of 4.5 million yuan, and the mortgaged forest land area exceeded 1970 mu” (Yu, 2020, p.70).

As introduced by Chen (2019), Xia Liumei, a low-income forest farmer in Shunchang county, deposited her family’s 9 mu of forest land in FEB and has thereafter received 310 yuan in returns every month. To take care of her disabled husband and young children, she was unable to work in the forest. However, through signing a trusteeship agreement with FEB, she can receive an expected income of 3,720 yuan from the bank every year for the next 20 years. Another successful case is Cao Guanghua, the person in charge of the bamboo and wood cooperative that has more than 7,000 mu of fir forests. He has successfully redeemed 870 mu of fir forests with nearly 10 million yuan and mortgaged 800 mu of fir forests with total loans amounting to more than 3 million yuan through FEB (Chen 2019).

Challenges

In spite of the achievements made by FEB to date, there are still challenges and issues within its operations which need to be addressed.

As Chen (2019) identified, the difficulty of redemption is one of the key challenges faced by FEB. Since recently, the forests contracted by forest farmers have been classified as “key ecological areas”, and logging is restricted or even prohibited, which has significantly impacted many forest farmers. The bank started to redeem forests from the local forest farmers who received very little compensation from the government. However, due to a lack of funding, they only redeemed a very small amount. As of 2019, the bank had only redeemed 7,000 mu of forests from key ecological areas, while 126,000 mu of forests in Shunchang are classified as “key ecological areas” (Chen, 2019).

Guo and Zhang (2022) examined the challenges within FEB’s operations, which include a lack of finance talent, insufficient project design and marketing, over-reliance on government subsidy funds, unattractiveness to private capital and slow reaction to the market. In addition, Huang, Wen, Fan and Luo (2020) pointed out the issue that forest farmers are not very motivated because they are price-sensitive and have very little access to the bank’s information due to insufficient promotion.

Besides the challenges identified above, other issues include the absence of additional stakeholders, such as international and local NGOs for capacity-building and consultation, and an inadequate communication strategy to encourage the participation of clients and investors and create a wider impact by showcasing the model to national or international-level audiences through various platforms and occasions (Liu, 2021).

Expectations

As highlighted by Chen (2019), Zhao Gangyuan, the director of a state-owned forest farm in Shunchang County, hopes to increase the subsidy standard for the redemption of forests in key ecological areas, gradually nationalize forests in key ecological areas and provide guarantees for the continuous improvement of forest structures and enhancement of forests’ ecological carrying capacity.

Given the significant progress that FEB has made so far, it should serve as a pilot model that can be promoted across the country and globally through various stages in the future.

Recommendations

On the financial side, the bank should carefully and regularly conduct risk assessments to maintain its financial stability. The bank should seek financial support from China Development Bank (CDB) that has pledged to "issue 150 billion yuan in loans" during the the 14th Five-Year Plan period (2021-2025) to support China's forest ecology construction in 2020 (Xinhua, 2020). In addition, the bank should also develop a private capital mobilization strategy to absorb more capital from the market and avoid over-reliance on government funding. To absorb private capital, adoption of Environmental, Social and Governance (ESG) standards, swift response to market forces and the proactive pursuit of cooperative opportunities are very important. Huang, Wen, Fan and Luo (2020) suggest building a multi-level market-oriented investment and financing system through introducing the models of Public Private Partnerships (PPPs) and Real Estate Investment Trusts (REITs) and continuously improving the income distribution mechanism.

On the communication side, the bank should develop a concrete communication strategy targeting clients/investors for business/investment and broader audiences to achieve a greater impact. As indicated above, some forest farmers are reluctant to participate, because they have received insufficient information from the bank. The bank should therefore adopt an on-the-ground marketing strategy within local communities to increase its visibility to the forest farmers. As for investors and other audiences, the bank should actively participate in high-level events through exhibitions and speeches delivered by the senior management at forums to showcase the bank’s achievements. In addition, higher levels of media exposure, especially in influential tier 1 national and even international media outlets, is critical. Details of the communication strategy are provided below.

Table of Proposed Communication Strategy for FEB

Key Elements	Details
Objectives	To increase FEB's visibility to the forest farmers, investors and broader audiences.
Target Audiences	Forest farmers Investors Other audiences
Communication Options	For forest farmers, face-to-face promotion on the ground is the most efficient option.
Communication Channels	Traditional paper media, especially tier 1 state media to achieve a greater impact and financial media for investors Local TV and radio platforms targeting the forest farmers Social media, such as WeChat and Weibo
Timed Activities	For forest farmers, on-the-ground promotion through the organization of exhibitions and events, including roadshows and small concerts. For investors, exhibitions and speaking opportunities at financial sector events For other audiences, exhibitions and speaking opportunities at high-level events, such as expos and international conferences
Resources	Limited funding to the promotion activities targeting the forest farmers. For other events, the bank should mobilize partnerships for free pitches.
Evaluation	Conduct surveys of the forest farmers to assess the promotion results Volume of media coverage and media levels Number of exhibitions and speaking opportunities as well as event levels

On the partnership-building side, the bank should conduct stakeholder mapping and actively engage with the identified stakeholders from different sectors and levels. At present, civil society, as an important stakeholder to provide capacity-building and funding, is absent from the process.

On the human resources side, the bank may consider launching an expert program to hire senior consultants who can provide guidance, a secondee program with other financial institutions from cities such as Xiamen and Fuzhou to bring experienced financial talent and a junior graduate program with universities to recruit junior talent. The bank should also work closely with the local government to attract talent to settle in the region. In addition, the bank may organize capacity-building workshops to train its staff.