China’s political banks are some of the largest financiers of the energy sector in the world. But in 2021, they provided no new development funding for overseas energy projects – the first year this century without such funding.

This striking finding, from our recent update of China’s Global Energy Financing Database (CGEF), maintained by Boston University’s Center for Global Development Policy, could represent a turning point in China’s involvement in overseas energy development.

The world faces a gaping investment gap in energy infrastructure, so questions about the future nature of China’s support in this area are of global importance.

President Xi Jinping pledged in September last year that China would increase support for low-carbon energy development overseas. Does the fall in political bank lending belie a shift towards supporting greener energy technologies around the world?

From national to global

China has two main political banks: the China Development Bank (CDB) and the China Export-Import Bank (CHEXIM). They played a vital role in China’s domestic development before expanding into overseas markets in the 2000s.

As the engine of China’s domestic growth over the past decades, the CBD was initially capitalized in 1994 under the State Council to primarily assist national infrastructure priorities. Since the 2008 global financial crisis, the CBD has become one of the world’s largest foreign lenders as part of a strategy to diversify China’s foreign exchange reserves and boost its energy security.

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Also capitalized in 1994, CHEXIM’s main mission was to facilitate China’s foreign trade and foreign economic cooperation. To implement China’s Going Out strategy, and now its Belt and Road Initiative (BRI), CDB and CHEXIM coordinated with China’s commercial banks and state-owned insurance provider China Export and Credit Insurance Corporation (Sinosure). He has also worked with government departments and companies to enable overseas projects in strategic areas and sectors. This model, dubbed the “coordinated credit space model”, has enabled the rapid take-off of financing for China’s overseas development since 2008, particularly in the energy sector.

In fact, public loans from CDB and CHEXIM have facilitated more power capacity additions than public loans from 10 major multilateral development banks (MDBs) combined, including the World Bank and the International Finance Corporation.

Anchored preferences

China’s political banks have devoted most of their overseas loans in the electric power sector to coal-fired power and hydropower projects, reflecting the domestic drivers of China’s energy sector. At the time of the global financial crisis, Chinese coal companies faced a slowdown in domestic electricity demand, which led to manufacturing overcapacity. Responding to demand from host countries with large coal deposits, growing electricity needs, and historical reliance on coal-fired power, China’s political banks lent $31 billion for power generation. coal-fired electricity abroad since 2000, according to CGEF data. This represents about 46 gigawatts (GW) of generating capacity, which has created significant opportunities for Chinese coal companies to expand overseas.

For hydropower, China’s political banks have also filled a large void left by traditional donors and MDBs, which have moved away from large dam projects at a time when developing countries have sought to develop their own hydropower resources. China’s hydropower industry also has decades of experience, giving it a competitive advantage overseas. Our data shows that China’s political banks have lent a total of $30 billion for overseas hydropower projects and another $2.5 billion for associated transmission infrastructure, totaling nearly 32 GW of power generation capacity. production.

Funding for China’s overseas energy development has also been largely devoted to oil and gas exploration and extraction. Coal and hydropower support are the second largest destinations by energy type and have been relatively more stable than oil and gas lending, which led to large lending spikes in 2009 and 2016 of $45 billion and $38 billion, respectively.

Despite this history of strong support for the energy sector, China’s political banks have decreased lending across all sectors in recent years, and Chinese overseas development funding has been declining since 2016. However, this is far from the end of the BRI: China’s outward engagement through direct investment (FDI) remains solid, and commercial bank lending and contractual agreements look relatively stable, potentially due to Sinosure’s support. These other financing tools are likely to increasingly diversify China’s modes of overseas engagement, compared to the previous dominance of Chinese political banks.

A prelude to greener investments?

Changing channels of engagement could mean that the types of energy China allows overseas are about to change – to the greener. China’s political banks have suspended lending, which was so heavily geared towards oil and gas extraction, as well as coal and hydropower generation. Pandemic-related borrowing constraints in host countries and restrictions on travel from China have made it difficult to strike global deals over the past two years.

Renewable energy is a key example of China’s overseas engagement which historically has not involved much political support from banks. Already, China’s financing for overseas renewable energy development via FDI from individual Chinese companies has far exceeded political bank loans.

Chinese companies, including specialized private companies such as Jinko Solar and major state-owned energy giants like Three Gorges and State Power Investment Corporation, have been capitalizing on overseas renewables. By measuring the associated generation capacity, Chinese companies have invested in nearly 12 GW of wind and solar capacity overseas, while political banks have financed less than one gigawatt, independently and through co-financing by IDE. Chinese companies have invested in renewable energy projects through mergers and acquisitions, but investment in new projects has dominated since 2019.

Recent political trends in China indicate that support for overseas renewable energy development will continue to grow. Along with pledging not to build new coal-fired power plants overseas, in September 2021 Xi Jinping also announced that China would step up its support for low-carbon energy overseas. More recently, at the end of March, several Chinese ministries issued BRI greening guidelines that indicated strong support for overseas wind and solar power, and further codified how this could be implemented. Various financial instruments were mentioned, including green bonds, mobilizing private finance through public-private partnerships, as well as the need for cooperation with international partners. This high-level political support is likely to spur more overseas investment from Chinese renewable energy companies.

Lack of support from political banks in the past means Chinese renewable energy companies operating overseas are walking when they could be working

However, the lack of political support from banks in the past means that Chinese renewable energy companies operating overseas are walking when they could. Political banks not only favor large-scale lending that supports massive centralized infrastructure (like coal-fired or hydroelectric plants), but they also perceive risks in the bankability of smaller-scale distributed renewables, and lack experience. to combat this perception. This has been true both at home and abroad.

After a sharp low in 2021, financing for China’s overseas energy development by its two strategic banks is expected to rebound in a post-pandemic future. Research has shown that overseas Chinese bank funding tends to follow international foreign exchange reserves, which have recently started to rebound significantly amid record trade surpluses.

To adhere to the emerging green BRI principles and policies, China’s strategic banks will need to explore ways to reduce the risks associated with their overseas renewable energy engagement, by considering co-financing arrangements, insurance instruments and guarantees and spreading the risks over a wider portfolio of projects. Of course, as countries around the world step up climate policy and strive to create enabling environments for renewable energy, BRI host countries also have the opportunity to approach China’s political banks to support renewable energy projects. renewable energy. Overcoming these challenges to match supply and demand will be key to the future of a green BRI.