By Xinyue Ma, Kevin P. Gallagher
After a decade-long surge in Chinese development finance into the global energy sector, China’s policy bank lending continued to trickle in 2019. This could largely be due to a lack of demand capacity in host countries and less financing available on the China side.
Losing Steam
According to the annual update of the ‘China’s Global Energy Finance database’ at Boston University’s Global Development Policy Center, China’s overseas development finance from the China Development Bank (CDB) and the Export Import Bank of China (CHEXIM) in the energy sector dropped to a lowest level in a decade (Figure 1). This may seem surprising given that overseas finance was a centerpiece at the Second Belt and Road Forum in 2019, but there are number of demand and supply side factors that led to the dimming of such prospects for 2019.
Figure 1 China’s Annual Energy Finance from Policy Banks 2000-2019，Source: China’s Global Energy Finance, 2020. Global Development Policy Center, Boston University.
As shown in Figure 1, according to information collected from public sources, in 2019, China’s policy banks issued a total of $5.3 billion to overseas energy projects, down 52 percent from the $11.08 billion in 2018. As of the end of 2019, we record a total of 272 loans given in the energy sector to other countries by these two banks since 2000, totaling approximately $241 billion and concentrated in oil, coal, hydropower, and gas.
The downturn could be due to a handful of key demand and supply side factors. Perhaps most importantly, emerging market and developing countries have hit their demand capacity. While these countries face an enormous need and financing gap for sustainable infrastructure, they have reached their limits in their ability to absorb new projects. In part this is due to the governance capacity to handle so many projects (Indonesia has 21 coal projects from China’s policy banks alone). More important however is the fact that, even before the COVID-19 crisis, many emerging market and developing countries had started to approach unsustainable levels of dollar denominated debt. According to the IMF, about half of all emerging market and developing countries were close to or already undergoing debt distress.
On the supply side China has heralded the BRI and outward finance in general, and has faced overcapacity on the mainland. So one might think there would be a surge in 2019. However, the level of dollars for outward finance has diminished in recent years. China has financed the BRI and overseas expansion through large current account surpluses, which are dwindling. Of course, 2019 was plagued by the US-China trade dispute, which slowed Chinese exports and investment into China. China’s current account balance was over 10 percent of GDP in 2007, but slid to 1 percent of GDP by 2019.
Faced with increasing risk and uncertainty, China has been tightening the reigns on the financing, including overseas financing, by strengthening its financial regulations, emphasizing prudent and sustainable lending. Since 2016, the China Banking (and Insurance) Regulatory Commission (CBIRC), People’s Bank of China, Ministry of Finance, etc. have issued a series of regulations which emphasize risks control and green finance practices. For policy banks in particular, capital adequacy regulations, monitoring and evaluation, and aligning the banks’ operations with their roles of policy and development banks are highlighted. The Guidelines for Establishing the Green Financial System published in 2017 and the Debt Sustainability Framework for Participating Countries of the Belt and Road Initiative issued in 2019 laid stress on environmental and financial sustainability of overseas financial activities. Over these years, CDB and CHEXIM leadership also frequently emphasized the caution they are practicing regarding debt sustainability, environmental impact, and risk management.
However, it is hard to attribute China’s overseas lending decrease to external or internal political or regulatory drivers alone. Chinese policy banks are market-based financial institutions, and largely respond to market dynamics and tracks a similar decline in China’s outbound Foreign Direct Investment (FDI) in energy (Figure 2).
Figure 2 China’s Outbound FDI in the Energy Sector，Source: FDI Markets, Dealogic, 2019.
According to Global Energy Monitor’s coal projects data and BNEF’s clean energy cross-border investment data, we find commercial bank investments in the power sector has slowed as well (Figure 3).
Figure 3 Chinese Development Finance and Commercial Finance in Overseas Coal and Renewable Energy
Globally, this downward trend of Chinese overseas energy finance has been concurrent with stagnant global energy investment and decreasing energy investment in the emerging markets – the main target of Chinese development finance (Figure 4).
Figure 4 Energy Investment in Selected Markets, 2015 and 2018，Source: IEA, 2019. World Energy investment.
Western-led multilateral development banks (MDBs) have followed a similar trend. Total energy loans from six MDBs had been much smaller than the amount provided by CDB and CHEXIM, and only surpassed CDB and CHEXIM in 2018 after two years of decline from the two Chinese banks (Figure 5). Given these global and domestic trends of financial supply and demand of the past few years, the slowing down of China’s overseas energy finance seems to be a systematic phenomenon.
Figure 5 Development Bank Annual Lending in the Energy Sector，Source: Development Bank Annual Reports & Project Database. Note: EBRD has not published annual report or projects for 2019. The 2019 column does not include EBRD loans.
Future Outlook
An increase in Chinese global energy finance seems even more unlikely in 2020 but could form an important part of the global recovery effort if it is re-calibrated toward the needs of the post-COVID-19 world.
China has signed a G20 agreement to freeze bilateral loan repayments for low-income countries until the end of the year, even though diplomats said that the process of identifying which loans in which countries would be eligible has only just begun and that negotiations were being undertaken with China on a bilateral basis. The Ministry of Commerce and the CDB issued a joint notice announcing potential relief for Chinese firms and projects in the Belt and Road Initiative that have been impacted by the COVID-19 pandemic. The CDB will provide low-cost financing and foreign exchange special working capital loans, set up reasonable repayment grace period, open up “fast lanes” for credit granting, and provide diversified support in foreign currency financing services to “high-quality” BRI projects and enterprises impacted by the pandemic.
Nevertheless, the COVID-19 related economic crisis inflicted serious damage on emerging market and developing economies. Capital flight has been over $100 billion and exchange rates plummeted by up to 25 percent. This has increased dollar debt burdens and over 100 countries went to the IMF for finance given the collapse of global trade and remittances. The vast majority of external debt is due to private creditors and multilateral lenders, but China is a significant bilateral creditor to many countries. While Chinese finance has been relatively patient relative to the private sector finance that has fled the developing world over the last few months, China’s borrowers will be hard pressed to service their debt to China for the foreseeable future. This lack of debt service on existing loans, and the limited ability to negotiate deals due to social distancing and travel bans, prepares us with a foreseeable shortage in Chinese energy finance in 2020.
Along with multilateral institutions and other development financiers in the world, Chinese development finance will be much needed as the world begins to develop recovery programs from COVID-19, which has revealed the need for more resilient and sustainable infrastructures. Energy infrastructure is a major pillar of economic development, and therefore sustainable infrastructure should be a cornerstone of recovery efforts. Moreover, China needs to make sure that any of its debt relief efforts are aligned with sustainability and climate standards, and continue to shift its overseas development finance into cleaner and more resilient energy sources, so that this crisis does not accentuate the climate crisis.