On Monday 19 July the American Enterprise Institute (AEI) released the latest update of their authoritative China Global Investment Tracker (CGIT) for the first half of 2021. Using publicly available sources, the CGIT tracks all Chinese investments and construction transactions over USD 95 million. The most recent data dump shows that the first half of 2021 saw no new investments in coal power plants. This is the first six monthly period since the start of the Belt and Road Initiative (BRI) in 2013 that has not seen Chinese investments in coal power plants overseas, and therefore represents a major breakthrough.

It is worth adding that, as tracked by Panda Paw Dragon Claw’s own newsletter, there were in fact at least three coal power plant related contracts signed over the last six months that did not show up in the AEI tracker. This can happen if the investment or contract value is below USD 95 million or, as most likely in this case, the project has not begun construction, a condition the AEI database uses as a quality control on its data. Those plants were the 110MW Na Duong lignite plant in Vietnam, equipment for 3x380MW units in the Tsingshan steel and nickel industrial park in Indonesia, and an EPC contract for the 2x350MW Ugljevik III power plant and open pit coal mine in Bosnia Herzegovina. These three plants are still fewer than the four coal power plants invested in in the first half of 2020, however. A clear trend has emerged in Chinese overseas energy investments – support for coal power is in its twilight moment.

So does 2021 mark the end of Chinese investments in coal power across the developing world? Yes and no. Many are holding out hope and expectations that China will join its east Asian neighbors in officially halting (public) finance and construction support for overseas coal power projects. The UK government, for example, is reportedly hoping to make the UNFCCC climate talks in Glasgow in November a moment where all the major economies of the world commit to phasing out coal at home and ending official support for coal power overseas. There is no guarantee China will sign on to such an announcement, however. In fact, there are a number of reasons why China would not make such a public announcement, despite the fact that investment opportunities in coal power are likely to continue to decline and despite the (much needed) credence such a ban would give to China’s claims that the Belt and Road is a green project.

The shrinking coal power pipeline

Firstly, though the coal power pipeline across the Belt and Road has been shrinking and will continue to do so, it has not shrunk to zero and will not do so for some time to come. Strategic Belt and Road partners and neighbors such as Cambodia, Laos, and Mongolia, for example, all have plans to expand their coal power generating capacity. Larger economies along the Belt and Road such as Vietnam and Indonesia also have no plans to halt their coal power sector development in the short term. While the former last year cancelled 7GW of planned capacity and halted a further 6GW, its under-review blueprint for the power sector, the Power Development Plan 8, still plans to install an extra 17GW worth of coal power capacity by 2030. The latter, Indonesia, while having surprised many observers by releasing a 2070 goal of net zero emissions, still intends to finish its supercharged build out of coal power plants up to 2023. That means adding more than 100 coal power plants, with a capacity of around 35GW, over the next two years.

It also deserves noting that coal power moratorium announcements can also be politically fragile. In December last year, prime minister of Pakistan, Imran Khan, used the global stage to announce that the country will construct no more coal power plants (after completing the 1.9GW already under development). Since then, however, the government has taken zero action to transform his words into policy, leaving the moratorium on fragile footing, particularly as various interest groups lobby for the expansion of coal to gas and coal to liquid technologies. In Bangladesh it took the government almost a year to move coal power review and cancellation suggestions into binding policy. In Pakistan there is no sign even of an attempt to make this happen.

And lastly, while the economics of power generation are certainly not stacked in coal’s favor, new coal power plants for industrial processes will likely continue for some time. Countries such as Indonesia who are keen to expand their production of steel, cement and nickel will continue to build coal power plants for those energy intensive processes, often not connected to the national grid.

In short, though the sun is undoubtedly setting on coal power across the world, it is still some way from dipping below the horizon. EPC contracts to build coal power plants will continue to trickle in over the coming years, and Chinese companies are well positioned to snap up those contracts.

Banning coal – a good look in whose eyes?

When it comes to understanding what motivations China might have for joining its East Asian overseas investment peers – Japan and South Korea – in announcing an end to state-backed financing and support for overseas coal power plant projects, we must also think carefully about who China understands as its audience for Belt and Road matters. As I see it, China’s principal audience for most foreign policy related issues – from which overseas financing and the Belt and Road cannot be separated – has never been Western governments, the constituency pushing hardest at a diplomatic level for an end to coal power on the Belt and Road. Rather, the developing countries and emerging economies who are increasingly China’s sole allies in global politics, are almost always the audience of most concern for China. This is evidenced by foreign minister Wang Yi’s tireless travels to partner countries in the Global South – Tajikistan, Turkmenistan, Uzbekistan, Syria and Algeria in just the last two weeks! His visits offer messages of developing world solidarity and demonstrate who China values and most wants to cultivate as allies.

Indeed, as noted in the New York Times Magazine’s recent profile of Zhao Lijian, the Ministry of Foreign Affairs’ (MFA) eyebrow-raising spokesperson, often the messages coming out of the Ministry that seem most directly targeted at the West are intended more for a domestic audience and an audience in developing countries, whom it is hoped share a sense of resentment and frustration at the US-led world order which has done little to bring them out of poverty and the “middle-income trap”.

Within this context, we must consider the nature of the “win” that China could achieve by announcing an official end to coal power development on the Belt and Road. While it would do much to allay the fears of Western diplomats that BRI will undermine the Paris Agreement targets and go a long way in giving credence to the green credentials China bestows on itself, it would hardly be a win for China’s allies, many of whom are still planning to develop coal power. The question then is, in whose eyes does China most want to gain and maintain respect? In this author’s opinion, it is undoubtedly among the Belt and Road, developing country allies with whom China spends so much effort cultivating good will.

Non-interference

There is one further element to consider here. That is China’s consistent principle of non interference. In the context of the Belt and Road, this extends to supporting, but not dictating, member countries’ development pathways. In his opening speech at the 5th Silk Road International Exposition held in Xi’an in May, foreign minister Wang Yi expressed this principle: “Belt and Road is releasing development potential and the path to growth. In the framework of Belt and Road cooperation, every country can utilize their own natural resource endowment and use their advantages to complement one another. Every country can develop what they excel at and jointly develop.” 

At a regular press conference in February, Ministry of Foreign Affairs spokesperson Hua Chunying responded to a question on China’s continued support for coal power overseas using a similar logic of development pathways and stages, which is worth quoting at length:

“Some countries opt for coal-fired power generation first [i.e. before renewables] in light of their national conditions and available resources so that they could at least manage to have access to affordable electricity. Chinese companies, based on the needs and requirements of cooperative partners as well as market principles, offered clean, reliable and safe energy supply solutions featuring high standards, low emission and low energy consumption. Such cooperation has not only improved people’s livelihood, but also contributed to local economic development and social stability.”

By the publicly expressed logic of China’s overseas investment and development assistance, as well as in the eyes of many of China’s Belt and Road allies, curbing support for coal power development sounds very much like dictating development pathways, and in fact blocking one of the pathways to development that in traditional economic metrics has historically proven most successful – coal powered industrialization.

Justin Yifu Lin, prominent Chinese development economist and pioneering thinker of the economic logic underpinning the BRI, talks about how every country should make the most of their “latent competitive advantages” in formulating development strategies. This comparative advantage is in part defined by a country’s “endowment factors”. For countries such as Indonesia, Mongolia and elsewhere, it should not be surprising that economic planners continue to regard their vast coal reserves as an important endowment that should be leveraged for development, not least because China’s demand for coal continues to grow, especially as it seeks alternative markets for coking coal previously imported from Australia. The Indonesian government, meanwhile, is clearly strategizing its upstream position in the world’s bullish nickel trade as an area of “latent comparative advantage”. It aims, via traditional industrial policy, to upgrade its nickel industry from extraction to smelting to battery production. The energy intensive processes required for such production will help sustain demand for coal in the country.

It could certainly be interpreted as hypocritical for China to erect barriers to such industrial development pathways – which in many ways take a page out of China’s own development policy playbook – by placing a ban on Chinese financiers’ and companies’ involvement in coal power projects.

So this doesn’t mean the end to Chinese support for coal power?

That is not to say that the pressure from Western governments, local populations in Belt and Road countries and environmental civil society groups have not been heard, however. In fact, recent moves by the Chinese government indicate great concern in regards to the negative environmental impacts of Belt and Road projects. At the end of last year the Ministry of Ecology and Environment (MEE) endorsed a study which classified coal power and coal mining as “red light” investments that Chinese companies should steer clear of. More recently, a 6-page Guidelines for the Green Development of Foreign Investment Cooperation issued jointly by the Ministry of Commerce and the MEE this month calls for “upholding the green development concept through the whole process of overseas investment.” It encourages investments in solar, wind and biofuels, as well as promoting the usage of higher environmental standards when those of a host country are deemed too weak. In a clear sign of concern about China’s global image, it also calls for “upgrading [Chinese companies’] green development reputation.”

Moves from Chinese financiers may also indicate increased caution on coal power. ICBC recently announced that it would pull out of financing arrangements for the Sengwa coal power plant in Zimbabwe, as well as stating publicly that it is in the process of drafting a “roadmap” to end its financial support for coal.

What we have not yet seen is the binding regulation or high level announcement putting an end to Chinese support for coal power projects overseas that many groups seem to be hoping for. There is a high chance, however, that this may never come. China may well prefer to de facto end its support for coal power overseas in a less coordinated, more opaque, incomplete and, most importantly, quiet manner.

A leaked letter from the Chinese embassy to Dhaka in March may be an important indicator of this approach. The letter stated that “the Chinese side shall no longer consider projects with high pollution and high energy consumption, such as coal mining [and] coal-fired power stations”. Despite what in many people’s eyes should have been a clear soft power win – tangible action on the rhetorical promise of a “green Belt and Road” – the letter was a private back-doors communication between governments that was never intended to make it into the public eye. 

The rest of this year and next year may see a handful of companies sign EPC contracts for coal power plants, particularly those for industrial uses, but Belt and Road coal power investments are already well into their twilight hour. Source of loud criticism, China’s support for coal power around the world is likely to end quietly.