Fueling Growth and Financing Risk: The Benefits and Risks of China’s Development Finance in the Global Energy Sector

In just over a decade, Chinese policy banks have emerged as global leaders in development finance in general and in finance for energy projects in developing country governments in particular. China has founded or co-founded two new multilateral development banks (MDBs) and at least 13 regional and bilateral funds that will increase Chinese development finance abroad by orders of magnitude. Such a stepwise increase in global development finance arrives just in time, as the world faces major infrastructure and energy gaps and has just committed to increasing finance for sustainable development on a global scale.

However, China’s global energy portfolio is heavily exposed to country, macroeconomic, climate, and social risks. To mitigate such risks and meet the broader sustainable development challenge for the 21st Century, China’s development finance will need to shift the composition of its global energy lending in a significant manner.

A working paper by Kevin P. Gallagher, Rohini Kamal, Yongzhong Wang and Yanning Chen provides the first estimates of China’s global development finance institutions in general and China’s policy bank lending to foreign governments for energy. 

Key Findings:

• China’s national development banks already lent as much to foreign governments for energy as all the major Western-backed MDBs combined.
• Between 2007 and 2014 Chinese banks doubled the amount of energy financing available to national governments, adding another $117.5 billion dollars in energy finance for foreign governments. 
• Chinese energy finance is exposed to significant country and macroeconomic risk, in contrast with the Western-backed development banks across the world.
• Chinese development banks are also heavily exposed to climate and social risk, with energy loans highly concentrated in fossil fuel extraction and power generation, especially coal. Using conservative estimates of the climate and local health costs of coal plant emissions, we calculate that the yearly social cost of Chinese overseas coal-fired power plants amounts to $29.7 billion. Assuming a power plant lifetime of 30 years, total social cost could range from $117 billion to $892 billion.  

The authors argue that diversifying China’s global energy portfolio toward cleaner energy technologies will help Chinese policy banks mitigate the risks associated with primary commodities and meet broader sustainable development goals. However, it will be a significant challenge for the Chinese banks and the newly created China-backed funds to shift toward a more sustainable energy portfolio.