Energizing Development Finance? 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. According to the China’s Global Energy Finance Database, between 2000 and 2017, the China Development Bank (CDB) and China Export-Import Bank (CHEXIM) provided $225.75 billion in overseas energy development finance.
In a new journal article, Kevin P. Gallagher, Rohini Kamal, Junda Jin, Yanning Chen and Xinyue Ma found CDB and CHEXIM have doubled the availability of global development finance –and hold more assets than the major Western-backed multilateral development banks (MDBs) operating in developing countries. With the onset of a new family of funds and multilateral development banks co-financed by China, China is poised to be the largest development lender in the world as Western-backed MDBs appear stagnated in their ability to increase their capital bases. 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.
Main findings:
- China’s ‘policy banks’ and funds have doubled the availability of global development finance – and hold more than twice the assets of the major Western-backed MDBs operating in developing countries.
- With the onset of a new family of funds and MDBs co-financed by China, China is poised to be the largest development lender in the world as Western-backed MDBs appear stagnated in their ability to increase their capital bases.
- China’s national development banks already lent as much to foreign governments for energy as all the major Western-backed MDBs combined. Between 2000 and 2017, Chinese banks almost tripled the amount of energy financing available to national governments, adding another $225.75 billion dollars in energy finance for foreign governments. Not only did Chinese finance increase the total amount of finance, Chinese banks are financing energy projects all over the world and expanding the set of countries that receive energy financing.
- Chinese energy finance is exposed to significant country and macroeconomic risk. In contrast with the Western-backed development banks across the world, Chinese policy banks are engaged with countries with higher country risk ratings and in commodity-backed loans that risk stress given the fall in commodity prices and associated macroeconomic downturns in the developing world.
- Chinese development banks are heavily exposed to climate and social risk. China’s energy loans are highly concentrated in fossil fuel extraction and power generation, especially coal. Indeed, Chinese development banks have provided upwards of $44.5 billion in financing for global coal projects—projects that accentuate climate change and social risks. Using conservative estimates of the climate and local health costs of coal plant emissions, the research team calculates 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.