Global Risks and Investment Uncertainty: Chinese Global Energy Finance in 2018

In 2018, overseas energy financing by China’s two global policy banks—the China Development Bank (CDB) and the Export-Import Bank of China (CHEXIM) —was at its lowest level since 2013. These two banks provided just $8.62 billion to foreign countries in financing for energy sector activity overseas in 2018, down 69 percent from the $28.04 billion in lending to foreign governments in 2017. In 2018, 93 percent of China’s energy loans went to BRI countries. While annual flows of energy finance by China’s policy banks since 2000 now sum to 244.2 billion, it is clear that the five-year anniversary of the Belt and Road Initiative is marked by a significant dip downward.

In a new policy brief, Xinyue Ma, Kevin P. Gallagher and Xintong Bu say the slowdown in overseas policy lending is due to an increase in uncertainty and risk in China, in host countries and in the broader world economy. Turbulence in the domestic Chinese economy from internal and external forces has increased caution on the part of all economic actors, triggering the government to pragmatically increase regulations on cross-border capital flows. Moreover, uncertainty and risk in emerging market and developing countries has also led Chinese authorities to be very cautious in 2018 as well. Given this uncertainty, extrapolating from the past may not be a good predictor of the future.

Main findings:

• There is a clear downward trend in CDB and CHEXIM’s overseas energy finance since the BRI momentum peaked in 2016.
  • The drop in China’s overseas energy finance could be seen as a systematic phenomenon against 2018’s downward trends in the emerging markets and developing countries – China’s major destination of development finance.
• Meanwhile, the lower financial flows are also not surprising when juxtaposed with China’s stagnant FDI flows and overseas contracting activities.
• Another factor that might have contributed to this slowdown is China’s strengthening domestic and cross-border financial and capital account regulations.
• As development finance institutions including Chinese banks and enterprises invest globally in public utility and infrastructure sectors such as energy over the years, while energy access levels have significantly improved in many countries, some 15 countries have begun to witness saturation of investment in these sectors, especially in electricity generation from conventional sources, such as coal and hydropower.
• The domestic policy shock to China’s renewable sector in 2018 is another likely contributor to the lack of overseas renewable energy finance.
• The limited scope of this data calls for more information on China’s overseas engagement in the renewable energy sector, as to whether they are being financed by Chinese commercial banks, international commercial banks, international development finance institutions or rely more on equity investment.

Out of the slowdown in lending going towards non-renewable resources, a new opportunity emerges. The scale of China’s past investments in overseas energy sector shows the country has the potential of becoming a major driver of meeting the Nationally Determined Contributions (NDC) renewable energy goals if its investments could be calibrated towards sustainable green projects. As China enters a more cautious stage of overseas financing, host country NDCs could prove to be a fruitful pipeline as the CDB and CHEXIM devise their investment strategies. Governments of BRI countries would also be well advised to communicate their NDC priorities, national strategies and associated project pipelines with sufficient granularity to financial institutions, including Chinese development finance institutions such as the CDB and CHEXIM.