Webinar Summary – Diversifying the Belt and Road Initiative: The Rise of China’s Overseas Development Investment Funds

By Christina Duran

On Tuesday, November 8, 2022, the Boston University Global Development Policy (GDP) Center hosted a webinar discussion on the diversification of Chinese overseas economic engagement for its Belt and Road Initiative (BRI). The webinar, as part of the Fall 2022 Global China Research Colloquium, featured Oyintarelado (Tarela) Moses, Data Analyst and Database Manager for the Global China Initiative (GCI), and Laura Gormley, GCI Research Assistant, who presented the findings from their new working paper exploring the unique features, financing capacity, policy implications and potential of China’s ‘Overseas Development Investment Funds’ (ODIFs). Cecilia Springer, Assistant Director of GCI and co-author of the paper, moderated the discussion.

To establish context for China’s ODIFs, Moses began the conversation by explaining that China’s ‘Going Out’ strategy and the BRI launched China to be the world’s largest source of cumulative bilateral official development finance. Providing an overview at the start of the presentation, Moses shared data from the China’s Overseas Development Finance (CODF) Database, showing that from 2008-2019, China’s policy banks, the China Development Bank (CDB) and the Export-Import Bank of China (CHEXIM), provided almost half a trillion in development finance to development projects across the world. However, in recent years, overseas development finance from China’s policy banks has declined and China’s outward finance has diversified towards other channels. Since the mid-2000s, Chinese public and private financing institutions have established specialized investment funds, like the Silk Road Fund and the China-Latin America and the Caribbean Industrial Cooperation Fund.

Moses, Springer and Gormley set out to categorize and track the specialized investment funds, termed ODIFs and defined as “pools of capital, often established by multiple public and or private shareholders that primarily provide equity financing to regions and sectors overseas.” This emerging and under-studied area of China’s overseas economic engagement has a unique set of characteristics. China’s ODIFs tend to have development-oriented mandates, not only focusing on making profits from their investments, but also on social and economic impacts from the project. They also have multiple shareholders, primarily wield equity finance and have a paid-in fund structure. These characteristics distinguish them from other Chinese financing tools used to support overseas development projects.

The researchers then divided the ODIFs further into three different fund types: sovereign development funds (SDFs), private equity funds (PEFs) and joint investment funds (JIFs). The researchers drew on existing literature of investment indicators and selected indicators that would provide a representative picture of the funds, like capitalization of the funds, shareholders and target region. Without a public, comprehensive dataset for ODIFs, the researchers collected information from fund and shareholder websites, statements by Chinese government officials and state-affiliated press. They cross-checked the information with Chinese foreign shareholders’ websites, academic and press sources.

The researchers found that ODIFs comprise $155 billion in capitalization through 21 funds established between 2007-2019, excluding subfunds. While not exceeding policy bank financing between 2008-2019 at more than $462 billion, Gormley argued ODIFs represent a sizable pool of capital. In 2014, available capital from ODIFs witnessed a large spike, adding $54.5 billion that year after the initiation of the Silk Road Fund. Since the researchers classified the Silk Road Fund as an SDF, this category boasts a larger total capitalization of $76 billion, despite having fewer ODIFs classified in this category. JIFs make up the largest number of ODIFs. According to Gormley, this likely reflects Chinese investors partnering with local investors to better structure and manage investments and navigate the regional regulatory environment. However, they also represent the least amount of capital, at $35 billion.

Examining support for different sectors, the researchers found a focus on funds supporting the energy and resource sector at 15 funds, followed closely by the general infrastructure sector at 14 funds. Gormley noted only four funds supported green development activities. Latin America and the Caribbean (LAC) had the largest potential ODIF capital available, including funds particularly for Brazil and Mexico. Africa and Asia had fewer dedicated funds, but may receive finance from global funds, like the Silk Road Fund. Potential capital for global projects is $70 billion.

Based on mapping Chinese shareholders for all funds, several patterns emerged regarding shareholders structures. Some funds are entered into as joint agreements between actors who retain a predetermined ratio of capitalization. For example, China and foreign partners for the China-United Arab Emirates (UAE) Joint Investment Fund and the China-Russia Investment Fund must match any increase in foreign capital. In other cases, one shareholder acts as an anchor investor who attracts additional capital from other partners. For the ASEAN Investment Cooperation Fund, CHEXIM acted as an anchor with a seed investment of $300 million. In some cases, shareholder composition is not always static, with certain funds going through rounds of refinancing in which old sponsors leave and new ones enter. Such is the case of the China-Central and Eastern Europe (CEE) Investment Cooperation Fund, in which CHEXIM and EXIM Hungary supplied the first round of financing, while the second round included additional contributions from the Silk Road Fund.

Gormley explained that because equity investments are a purchase of ownership in a project, company or asset, the composition of shareholders provides insights on ownership over foreign assets. ODIFs create a unique space in which sovereign-backed institutions, China’s policy banks, partner with private sector or foreign actors. ODIFs allocated the decision-making process between foreign or private shareholders internally to the funds management team, presenting a departure from other actors participating in China’s overseas development finance.

Gormley presented a case study for PEFs and JIFs, through the Green Silk Road Fund (GSRF) and the China-UAE Joint Investment Fund, respectively. Established as a private equity fund to support BRI projects in improving environmental conditions along the BRI and mitigating climate change in China and host countries, Gormley believes the GSRF investments have potential to expand within the coming years. The China-UAE Joint Investment Fund, established as a platform for co-investments between CDB, China’s State Administration of Foreign Exchange (SAFE) and Mubadala Development Company and owned by the Emirati government, serves the general public policy purpose of strengthening economic cooperation between China and other regions through financing development.

Concluding the presentation, Moses presented three main policy implications for the rise of ODIFs. First, the decline of Chinese development finance may accompany a diversification of finance, specifically using ODIFs and other financial instruments. Second, ODIFs appeared in several of China’s policy documents, particularly when China released recent guidance on greening the BRI, mentioning several equity funds to support green projects. In the 2021 Forum on China-Africa Cooperation (FOCAC) Dakar Action Plan, the researchers found several ODIFs were mentioned, as well as the importance and use of  equity to support different development projects in the region. Finally, the demand from the Global South, where countries that are grappling with or at risk of debt distress may consider alternative forms of finance for development.

However, the 54 percent of low-income countries in debt distress or in high risk of debt distress that may consider equity finance through the use of ODIFs, must assess the advantages and disadvantages of working with ODIFs through public private partnerships. On one hand, equity finance is not considered debt and interest gained is dependent on performance of the asset, not repayment or credit. But countries should consider that governments must share ownership of the supported asset and the profits from the asset must be shared to pay back all shareholders. Also, countries should weigh the private versus public goals for supporting development projects, as private institutions may be more profit-driven.

During the Q&A section, Keren Zhu, a Global China Post-doctoral Research Fellow, asked whether China-backed loans and ODIFs are alternative or complementary to each other and who are drivers of the rise in ODIFs? According to Moses, China-backed loans and ODIFs can be both alternatives and complementary, depending on the size of the project, since most equity funds tend to support smaller projects. Large enough projects may receive Chinese backed loans that could be provided for the project, but ODIFs could also provide the equity portion of the project. However, if the host country prefers to take on equity for a project, instead of loans specifically, then ODIFs would provide an alternative. Moses also indicated that having multiple financiers, through either loans and/or equity on the project, can spread the risk of exposure to failure of a project and its ability to return their investments. Due to China’s desire to find ways to diversify risk and innovate financing for overseas development projects, China and Chinese institutions have primarily driven the rise in ODIFs.

Against the background of China’s domestic dual circulation strategy, an economic strategy first raised in 2020 and later memorialized in China’s 14th five-year plan (2021-2025), which seeks to prioritize both domestic consumption in China and encourage international investment and trade, and given the multiple mentions of ODIFs within Chinese policy documents, Moses explained that China appears to want to encourage use of more ODIF-type financing. Furthermore, considering the advantages of ODIFs for the renewable energy sectors, Gormley explained that ODIFs offer more flexibility in financing structures by providing alternative project entries beside debt or grant financing. Also, ODIFs allow closer coordination and collaboration between local stakeholders, providing greater insights into the market that might be useful for maneuvering an investment, risk management and improving a project’s chances of success. Springer added while they did not see specific renewable energy projects financed through ODIFs, this financing tool could come into the fore in the future as China begins to think about delivering on overseas green and low carbon energy, considering several of the funds have been earmarked for green development activities.

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