China Is Now The World’s Leading Energy Financier — What Does That Mean For Climate Change?
The International Money Fund and the World Bank have long functioned as pillars of the global economic and financial order. But when it comes to financing the energy needs of the world, there’s a new leader: China.
According to a new study by Boston University’s Global Economic Governance Initiative, China is now the world’s largest provider of development finance for energy. Its twin policy banks, the China Development Bank (CBD) and the Export-Import Bank of China (CHEXIM), hold $2 trillion in assets. That’s almost three times the $700 billion held together by six Western-backed development banks. From 2007 to 2014, on average, CDB and CHEXIM together provided $13.5 billion a year in energy finance to foreign governments compared to $10 billion a year loaned by the World Bank.
These banks also fund the overseas expansion of Chinese national oil companies by giving them massive lines of credit at discounted rates.
What does China’s new and growing dominance of global energy financing mean for economic development and climate resilience? The study examines China’s global energy portfolio and finds it is lending to countries under-served by traditional multilateral banks; often those with high risk ratings like Bosnia & Herzegovina, Niger, Pakistan and Sudan. So arguably, China is filling an important development gap. At the same time, more than 90% of China’s energy loans are concentrated in coal and large hydropower. There is virtually no financing of wind- and solar-based energy.
Source: Kevin P. Gallagher, Rohini Kamal, Yongzhong Wang, Fueling growth and financing risk, The Global Economic Governance Initiative (GEGI) Boston University 2016
This path is simply not sustainable. Not only is it inconsistent with the commitments China has made — toward UN Sustainable Development Goals and the Paris Agreement on climate change — but it’s also fraught with risk.
Hundreds of Bangladeshi protests began a four-day march from the capital Dhaka to the Sundarbans in a last-ditch protest against plans to build a coal-fired power plant near the World Heritage-listed forest. (Photo credit AFP/Getty Images)
Consider the tragedy unfolding in Chittagong, Bangladesh, where villagers are protesting plans to construct a China-funded coal-fired power plant.
There are serious social costs and risks associated with large hydro plants, too, particularly when dams, including those funded by the World Bank, threaten biodiversity and displace indigenous communities.
Chinese financing frequently occurs in the form of “tied aid,” i.e., the recipient must spend the money on goods and services sold by Chinese companies. So in the short-term, China’s motivations are easy to understand. It is channeling its foreign exchange reserves to earn high returns while also promoting exports of Chinese energy products and technologies.
It would be unfair to call out China for this form of financing. Japan pursued a similar model of tied aid for a long time. Moreover, development financing from the IMF and the World Bank is hardly no-strings attached; it is tied to unpopular privatisation and deregulation conditions.
The real question is: Will Chinese financing lock developing countries into fossil-fuel intensive energy infrastructure? China has to only look across the Pacific to see the pitfalls of pursuing narrow, short-term national interest. U.S.-based multilateral banks are known for imposing painful structural adjustment programs on borrowing countries. The Washington consensus certainly did not win over hearts and minds in the developing world. And that’s partly why an alternative system of development financing, led by China — and shunned by the U.S. — appeals to so many.
As China sets about rewriting the rules of global development financing, it can potentially promote a long-term development agenda that’s low-carbon and socially inclusive. The Chinese state is already coordinating its financial and energy bureaucracies, its national oil companies and private clean tech enterprise. If it decides to change course globally — as it has done domestically — it will be able to support clean energy transactions with blended finance, which combines development funding, private capital and grants, at relatively low risk.
Professor Kevin P. Gallagher, a co-author of the study mentioned prior, says: “A lot happens within one building in China. If clean energy financing and exports are prioritized at the top, China has the firepower and flexibility to quickly broker deals that blend non-concessional and concessional loans, as well as climate change aid, to deliver sustainable energy to borrowers.”
At home China is rapidly transitioning to clean energy. For the first time in its Five-Year Plan, China has put a cap on domestic coal consumption. In fact, climate change economist Lord Stern believes China’s carbon emissions may have already peaked. That’s why China’s oil companies, struggling with overcapacity, are eager to find export markets. But China also leads the world in clean tech investments that can be commercialised on a global scale.
If China can contain the carbon footprint of its gigantic domestic economy, it can also stop bankrolling carbon emissions in poor countries.
This article was originally published by Forbes on November 1, 2016.
