Overseas energy financing from Chinese policy banks plummeted last year in the wake of the Covid-19 pandemic, a new report says, as pressure builds on Beijing to drop its zest for coal projects in developing countries.
According to data from Boston University’s Global Development Policy Center (GDPC), funding from the China Development Bank (CDB) and the Export-Import Bank of China (Cexim) plunged by roughly 43% in 2020.
Having funded around US$8.1bn in loans for energy projects in developing countries in 2019, the pair’s outlay tightened to US$4.6bn last year.
More than half of the two banks’ combined overseas energy funding went to a single project in Nigeria, with Cexim providing a US$2.5bn loan to the Ajaokuta, Kaduna, Kano (AKK) gas pipeline project in Nigeria.
The total figure was comprised of eight loans to countries across Africa and Asia, as well as one deal for a coal-powered district heating system in Serbia.
While overseas lending for energy projects from CDB and Cexim has fallen to its lowest level since 2008, the report says that the contraction in Chinese overseas development financing was always likely, given the impact of Covid-19.
“As the pandemic wreaked havoc globally on business activities, energy demand decreased, and countries approached debt ceiling levels, a contraction in China’s overseas development finance was to be expected,” it notes.
A host of countries which have previously received sizeable loans from the CDB and Cexim, including Pakistan and Zambia, were forced to apply for debt relief from China in the wake of the devastating effects of Covid-19.
Zambia, which became the first African country to default on a payment since the start of the pandemic last year, already owed US$391mn to the CDB and US$2.6bn to Cexim as of 2019 – and as such was in no position to apply for further funding.
Yet there’s optimism that lending from China’s two leading policy banks will return to relatively normal levels in 2021.
Kevin Gallagher, a global development policy professor at Boston University’s GDPC, says that he expects some form of recovery in overseas energy financing this year, though adds that the pandemic could limit any bounce back.
“I think there is a good chance that there will be a 2021 pickup in Chinese overseas energy investment but far from a surge given the lingering virus,” he tells GTR.
This view is echoed by Kanyi Lui, a Beijing-based finance partner at law firm Pinsent Masons: “Assuming the pandemic can be effectively contained globally in 2021, I would expect a rebound in Chinese lending activities, but with the focus remaining on quality over quantity.”
Even if there is a jump in development energy lending, China’s policy banks are unlikely to match their peak levels of funding from a few years ago, however.
According to GDPC data, from 2013 to 2016, China provided US$73bn in energy development finance to BRI countries. By comparison, it financed US$49bn between 2017 and 2020.
The authors of the Boston University GDPC report, in a separate blog post, say that several demand and supply side factors could have driven this downturn. For one, emerging markets may have reached their limits for taking on new projects, with many developing countries having reached unsustainable levels of debt.
They also point to China’s “dwindling” current account surpluses as a reason why the country may have drawn back BRI support.
They note: “2019 was plagued by the US-China trade dispute, which slowed Chinese exports and investment into China. China’s current account balance was over 10% of GDP in 2007, but slid to 1% of GDP by 2019.”
China to assess coal financing?
Pressure has been growing internationally for export credit agencies (ECAs) such as Cexim to withdraw support for coal-fired power plants, and there are suggestions that Beijing could seek to ban development financing for overseas coal projects.
UK Export Finance (UKEF) announced in December that it would end support for fossil fuel projects, joining the likes of France and Sweden in ruling out backing for deals in the oil, gas and coal space.
Last year, the Japanese government said it would tighten lending criteria for export credit support for coal-fired power plants.
Critics have, however, condemned “loopholes” in Japan’s commitment, noting that the country is still open to funding overseas coal plants that use highly efficient technology, or any project it has already agreed to back.
A report from US-based research organisation Oil Change International has previously shown that when it comes to providing export credits for fossil fuels, Japan is the main offender – with China in second place.
According to the report from early 2020, Japan provided US$7.8bn annually to fossil fuels, followed by China, Korea and Canada with US$7.7bn, US$5.3bn and US$4.3bn respectively.
China is now also reportedly weighing up some form of curtailment of development financing for coal projects, says GDPC’s Gallagher.
“China’s banks have seen the writing on the wall about coal and realise that it won’t be profitable for them or host countries moving forward,” he tells GTR.
He adds: “There are strong discussions happening in China about banning coal from overseas development finance and the sooner they come to a swift conclusion, the better off host countries, the global climate, and China’s balance sheets will be,” he adds.
In one example of the steps being taken by the Chinese government, in December, the environment ministry backed a green guidance paper suggesting that the most polluting BRI projects should be put on a negative list.
The study – which was compiled by a group of international NGOs including ClientEarth and the World Resources Institute, alongside the Chinese government – proposed that BRI projects should be colour-coded based on their climate, pollution and biodiversity credentials.
Coal and fossil fuel projects, due to their negative climate impacts, would be “red” projects, for example, while solar power would be classified as “green”.
For the meantime, however, while President Xi Jingping has talked up domestic prospects and said China will aim to go carbon neutral by 2060, Cexim and CDB have made no pledge to stop supporting overseas coal projects.
In 2020, the commodity was still very much on the agenda, with the pair providing a combined US$474mn to two coal projects in Pakistan and Serbia.