Demanding development: The political economy of climate finance and overseas investments from China

Abstract

This paper examines the drivers of Chinese overseas financing in renewable energy and the political economy factors in recipient countries that steer this finance towards climate-friendly projects. We examine utility-scale renewable energy projects in Argentina, Bulgaria, Chile, Ecuador, Ethiopia, Kenya, Lesotho, Pakistan, and Romania. Through in-depth interviews with policymakers and relevant stakeholders, we gathered data on the factors that led to Chinese policy bank investment in renewables. We find that where host country governments have offered strong policy incentives for renewables, the Chinese banks and developers readily provided bundled financing, technology, and construction services even in markets considered to be risky. Additional risk mitigation instruments were utilized by the Chinese policy banks in some cases. In five of the nine countries studied, political agreements preceded the investments. Developing countries are found to value the bundled nature of finance, technology, and construction services offered by China as well as the timeliness of construction. As governments move towards policies utilizing competitive price discovery mechanisms, such as reverse auctions where developers compete to submit the lowest bid, the Chinese policy bank appetite for low-carbon investments may wane. Potential future synergies between China's policy banks and other multilateral development banks are explored.