Taking a gamble: Chinese overseas energy finance and country risk

Abstract

Investment in renewable energy is essential for reaching ambitious climate goals outlined in the Paris Agreement. Unfortunately, a large investment gap prevails, particularly in developing economies with underdeveloped domestic capital markets and weak institutions. Multilateral development banks with softer budget constraints and longer investment horizons can play an important role in filling this gap. Development finance, which traditionally originated in the West, has been increasingly dominated by two Chinese state-owned development banks: the China Development Bank and the China Export-Import Bank. These banks acted as major financiers of the Chinese Belt and Road Initiative and, between 2005 and 2017, provided more than US$220 billion of overseas energy finance - more than any other multilateral development bank. Their investments have been controversial: the Chinese banks were often accused of financing fossil fuels projects located in politically and economically risky countries. This paper uses detailed data on the Chinese energy finance to illustrate the investment pattern of the Chinese banks, and implements Hurdle and simultaneous Probit models to test whether the two banks are in fact tolerant of the country risk: credit, governance and political risk. The analysis shows that projects located in countries that are politically stable but have higher credit risk and corruption levels are more likely to receive Chinese energy finance. Governance risk and autocratic regime type do not affect the decisions of the Chinese banks. This investment pattern indicates missed opportunities for advancing the clean energy transition and creates future risks for the host countries i.e. stranded assets.