China’s stalled Belt and Road Initiative is shifting towards low-carbon projects, as banks and sponsors look to align themselves with Beijing’s new policy objectives.
The increased focus on environmentally sustainable projects comes as China is looking to rebuild support for the trillion-dollar infrastructure drive after a rise in geopolitical tensions that has seen several deals shelved or cancelled.
At the Boao Forum for Asia on April 20, Chinese President Xi Jinping called for stronger cooperation on green infrastructure, green energy and green finance “to make green a defining feature of Belt and Road cooperation”.
“When it comes to BRI lending, Chinese policy banks or the big four banks make decisions that are rather policy-driven,” said a banker at a major Chinese bank. “There has been a growing tendency to lend to green projects and increasing concerns among these banks in projects that have a negative impact on the environment because of the government’s climate rhetoric.”
China, which accounts for almost 30% of the world’s carbon dioxide emissions, in September said it planned to become carbon-neutral by 2060 – arguably the biggest single pledge in the global battle against climate change.
Xi’s signature Belt and Road Initiative, however, has fallen out of favour in recent years. Western nations are wary that China is using cheap loans to expand its diplomatic influence, while several projects have run into financial difficulties or been cancelled altogether.
Despite the tensions, BRI experts see continued demand for Chinese investment in international projects, especially as more countries embrace the transition to clean energy.
“There are some complications to the latest developments, but if we think about global development needs, China alone can provide only a fraction of the infrastructure investments globally, a lot more capital is needed from the international community,” said Christoph Nedopil Wang, director of the Green BRI Center at the International Institute of Green Finance, a university-based think tank based in Beijing.
“More infrastructure investments with global standards can be very helpful for the economic development of many developing countries.”
Leaner and greener?
Chinese investments under the BRI fell 54% in 2020 to about US$47bn, a fraction of the 2015 peak, according to the Green BRI Center, which tracks projects in 138 countries covered by the initiative.
The renewable energy sector accounted for over half of all BRI investments, according to the think tank. Investments in hydro, solar and wind projects made up 56% of the total last year, compared to 35% in 2017.
“With improvements in technology, the overall costs of producing energy have in many places become lower with solar or wind, compared with coal,” said Nedopil Wang. “Why would anybody want to buy more expensive fuels if you can get the same electricity output for a cheaper price? It makes sense for investors to put their money in better, greener technology.”
Chinese bankers say risk appetite is not what it once was. Even before the coronavirus pandemic, many low-income countries were struggling to repay loans for BRI projects that are not financially sustainable.
Last month, the EU rejected a request from the government of Montenegro to help repay an approximately US$1bn loan from the Export-Import Bank of China that financed the construction of a motorway linking the Bar harbour to the border with Serbia.
Zambia became the first African nation last November to default on its debt in the wake of the Covid-19 pandemic, days after reaching a deal with China Development Bank to defer loan repayments.
“Chinese lenders have a final safety net from the China Export & Import Credit Insurance Corp (Sinosure) in case things go wrong. Because of high uncertainties, political and market risks in developing countries, we basically do not approve loans for projects without Sinosure coverage,” the Chinese banker said.
In 2019, Sinosure’s insured amount of China’s exports to and investments in the BRI countries reached US$133.8bn.
“China is trying to 'stop the bleeding' of highly indebted countries. It has been working with the G20 DSSI [debt service suspension initiative], so it has been working in a multilateral framework. At the same time, China is negotiating bilaterally with a number of countries that have outstanding debt too. But the debt issue is not solved yet, and that’s really the next big step that needs to take place,” said Nedopil Wang.