Clean at home, polluting abroad: the role of the Chinese financial system’s differential treatment of state-owned and private enterprises

ABSTRACT

Although China is the world’s largest investor in renewable energy, its overseas energy investments are primarily in fossil fuels. This is a cause of major concern as countries across the globe need to transition toward low-carbon development trajectories to meet the 1.5-degree warming target of the Paris Agreement. In this paper, we present data up until and including 2019 showing that power generation investment in renewables domestically (excluding medium and large hydro) is 77% while only 22% overseas. We add to the literature on the institutional environment surrounding Chinese overseas investment by finding that in addition to general barriers to renewables, such as higher up-front costs and different income cycles, Chinese renewable firms face significant structural financing disadvantages vis-à-vis conventional energy firms. We find that the underlying reason is that Chinese fossil fuel companies are largely state-owned while renewable companies are largely private-owned. The disadvantage then materializes through the Chinese financial system’s preference for state-owned enterprises. Lastly, we identify concrete policy options to overcome the disadvantage by addressing five types of actors: 1) policy banks that can emphasize their development focused mandate, 2) state-owned commercial banks currently financing the majority of Chinese overseas energy projects, 3) smaller financial institutions currently not involved in this type of financing overseas, 4) Sinosure, currently focusing on insuring fossil fuel projects, and 5) Chinese energy, utility, and construction companies that would benefit from further diversifying into renewables.

Key policy insights

• The proportion of renewables in Chinese power generation investment is 77% domestically while only 22% overseas.

• Chinese fossil fuel companies are largely state-owned, while renewable companies are largely private-owned.

• The key barrier for Chinese renewable energy companies going overseas is their lack of access to finance.

• Chinese financial institutions favor state-owned over privately-owned organizations, both domestically and overseas. Consequently, a key reason for renewable/fossil disproportions is that Chinese renewable energy companies are largely private-owned.

• The favoritism can be overcome through policies targeting 1) policy banks, 2) state-owned commercial banks, 3) smaller financial institutions, 4) Sinosure, or 5) Chinese energy, utility, and construction companies.

KEYWORDS:

• China
• renewables
• fossil fuels
• climate finance
• energy investments

Acknowledgements

The authors would like to thank the three anonymous reviewers for their feedback and the Climate Policy editors for their close readings and constructive suggestions. We would also like to thank the organizers and participants of the CEFGroup/GRASFI 2020 workshop on Climate Finance in Asia.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

1 Encompassing energy production and use.

2 When low-carbon energy became a priority in China’s 11th Five-Year plan and the renewable energy law came into effect.

3 First half of 2019; excluding large hydro (FS-UNEP, 2018).

4 The sum of all European investments is $698 billion (FS-UNEP, 2018).

5 40% of China’s overseas investment was reportedly spent on coal projects (Watts, 2019).

6 This represents 26% of all coal plants under development outside China (399 GW), according to IEEFA (2019b).

7 The majority of data was only available in Chinese language.

8 We acknowledge that the database might not include all Chinese energy firms, but includes the largest 100 by revenue based on publicly available details.

9 Concessional loans are part of the 85% figure as it is not possible to calculate them separately. This subdivision is not disclosed by policy and commercial banks and Chinese definitions are flexible; determining concessionally is difficult with limited information on loan portfolios.

10 The term ‘21 main banks’ is defined by the Chinese Banking and Insurance Regulatory Commission (CBIRC) (formerly CBRC) as used for statistics collection purposes. For example, green credit statistics collected by CBIRC only covers these banks.

11 For reasons not disclosed, CBIRC has not published a sectoral breakdown of green loans since 2017, while only publishing the total proportion which remains around 10%.

12 Based on figures provided by Zhou et al. (2018).

13 From financing short- to long-term and from financing operating costs to financing upfront costs.

14 Based on interviews with Chinese companies and financial institutions investing in BRI countries.

15 For example, Shanghai Electric diversified into offshore wind through a joint venture with Siemens in 2014 (Dai et al., 2020).

16 In 2017, China started to reorganize its largest state-owned power generators, which has been perceived as an effort to move away from their domestic reliance on coal (IEEFA, 2018).

17 In terms of installed capacity.

18 ‘Leading’ refers to both market share and technological innovations. See Hain et al. (2021) for a detailed discussion.

19 China Huaneng, China Huadian, China Energy Investment, State Power Investment Corporation Limited, and China Datang.

20 Please see Gallagher and Qi (2018) for an overview of regulations and policies governing Chinese overseas investment, and Gallagher and Qi (2021) for details specific to climate change impacts.