China has been issuing a number of new policies on its approach to climate and energy. In 2021, the Chinese government announced that it would end the financing of coal-fired power plants overseas. In early 2022, it issued new environmental guidelines on its overseas investments.
Toward Africa in particular, Beijing has signaled equally significant shifts. At the December 2021 Forum on China-Africa Cooperation ministerial, China substantially reduced its infrastructure investments in Africa for the next three years. It also cut its assistance in agriculture, climate, health, peace and security, and trade promotion by 80 percent and in capacity-building by 90 percent. At the same time, the Vision 2035 document released in conjunction with the ministerial promised “a new green growth model for common eco-development of China and Africa.”
At an off-the-record meeting with representatives of African NGOs, three experts on Chinese law, investment strategies, and energy transition connected to Africa shared their insights on this evolving relationship. They offered different ways of interpreting the new Chinese policies and provided recommendations for how African civil society could advance their agendas with respect to various Chinese entities: the state, multilateral financing institutions, and enterprises.
The Pattern of Chinese Overseas Investments
It’s no longer boom time for Chinese investments overseas. Chinese overseas lending has dropped considerably since a peak in 2016. Lending to Africa in general as well as specific investments in energy projects in Africa follow the same downward trend line.
The rise and fall of Chinese overseas investments follows developments within China itself. Beginning in 2008, five years before the official launch of the Belt-and-Road Initiative, there was a huge outflow of investment as Chinese firms and contractors were looking everywhere for opportunities to build infrastructure projects. African governments in particular had large construction wish lists, and Chinese banks entered the picture to provide the financing.
But then came the slowing down of the Chinese economy—from double digit increases in the early 2000s to around 6 percent growth just before the pandemic hit—as well as a tumble in global commodity prices after 2015. The outbreak of COVID-19 precipitated a period of negative growth. Coming out of COVID, the era of “hot money” going into railroad investments, ports, and roads is not likely to return. “Chinese banks are a lot more cautious and more strategic,” noted Gao Qi (pseudonym), an energy expert. “There’s been a bit of a shift away within the Belt-and-Road Initiative away from hard infrastructure and more toward digital connectivity through e-commerce and newer technologies.”
The composition of those investments has also changed dramatically over the years. In the early 2000s, much of the investment went into natural gas. In any given year, coal might also represent a significant portion of the overall investments, but that reflects the fact that a single coal project might involve a disproportionate amount of Chinese funds. At the same time, hydropower has increasingly attracted much of the Chinese energy investments, with solar and wind investments also rising in recent years. “In official discourse, the Chinese government has been quite positive about low-carbon cooperation,” Qi concluded.
The type of energy investments depends a great deal on local conditions. Chinese energy funding in Africa tends to follow local resources: coal in the south, hydropower in the east, and gas in the west.
The Coal Announcement
Against the backdrop of these investments, Chinese President Xi Jinping surprised the world by announcing at the UN General Assembly in November 2021 the end of financing for overseas coal-powered plants. On the one hand, Xi wanted to promote China as a responsible player in the climate sphere.
On the other hand, the announcement was “conveniently vague,” noted Yunnan Chen, a senior research officer in the Development and Public Finance program at the Overseas Development Institute in London. The announcement seems to over any new state financing from August 2021 on. However, projects that were already under construction before this date will likely continue. Also, “whether this applies to Chinese state-owned enterprises involved in the construction of coal plants is less clear and whether it applies to financing from Chinese commercial banks yet to be seen.”
On this last point, she continued, “commercial lenders will probably incorporate this policy signal into their own strategic decisions going forward, but whether it will be legally binding on them remains to be seen.” Because the public perception of coal-fired plants has turned quite negative, Xi’s announcement, however vague, might be sufficient in persuading commercial lenders to reconsider their investments in this field. The same applies to Chinese contractors, who are not covered by the new directive, as they consider involvement in overseas coal-fired plants going forward.
China’s domestic use of coal increased significantly last year, as part of an overall rise in energy demand. It remains unclear, however, whether the policy push to secure access to coal will have any impact on coal policies abroad beyond possible increases in coal imports.
New Environmental Guidelines
In January 2022, the Chinese Ministry of Ecology and Environment along with the Ministry of Commerce released new “Guidelines for Ecological Environmental Protection of Foreign Investment Cooperation and Construction Projects.”
These are guidelines, however, not laws. “So, it’s still perfectly legal under Chinese law to build a coal-fired plant,” pointed out Jingjing Zhang, a Chinese environmental lawyer, a lecturer in law at University of Maryland Law School, and director of the Center for Transnational Environmental Accountability. “There are no legal consequences.” There is still some conflict within the Chinese government over which authority can regulate overseas investments. “The Ministry of Ecology and Environment does not have the mandate to regulate overseas projects.”
So, the wording of the new guidelines is very important. The document uses verbs like “promoting,” “urging,” and “improving.” It talks of “should” and “shall.” But none of these words has legal consequences.
In fact, China’s environmental laws only apply within China. “When you see a very positive signal, like this new set of guidelines covering overseas projects, you can be cautiously optimistic about them,” Zhang continued. “These are not the first set of guidelines. Some guidelines appeared in 2013, almost 10 years ago, and there have been various guidelines from various government bodies since. But we are still seeing a lot of projects approved by China causing environmental problems and having a human rights impact. We can just hope that Chinese companies voluntarily comply. If they don’t comply, maybe there can be internal political pressure, but there are no legal consequences.”
On the other hand, the environmental impact system outlined in the new guidelines has been designed by very professional experts. This makes the new document stronger than previous guidelines. “This is a promising signal,” she added. “This could lead to stronger regulations. But it will take time. Another good signal is that in our most recent Five Year Plan, the Chinese government indicated that it will design legislation to manage overseas investments.” Such legislation could give the Ministry of Environment and Ecology power to regulate and manage Chinese overseas investment as to their climate impact.
“Until that happens, we cannot use Chinese environmental law to request Chinese companies to conform to environmental standards,” she concluded.
China’s energy law has also been under revision for two years. A chapter of the law will cover overseas cooperation. It may also enumerate different requirements around coal than those specified in Xi Jinping’s pledge.
The Chinese System
The Chinese political system is not a monolith. For any energy project to move forward, it needs the approval of all three key actors: guardian ministries, the Export-Import Bank and the China Development Bank (plus the insurance company Sino Sure), and state-owned enterprises (SOEs) in the energy sector. Nearly all of these actors have veto power. So, for instance, the Ministry of Finance can nix a project all by itself. Tellingly, the Ministry of Ecology and Environment is not one of the guardian ministries, so it can’t stop a project even if it has serious reservations about it.
The four big SOEs—Power China, Energy China, China Three Gorges Corporation, China Industrial Machinery Corporation—are just contractors not project developers. As contractors, they do what the owner says. So, it is not easy to assess accountability in the case of a violation such as land appropriation. Responsibility for violations depend on the legal relationship between owner, contractor, and funder. These four SOEs are also involved in both conventional energy and renewable energy projects.
As “state-owned” enterprises, SOEs have state shareholders. The state also makes appointments to the leadership of the SOE. High-level appointees to management positions are tied to politics and thus more susceptible to political pressure than private entrepreneurs. They can thus be made more accountable through pressure on the Chinese government, particularly by host countries.
Nevertheless, China’s state-owned enterprises are, to a significant extent, independent actors rather than “barnacles on the huge ship” of China. They undertake overseas projects at their own initiative, not at the behest of the government, and they can operate autonomously overseas. If they get involved in energy and hard infrastructure projects, that’s “primarily where the commercial opportunities are for contractors,” Gao Qi noted. These are profit-seeking projects financed by Chinese credit, which comes from the Export-Import Bank or the China Development Bank. “The involvement of the state raises the political profile of the project,” and makes it easier to get the green light for the project both in China and in the host country.
“The state-owned enterprise needs policy entrepreneurs from both sides to facilitate the deal,” Qi continued. “The DFIs are so important. They are the gatekeepers that determine whether these projects are bankable. The ministries don’t have the information or the financial sector expertise. So, project screening rests on the policy banks.” Also, there is evidence that the Chinese government is “shifting away from the mercantilist, profit-driven ideology that has dominated overseas loans.”
When Chinese firms get involved in social projects, and it’s not that often, it’s usually under the umbrella of corporate social responsibility. “These firms want to improve their reputation,” Yunnan Chen explained. “They adopt more international practices and norms to demonstrate that they are benevolent social actors. Sometimes we’ll see a construction company build a school near a project or make a donation or consult with the community. In some cases, this is corporate greenwashing.
The Chinese government created an international development agency (China International Development Cooperation Agency) in 2018. It remains small and separate from other overseas activities. “But it does have potential, and it has co-promoted some new environmental regulations,” Qi concluded.
International Human Rights and Transparency Standards
China has a provision of its criminal law that makes it a crime to bribe the officials of foreign governments and international organizations. “This article has never been used to prosecute a Chinese corporation or a person,” Jingjing Zhang pointed out. “Potentially, it could be used. But there’s no opportunity for individuals or civil society to initiate such a procedure. The Chinese prosecutor office has to initiate the procedure.”
There’s a diversity in behavior even in a single company across different countries. “There are definitely bad actors from certain enterprises,” Yunnan Chen noted. “They go to Africa to make money. They don’t have a strong stake or incentive to care about the impact on the local economy or local people. But other companies care about their public image in African countries and care about long-term investments. They want to be seen as responsible stakeholders and can more easily be held accountable in their activities.”
China has signed and ratified international human rights and environment treaties. “Under those treaties, the state has a legal obligation to comply with those international treaties,” Zhang pointed out. “These treaty obligations include the International Covenant on Economic, Social, and Cultural Rights, which requires the Chinese state to protect human rights beyond its borders. “This is a legal instrument that civil society could use.”
Chinese contractors have engaged in human rights violations, illegal mining, and bribery. “But not all the conflicts originate from China,” Chen added. “You have to look at your own legal and governance issues. Different subsidiaries act very differently in different countries, depending on the governance of that country. Applying your country’s regulations: that is the first and foremost line for a community group or NGO to use. The bar needs to be raised from both sides.”
China has provided a lot of loans to Africa, approximately $150 billion. As the largest bilateral creditor, China holds about 21 percent of the continent’s debt, while 30 percent of all debt service goes to Beijing. China has also engaged in considerable debt restructuring, including debt service suspensions for 16 African countries during the pandemic period.
The loans do not follow a single template. Deals are tailored to the country, to the kind of project, to the different partners involved. Some are linked to access to particular commodities. With Guinea-Bissau, for instance, China extended $20 billion of loans over a nearly 20-year period for bauxite concessions.
There is a widespread fear that China will take over assets in the case of a default on loans. “But there is no evidence of a Chinese company taking over an asset if the government can’t pay,” Yunnan Chen argued. “If there are problems with repayment, banks allow for delayed repayment, a moratorium on the principle as long as the interest is paid. Seizing an asset is a more complicated and politically destructive move, which is not in the interest of the Chinese government or Chinese contractors. The asset might not be profitable. And the potential public relations fallout makes it an unattractive option, even if the countries could work out a debt-equity swap.”
“That doesn’t mean that indebtedness to China is harmless,” she continued. “Debt is still a huge issue for fiscally strained governments. And renegotiating debt with China is not easy. What we’ve seen through the G20 framework is that China can be an assertive and bureaucratically stubborn actor to deal with. But China is not going to seize ports or airports.”
Between 2007 and 2020, the lion’s share of China’s public sector development funding for infrastructure projects in Africa went to renewable energy: $23.5 billion versus $19 billion for transport, $13.5 billion for fossil fuel projects, and $4.6 billion for telecommunications. .
But even these figures don’t cover all of China’s involvement in renewable energy on the continent. For instance, 80 percent of the solar panels used in projects in Africa are provided by Chinese companies. “So, it might not be a Chinese project, it could be a World Bank or USAID project, but there’s still some Chinese involvement,” Gao Qi noted. “This could be scaled up if China’s development agency becomes more powerful.”
Another development that could spur more investments in renewable energy is the Green Panda bond, an instrument introduced in 2016 by the BRICS bank. It remains unclear, however, whether natural gas projects, ordinarily not considered “green” under China’s definitions, will be eligible for such bonds.