According to new GEGI research in collaboration with Yongzhong Wang of the Chinese Academy of Social Science’s Institute for World Economics and Politics, in just over a decade Chinese policy banks have emerged as global leaders in development finance in general and in finance for energy projects in developing country governments in particular.

Moving forward, China has founded or co-founded two new multi-lateral development banks (MDBs) and at least 13 regional and bilateral funds that will increase Chinese development finance abroad by orders of magnitude. Such a stepwise increase in global development finance arrives just in time, as the world faces major infrastructure and energy gaps and has just committed to increasing finance for sustainable development on a global scale.

China’s global energy portfolio is heavily exposed to country, macroeconomic, climate, and social risks however. To mitigate such risks and meet the broader sustainable development challenge for the 21st Century, China’s development finance will need to shift the composition of its global energy lending in a significant manner.

This paper provides the first estimates of China’s global developmental finance institutions in general and China’s policy bank lending to foreign governments for energy in particular. We find that: China’s ‘policy banks’ and funds have doubled the availability of global development finance – and hold more than twice the assets of the major Western-backed MDBs operating in developing countries. With the onset of a new family of funds and multilateral development banks co-financed by China, China is poised to be the largest development lender in the world as Western-backed MDBs appear stagnated in their ability to increase their capital bases.

• China’s national development banks already lent as much to foreign governments for energy as all the major Western-backed MDBs combined. Between 2007 and 2014 Chinese banks doubled the amount of energy financing available to national governments, adding another $117.5 billion dollars in energy finance for foreign governments. Not only did Chinese finance increase the total amount of finance, Chinese banks are financing energy projects all over the world and expanding the set of countries that receive energy financing as well.

• Chinese energy finance is exposed to significant country and macroeconomic risk. In contrast with the Western-backed development banks across the world, Chinese policy banks are engaged with countries with higher country risk ratings and in commodity-backed loans that risk stress given the fall in commodity prices and associated macroeconomic downturns in the developing world.

• Chinese development banks are heavily exposed to climate and social risk. China’s energy loans are highly concentrated in fossil fuel extraction and power generation, especially coal. Indeed, Chinese development banks have provided upwards of $28 billion in financing for global coal projects – projects that accentuate climate change and social risks. Using conservative estimates of the climate and local health costs of coal plant emissions, we calculate that the yearly social cost of Chinese overseas coal-fired power plants amounts to $29.7 billion. Assuming a power plant lifetime of 30 years, total social cost could range from $117 billion to $892 billion.

As commodity prices fall and the macroeconomic outlook for many of China’s borrowers declines, China will need to diversify its global energy portfolio. To meet these goals Chinese overseas development finance will need to make a significant change in composition of its lending portfolio. Such a shift will not only help China’s banks mitigate the significant risks associated with the current portfolio of its policy banks, it will also enable China to meet its broader global commitments. Through the newly minted Sustainable Development Goals and again at the Paris Climate Summit of 2015 world leaders – China included – have committed to steer public finance toward energy and infrastructure in a manner that is environmentally sustainable and socially inclusive. Also in 2015, the governments of the United States and China committed to “controlling public investment flowing in projects with high pollution and carbon emissions both domestically and internationally.” Later in 2016 it is anticipated that China will dub ‘green finance’ a global commitment under the G-20 with the establishment of G-20 study groups in both green finance and in climate finance.