Fueling Global Energy Finance: The Emergence of China in Global Energy Investment

Energy is the lifeblood of the global economy, critical to all sectors of the economy including agriculture, transportation, waste collection, information technology and communications sources. In 2011, energy expenditures amounted to approximately 10 percent of the world gross domestic product (GDP), in which North America accounts for 20 percent, Europe for 25 percent and Japan for 6 percent of the total.  Since 2008, China has become a dominant player in the energy sector and the world’s biggest investor in renewable energy, both at home and overseas.

In a new journal article published in Energies, researchers from the Boston University Global Development Policy Center (GDP Center) and the Woodrow Wilson School of Public and International Affairs assess the investment trends in the global energy sector before, during and after the financial crisis of 2008, from 1996-2016. They highlight the changing role of China and compare its cross-border mergers and acquisitions (M&As) and greenfield (GF) foreign direct investment (FDI) activities to those of the United States, Germany, United Kingdom, Japan and others during this period, analyzing the investments along each segment of the energy supply chain of these countries.

Main findings:

• While energy accounts for nearly 25 percent of all GF FDI, it only accounts for close to 5 percent of total M&A FDI activity in the period 1996–2016.  
  • Thus, the proportion of global M&A and GF FDI in the energy sector is five to one in the period 2003–2016. Both investment types have recovered in the post-recession phase.
• China’s outbound FDI in the energy sector started its ascent around the time of the global recession and accelerated in the post-recession phase. 
  • China’s overseas GF investment grew by 391 percent between 2003-2016, while the US decreased its share by 76 percent during the same period. 
  • Similarly, China’s share of M&A activities in the global energy sector has grown from zero to 9 percent in the period from 1996-2016. 
• In the energy sector, China’s outbound cross-border M&As are similar to the US and UK, located mostly in developed Western countries, while outbound GF investments are spread across many countries around the world. 
  • While China’s most significant M&A outflow is to Australia, Brazil and Portugal, its largest recipients of GF are in Asia, Pakistan and India. The US exhibits a different pattern; its M&A outflow is to countries in Europe and Canada. 
  • The bulk of Chinese investment is in extraction and electricity generation, primarily focused in Africa and South Asia. Electricity generation and power and pipeline transmission are the primary focus of Chinese GF FDI. 
• Chinese M&A FDI activities peaked in 2012 while GF peaked in 2016 in the energy sector. 
• Northern countries dominate outbound M&As while Northern and Southern countries both receive inbound GF. A small number of countries account for a significant share of the overall activity in all segments of the energy supply chain. 
  • The most consistent outbound investments in M&A are North-North countries.
  • However, Chinese entities amount to only 5 percent of all overseas investment over the period and the Chinese investment is more concentrated in GF rather than M&A FDI. 

The researchers hope to set up a framework to study China’s Belt and Road Initiative, especially related to the energy sector and characterize the flows of investment, as well as social, environmental and economic impacts in the destination countries.