Domestic Push Meets Foreign Pull: The Political Economy of Chinese Development Finance for Hydropower Worldwide
Faced with pressure to deliver economic development, improve access to electricity, enhance energy supply security while simultaneously addressing the growing concerns about climate risks and impacts, many countries around the world have turned to hydropower in recent years. According to the International Energy Agency (IEA), the world has added more than 530 GW of newly built hydropower generating capacity from 2000 to 2019, accounting for 40 percent of all capacity the world has built since the 1900s. China is no exception to this hydropower revolution, and in fact, is leading new construction in low- and middle-income countries.
In a new working paper, Bo Kong explains why China has emerged as the world’s largest underwriter for hydropower projects in a short span of two decades. His analysis points to a convergence of both domestic push and foreign pull factors. Domestically, this push stems from the alliance of a strategic trio among the Chinese hydropower sector characterized by growing comparative advantages and mounting development challenges, the Chinese state keen to pursue its international developmental strategies and economic diplomacy abroad and the two policy banks mandated to fulfill the will of the Chinese state at home and abroad, but dependent upon wholesale lending for revenues. Externally, the pull originates from a new boom of global hydropower buildout—concentrated primarily in low- and middle-income countries reliant upon foreign suppliers, contractors and financiers to carry out their hydropower expansion. This comes at a time when leading multilateral development banks have increasingly pivoted away from hydropower.
- Challenges, such as the slowing growth of the hydropower industry in China, produced a mounting pressure for the Chinese hydropower state-owned enterprises (SOEs) to go beyond the Chinese shores to look for solutions to their domestic problems. Eager to capitalize on their comparative advantages and offset domestic challenges, Chinese hydropower SOEs started to expand overseas in the early 2000s.
To beat out the competition and win contracts, these SOEs have turned to the two policy banks, the China Development Bank and the China Export and Import Bank, for assistance in arranging development finance for the host governments in the low- and middle-income, which depend on external suppliers, contractors and financiers for fulfilling their hydropower development targets.
This global expansion spearheaded by the Chinese flagship hydropower SOEs and underwritten by the two Chinese policy banks also coincided with the Chinese government’s two developmental strategies—the going out strategy and the Belt and Road Initiative—and its economic diplomacy necessities.
As a result, the Chinese hydropower SOEs’ global expansion has gained support from the Chinese state, which further reinforces the incentive for the two policy banks to back the global expansion of the Chinese hydropower SOEs. Ultimately, the push from the Chinese hydropower sector and the push from the Chinese state converge in their symbiotic relationship with the two policy banks to foster this strategic alliance in the globalization of the Chinese hydropower sector.