The Role of China’s Policy Banks in its Energy Acquisition Strategy in the Developing Nations

Dr. Manochehr Dorraj's picture

China’s policy banks, particularly the China Development Bank (CDB) and China Exim Bank (EXIM), are playing an increasingly active role in its energy acquisition strategy. The two banks finance the overseas investments of China’s National Oil Companies (NOCs) and the development of host country infrastructure to deliver oil and gas to China, and further provide credit to foreign energy companies in return for long-term energy contracts.

For example, in 2009 and 2010, CDB extended $65 billion in “energy backed loans” (EBLs) to Russia, Brazil, Turkmenistan, Ecuador and Venezuela. These EBLs have several notable features making them alluring to borrowers: their large size (up to $20 billion), long term (up to 20 years), and availability at a time when few other institutions were willing to lend large amounts of money for extended periods due to the 2008 Global Financial Crisis. Their key role as a link between Beijing and the commercial interests of Chinese firms ensure credit remains available to NOCs as they pursue energy resources abroad. CDB takes its role a step further by dispatching “work teams” to more than 100 different countries where they gather information, build relationships with business and political leaders, and identify investment opportunities for Chinese energy companies. CDB and EXIM, which are owned by the Chinese government and supervised by the State Council, were created in the 1990’s to facilitate China’s ‘going out’ strategy. Policy banks are not subject to China’s Commercial Banking Law, which blocks commercial banks from participating in both commercial and investment banking. CDB has taken advantage of such privileges to underwrite the bonds of major state-owned enterprises, which has increased its size and, in turn, allowed it to expand its foreign currency lending. These features have transformed the policy banks into highly effective tools in China’s developing world energy acquisition strategy.