China's financing practices towards the Global South have been showing an increasing business-oriented trend
China's Shift Towards Commercial Co-Financing: Implications for Green Development
China's approach to green finance continues to show promise, with a growing trend towards commercial co-financing arrangements that involve Chinese banks partnering with international counterparts. This shift, which has been marked by an increase in syndicated loans, is a departure from traditional state-led lending and signals a move towards more market-driven financing with shorter maturities and higher, variable interest rates [1].
One of the key benefits of these co-financing arrangements is the increased confidence that Chinese participants can have in a deal. The initial due diligence and project assessment is often handled by the international commercial bank partner, providing a level of assurance [2]. This trend has been particularly evident in the Belt and Road Initiative (BRI) partner countries, where over USD 180 billion in syndicated loans were issued between 2013-2021, matching the much-reduced volume of sole-bilateral financed loans from China's official policy banks [3].
However, this shift towards commercial co-financing has implications for debt-repayment dynamics in BRI partner countries. Commercial lenders now receive a larger share of repayments at higher interest rates compared to Chinese policy banks or multilateral institutions. Lower-income countries spend three times more repaying commercial creditors than Chinese lenders, with commercial debt posing greater challenges for debt sustainability [4]. Consequently, debt-repayment pressures have increased, leading to calls for inclusive debt relief involving private lenders, not only Chinese government institutions [4].
Despite these concerns, China is making efforts to align its financing with greener practices. The country is updating its green finance taxonomy to increase funding for sustainable projects, including those focused on climate resilience, methane abatement, and energy-efficient transport like passenger rail [5]. This indicates a potential moderation of adverse environmental effects over time.
The trend of risk-sharing through on-lending can be seen with regional banks such as the Trade and Development Bank and Africa Finance Corporation in Africa. Chinese commercial creditors like ICBC and the Bank of China are increasingly active in Africa and the Global South, and are internationalizing via global financial markets [6].
The role of development finance remains critical in green co-financed transactions, with MDBs and development-finance institutions, including China's policy banks, dominating green co-financed transactions [7]. The current trend in China’s overseas financing shows a significant rise in commercial co-financing, particularly through syndicated loans, which could have complex implications for BRI countries’ debt health and environmental outcomes [1][4][5].
In conclusion, China's shift towards commercial co-financing is a significant development in its approach to green finance. While this shift has implications for debt-repayment dynamics and environmental outcomes, China is taking steps to align its financing with greener practices. The evolving landscape marks a shift towards more commercially oriented international lending by China, with complex implications for BRI countries’ debt health and environmental outcomes.
References:
- China's commercial lending to developing countries: Implications for debt sustainability
- China's Green Finance: A New Era
- China's overseas lending: Syndicated loans become more common
- Debt Sustainability Analysis of Belt and Road Initiative Countries
- China's Green Finance: A New Era
- China's growing presence in Africa: An evolving landscape
- Green Finance in China: A Review of the Landscape
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