China’s Energy Belt & Road Initiative: Priorities are Shifting

Belt & Road Initiative has been China’s fundamental international strategy for almost a decade. However, subtle signs suggest that the “wind” is changing. 

Beijing’s new national strategy, the “dual circulation” or “domestic circulation” (双循环/内循环), heralds this inevitable change. 

The dual circulation strategy, introduced early 2020 amidst hit of COVID-19 global pandemic and a stressing international political climate, lead to Beijing’s re-zooming into domestic “New Infrastructure” (新基建) investment development. [READ our in-depth analysis of China’s new infrastructure investment policy and its impacts on renewable sectors. ]

With these fundamental priorities shifted, a “retrenchment” of Chinese investment overseas—as the recent Reuter report obverses—seems natural. 

The energy sector is one of China’s critical BRI areas, and it will embrace such changes, too. 

Belt & Road: New Principles

Even subtle rhetoric differences could be indicators of critical policy turns in China. But in this case, the changes maybe not even that subtle. 

Energy industry experts have come to notice the latest emphasis changes when the top authority refers to the principles of BRI development. 

Last month, the central committee of the Chinese Communist Party issued its “advisory” for the country’s 14th Five-Year Plan and 2035 Long-term Vision. Regarding BRI, it reinstates the following principles:  

  • companies as the main actors (for BRI)
  • market-oriented as the key principle
  • following international rules 
  • financial (lending/debt/loan) sustainability 
  • to promote a variety of financing structure 

The top-2 principles were not new. In fact, the previous 13th Five-Year Plan “Advisory” released by the CCP has mentioned that the proposition of BRI should be”companies-led & market-oriented.” 

However, practices in the past years surely did not follow these principles. And often time, the industry emphasized on the role of government-led platforms instead of companies’ actions.     

Moreover, “financial lending sustainability” and “a variety of financial structures” are clearly new expression, underlining critical changes in how Beijing approaches overseas efforts. 

The emphasis on “debt or loan sustainability” implies a “retrenchment” of overseas lending, a trend observed by FT’s recent reports

Both reports cite data from Boston University, who already picked up a significant change of leaning activities since 2018:  

Lending by the China Development Bank and the Export-Import Bank of China collapsed from a peak of $75bn in 2016 to just $4bn last year, according to data compiled by researchers at Boston University and seen by the Financial Times.

FT report

A Shift from the Government-Oriented Strategy

Notably, Beijing’s recent BRI expression in the 14th FYP “Advisory” also makes a stark contrast to China’s BRI framework policy—the Vision and Actions on Jointly Building Silk Road Economic Belt and 21st-Century Maritime Silk Road to promote the implementation of the Initiative.

In that policy released in 2015, Beijing’s authority said that China had been actively promoting BRI by the following measures: 

  • top-level (government) led activities 
  • (inter-governmental) framework signing  
  • promoting key projects 
  • providing improved policies: notably, “Chinese governments have coordinated all sorts of domestic resources to provide a better BRI mechanism.” Such efforts include the set up of AIIB and the Silkroad fund. 
  • based on various (international/inter-government) platforms 

In the 2015 policy, there is a clear emphasis on the leading role of government in companies’ international activities. 

That emphasis was nowhere to be found in the recent 14th FYP advisory. The absence of mentioning governmental role is another indicator of BRI’s shifting style.   

Chinese Energy Belt & Road Initiative: Implications 

To a certain extent, the policy combo of shifting BRI focus and the “domestic circulation” emphasis would lead to some retreat of China’s oversea energy investment—naturally. 

In a nutshell, the retreat could be more obvious in the “conventional” energy than on emerging and new energy projects. 

Emphasis on Project Commercial Viability

Overseas energy investment expansion would need to focus more on projects’ commercial viability and their financing options, due to the shift from political emphasis and the retrenchment of state funding support.  

Political-driven projects of less solid commercial ground will face difficulties, due to lack of financing support from the state-owned banks. 

Local Energy Policies the Decisive Factor

We have seen the reduced activities of nuclear power projects oversea. The most noticeable case is the reactor talk with Argentina, where a commercial contract is still nowhere to be found.

But in different markets, BRI’s preference between “conventional” and new energy projects is not that black-and-white. 

Local energy policies are the key factor in defining Chinese firms’ investment interest.  

In other words, in areas where fossil fuel and conventional energy are heavily supported, BRI activities in these sectors could still be prevailing. 

Similarly, new energy expansion is expected in regions with better financial and pricing policy in place for renewable.   

Players Changes in the Oversea Scenes 

The shift would have different impacts on different players. 

A sizable portion of state-owned energy players—especially those who heavily rely on state funding— would tone down their oversea expansion ambition. Companies’ debt-to-asset metrics would become a key divider, deciding their options for international expansion.

Equipment suppliers and engineering contractors would continue to seek opportunities in the oversea markets. Infrastructure developers and investors may reduce activities. 

“Competition” from the Domestic Market 

Overall, energy investors may prioritize domestic over the international markets, as the “dual circulation” and “new infrastructure” policies open up new growth space. 

Such “competitions” would be especially obvious in: 

Those sectors are promoted in the “New Infrastructure” strategy. 

It implies that Chinese developers could slow down their overseas asset acquisition in these areas if there are sufficient domestic demands.

However, technology acquisition and cooperation would continue in the emerging sectors like hydrogen fuel cell, as the market looks to means to improve efficiency.