Chapter 3: Overview of Chinese Energy Policy
3.1 Actors
3.1.2 State Policy Banks
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Diplomacy in pursuit of security of transportation involves countries that “patrol or are situated along a transportation corridor.”92 Transportation corridors can be SLOCs or oil/gas pipeline pathways. China’s use of diplomacy to promote pipeline projects, whether in partnership with Russia, Kazakhstan, or other countries, falls under this type of diplomacy.
The case of the Central Asia-China pipeline connecting China to Turkmenistan shows the importance of diplomacy in pursuit of security of transportation matters because the pipeline must pass through Uzbekistan and Kazakhstan on its way to China.93 The relationship between transportation and energy security will be described in further detail in Chapter 5.
3.1.2 State Policy Banks
China’s state policy banks are another key source of the government aid that has helped Chinese NOCs compete for investment opportunities in the global market. The
preeminent Chinese state policy bank is the Export-Import Bank of China (Eximbank), whose mandate is to:
facilitate the export and import of Chinese mechanical and electronic products, complete sets of equipment and new- and high-tech products, assist Chinese companies with comparative advantages in their offshore project contracting and outbound investment, and promote international economic cooperation and trade.94
Like its counterparts the China Development Bank (CDB) and the Agricultural Development Bank, Eximbank is a “policy bank” in that its sole purpose is to “take over lending in support of government policy objectives…free[ing] the commercial banks from pressure to undertake politically popular projects."95 As such, Eximbank is the primary source of Chinese
92 Ibid., 119.
93 Wu, Energy Economy in China, 188.
94 The Export-Import Bank of China, http://english.eximbank.gov.cn/en/.
95 Barry Naughton, The Chinese Economy (Cambridge: The MIT Press, 2007), 457.
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concessional loans to developing countries such as Angola.96 Kong argues that the
considerable amount of support that NOCs have received from state-owned banks in recent years reflects the importance that the Chinese leadership has placed on the “going-out”
strategy. For example, in the early 1990s, the NOCs struggled to receive loans at favorable rates from Eximbank, but in the early 2000s, both Eximbank and the CDB launched initiatives making NOCs “eligible for receiving preferential loan credit from these state policy banks when making overseas acquisitions.”97 NOCs and the state policy banks work in tandem to secure so-called “loans for oil”, with NOCs offering their expertise and state banks providing financial backing: between the months of January and September of 2009, Chinese policy banks offered $54 billion in loans to oil-rich countries.98 Between 2009 and 2010, the CDB alone extended nearly $65 billion worth of credit to both foreign energy companies and government entities.99
Paul Hubbard uses a number of Chinese-language sources to explain how Eximbank provides concessional loans. He identifies the life cycle of a concessional loan as follows:
1. The government of the borrowing country submits an application to the China Eximbank.
2. The China Eximbank reports the evaluation to the Ministry of Commerce.
3. The Chinese government signs a framework agreement with the borrowing country.
4. The borrowing government signs a project agreement with the China Eximbank.
5. According to the contractual terms, the Chinese contractors and exporters invoice the foreign executing agency requesting payment.
6. The foreign executing agency submits the invoice and progress report to the borrowing country government.
7. The foreign government submits a drawing application, invoice, and progress report to the China Eximbank.
8. The China Eximbank then disburses the funds to the exporter.
96 Paul Hubbard, "Chinese Concessional Loans," in China into Africa, ed. Robert I. Rotberg (Washington, D.C.:
Brookings Institution Press, 2009).
97 Kong, China's International Petroleum Policy, 68.
98 Ibid., 69.
99 Meidan, The Structure of China's Oil Industry, 45.
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9. The foreign government pays interest and fees and loan repayments to the China Eximbank.100
It should be noted that according to this process, China is not necessarily on the hook for the full amount of aid that it pledges insofar as the amount of aid that it actually disburses depends on the cost of the projects that are proposed, approved, and completed; the amount that China pledges is more of an upper limit than a realistic goal. Michal Meidan, looking at the China Development Bank, sees a similar pattern: the host nation opens an account with CDB, and an energy-backed loan (EBL) is “secured by revenue earned from deliveries of oil
100 Hubbard, "Chinese Concessional Loans," 219.
Figure 3.2: The lifecycle of a Chinese concessional loan (Hubbard 2009)
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or natural gas to a Chinese oil company.”101 The Chinese company then deposits payment into the host nation’s CDB account, allowing CDB to withdraw anything it is owed.102103 Chuan Chen et al. refer to this structure as the “Angola mode” used for countries
“unable to provide adequate financial guarantees to back their loan commitments.”104
Echoing Hubbard’s explanation of Chinese concessional loans, Chen et al. explain that after a framework agreement for infrastructure investment is signed, the recipient government
awards the contract to a Chinese construction firm to be paid for by Eximbank credit.105 What makes the Angola model distinct from other Eximbank concessional loans is that the
recipient government also awards a Chinese petroleum company “the rights to begin
production of the oil or other natural resources that will constitute repayment of the loan.”106 Yun Sun also notes that there is an additional component of Chinese assistance that is
“essentially ‘tied aid’…Beijing requires that infrastructure construction and other contracts favor Chinese service providers.”107
The importance of policy banks can be seen by their alleged impact on NOCs. There is some debate as to whether state policy bank support actually helps NOCs. One way to see the importance of policy banks is bErica Downs argues that there is a perception that NOCs are handicapped by their status as relative latecomers in the international oil business, lacking the experience of more established international oil companies (IOCs).108 As a result,
101 Meidan, The Structure of China's Oil Industry, 45.
102 Ibid.
103 According to the English-language website for China Eximbank, “China Eximbank is the only bank
designated by the Chinese government to implement [preferential] facilities.” The Export-Import Bank of China.
104 Chuan Chen et al., "China's Emerging Role in Africa," Gridlines, no. 42 (2008): 2.
105 Ibid.
106 Some of these other resources include “iron, bauxite, and cocoa.” Ibid.
107 Yun Sun, "Africa in China's Foreign Policy," (John L. Thornton China Center and African Growth Initiative, 2014).
108 Erica S. Downs, "Who's Afraid of China's Oil Companies," in Energy Security, ed. Carlos Pascual and Jonathan Elkind (Washington D.C.: The Brookings Institution, 2010), 93.
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concessional loans are a tool by which the central government can help make up for some of the lack of experience.
State entities can also benefit NOCs by smoothing relationships between China and the government of the target country, especially where local energy companies are state-owned. By linking oil investment to investment in other sectors of the local economy, these governments hope to develop their infrastructure and diversify away from extractive
industries. Turkmenistan and Angola are two examples of countries in which Chinese loans may have paved the way for NOCs to sign production-sharing agreements.109 Sun notes, “in 2006, this approach probably helped Chinese oil companies win the exploitation rights to multiple oil blocks through $4 billion in loans.”110 Michal Meidan argues that CDB-provided EBLs helped NOCs acquire overseas assets, and “were the first truly effective mechanism for advancing China’s energy security, by earmarking set volumes of oil to China.”111 He
identifies CDB loans as contributing to successful acquisitions in Brazil, Ecuador, Venezuela, Turkmenistan, and Russia, among others.112 However, he also argues that EBLs are not the preferred funding source for NOCs; they do not protect against political risk, they do not always protect against price fluctuations in the open market, and in the event that borrowers renege on the original contract, “CDB [has] limited recourse to recover oil or revenues.”113
On the other hand, such financial backing can be ineffectual or even
counterproductive. A proposed deal with Nigeria that would have provided $2.5 billion from China Eximbank fell short despite the fact that Nigeria “offered preferential rights to oil exploration and production blocks to foreign companies that promise to invest in the
109 Ibid., 94.
110 Sun, "Africa in China's Foreign Policy," 8.
111 Meidan, The Structure of China's Oil Industry, 46.
112 Ibid.
113 Ibid.
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country’s energy and transportation sectors.”114 One example of this can be seen in CNOOC Ltd.’s ultimately unsuccessful bid to purchase Unocal for $18.5 billion.115 Unable to fund this bid itself, it lined up a $7 billion loan from its parent company as well as a $6 billion loan from the Industrial and Commercial Bank of China.116 CNOOC’s bid for Unocal failed in part due to American perceptions that CNOOC was in effect receiving subsidies from the Chinese government that Chevron would not be able to match.117 CNPC’s attempt to purchase Russia’s Slavneft in 2002 faced similar opposition from Russian lawmakers.118