China is a major green financier in the Middle East and North Africa (MENA) despite being classified as a developing country in the United Nations Framework Convention on Climate Change. In this it is driven by the structural recalibration of its industrial policies and its economic growth model. China has adopted a diverse pool of green credit instruments, including green loans, green bonds, green development funds, green insurance, equity and markets for pollution-control rights.
China has several objectives in MENA, including further aligning its focus on sustainable development with local economies, boosting its energy security and pushing forward the renminbi’s internationalization.
This article presents an analysis of China’s green finance in low- and middle-income countries in MENA, based on data for 2016–2023 (except where data is only available to 2021 due to low transparency and availability of official data in China or where data was not available due to the lack of projects and immaturity of China’s green financial system).
Greening China’s financial system
China has made strides in green finance since 2000. Its double target of reaching a carbon peak by 2030 and carbon neutrality by 2060 has accelerated the greening of its financial system.
Three milestones have shaped China’s regulatory reform to support the green-finance sector. First, the China Banking Regulatory Commission issued the Green Credit Guideline in 2007 to make bank loans greener and more focused on environmental priorities. Second, in 2016, the People’s Bank of China (PBoC) published the Guidelines for Establishing the Green Financial System, marking the real beginning of the green shift in the financial system and laying the foundations for more sophisticated and multi-layered process and mechanisms. Third, in 2021, the PBoC unveiled ‘three major functions’ and ‘five pillars’ to consolidate the market further. This followed the launch of green-finance pilot zones in 2017, which now number ten in seven provinces.
In another essential step towards realizing a voluntary carbon market, China relaunched its Certified Emission Reduction scheme in January 2024 (in addition to the mandatory national emissions trading system).
Financing instruments
Since 2013, China’s green lending has increased in volume and in number of issuances as a share of total loans. As Figure 1 shows, in 2016 and 2017, the increase in green lending was slow and sometimes unchanged in percentage (slightly more than 15 per cent) despite the rise in the number of loans. This resulted from China’s lower emphasis on greening its financial sector and the lack of a robust policy and supporting regulatory enviroment.
Following the PBoC’s 2016 Guidelines, the share of green loans fell to 6 per cent in 2018 due to regulatory reform, before rising over the next five years. In 2018, the green performance of banks was included as a factor in the PBoC’s Macro Prudential Assessment Framework. The framework allows for an increase in interest rates given by the PBoC to a bank on its required reserves, based on the bank’s green performance. This motivated the rise in green lending. In 2023, green loans accounted for 23 per cent of total lending at $53.58 billion, an increase from 19.77 per cent at $41.58 billion in 2022.
China’s issuance of green bonds has increased dramatically since 2021, in volume and the number of issuances, following a period of inertia after the outbreak of Covid-19 in 2020, before decreasing in volume by 4.4 percentage points in 2023. The volume of issued green bonds increased from $607 billion in 2021 to $874.6 billion in 2022 before decreasing slightly to $836 billion in 2023. This pattern was repeated in the number of issuances, from 491 in 2021 to 521 in 2022 to 475 in 2023.
Between 2021 and 2023, China issued $100 billion’s worth of sustainability-linked bonds, which accounted for 4.3 per cent of the total green bonds issued. The low-carbon-transition-linked bonds volume was $36.4 billions at 1.6 per cent from the total (Figure 2).
The renminbi’s share of the global issuance of green bonds fell from 22.9 per cent in 2016 to 6.8 per cent in 2020 due to challenges related to the pandemic before rising again to 16.9 per cent in 2022 (Figure 3). However, the euro and dollar still dominate the market. China’s economic slowdown and the stringent 2022 Green Bond Principles rules that dictate the allocation of all proceeds to green projects led to a slight decline in 2023.
Central state-owned entreprises (SOEs) continue to be the leading issuers of green bonds in China, but their share fell from 74 per cent in 2021 to 52 per cent in 2023. The role of private corporations and financial institutions has increased dramatically, from 1 per cent in 2021 to 20 per cent in 2023. The role of local government pilot programmes and green bond initiatives is reflected in the increase in the share issued by provincial SOEs from 25 per cent in 2021 to 28 per cent in 2023 (Figure 4).
China’s green finance in MENA
Data for 2016–2021 on China’s green finance in low- and middle-income MENA countries shows the close alignment between the development and maturity of its green financial system and emission-reduction policies as the main drivers of the Belt and Road (BRI) priorities overseas. Egypt, Iran, Iraq and Turkey received most of China’s green finance in the region. Almost all of this (98.02 per cent) was in the form of green loans, with grants accounting for 1.84 per cent.
In 2017, the energy sector dominated China’s green finance at $2.8 billion, but in 2021 (the most recent year for which data is available) it had fallen to almost nothing. This was partly due to China’s focus on the transport and storage sector, which accounted for 54.23 per cent of its total green funding between 2016 and 2021 (Figure 5). The pandemic and China’s recalibration of the BRI priorities (including slashing high-risk lending and refocusing on smaller and greener projects, in line with the recommendations from the second BRI Forum in 2019) were partly responsible for the sharp decline in funding overall.
China’s bilateral project financing in low- and middle-income MENA countries promoted mitigation (45 per cent) and cross-cutting purposes (47 per cent) over adaptation (8 per cent), in line with its global financing approach (Figure 6).
The data shows that China focused on promoting the renminbi as part of its green-financing cooperation with the region’s low- and middle-income countries. Between 2016 and 2019, the renminbi’s share of total finance rose to surpass euro’s share (Figure 7). However, the dollar kept its dominant position at 87.14 per cent.
Data for 2016–2023 on debt and equity shows that, despite China’s pivot towards heavy investments in green energy, traditional fossil fuels still dominate its financing initiatives in the region. Oil, gas and coal accounted for 57 per cent of its financing in the energy sector and clean energy sources 43 per cent (Figures 8).
Solar power (photovoltaic and concentrated solar power combined) was the top energy sector with 40.19% (Figure 9). This shows the focus of MENA countries on solar as the dominant sector to lead the energy transition and their push to leverage China’s tech and expertise as the biggest solar manufacturer in the world. Next was coal at 38.2 per cent, despite President Xi Jinping’s 2021 announcement that China would stop supporting new coal projects abroad. Oil and gas accounted for 3.09 per cent and 15.7 per cent, respectively. The combination of debt and equity accounted for 59.1 per cent of China’s energy financing, compared debt alone (38 per cent) and equity alone (2.8 per cent).
China’s status as a developing country, according to the United Nations Framework Convention on Climate Change, may justify its resistance to green financing contributions to multilateral mechanisms, such as the Loss and Damage Fund approved during COP28. However, multilateral development banks in which China has significant influence have actively promoted green-finance cooperation with low- and middle-income countries since 2016. Looking at data for multiple development banks in Europe, Africa, Asia and multilateral orgnisations, the Asia Development Bank (ADB) spearheaded the green-finance initiative, followed by the Asian Infrastructure Investment Bank (AIIB) and the BRICS New Development Bank (NDB). In terms of contribution to green finance in low- and middle-income countries worldwide, the ADB’s was $48.6 billion in 2023, while the AIIB’s was $9.8 billion and the NDB’s $1.6 billion. The data includes other multilateral and regional development banks, including the African Development Bank, the Council of Europe Development Bank, the European Investment Bank, the Islamic Development Bank, and the World Bank.
The top MENA recipients of green financing from multilateral development banks were Egypt (48.1 per cent), Morocco (28.4 per cent) and Jordan (17.7 per cent). The contribution by the ADB, the AIIB and the NDB to this green finance was 14.4 per cent. However, multilateral green finance for low- and middle-income MENA countries decreased relative to that for similar countries in other regions, from 8 per cent in 2016 to 5 per cent in 2023.
Conclusion
China is investing heavily in greening its financial sector as the basis for structural economic reform. Climate-related finance can be expected to drive its efforts to restructure its growth model, driving industrial and technological policies in the medium and long term.
Although its financing contributions to UN-led multilateral mechanisms may not be compatible with its economic prowess or its quickly expanding and maturing green financial system, its contribution in MENA, through BRI bilateral agreements and multilateral platforms, have increased and will likely continue to do so.
Despite the significant increase in the contribution of green bonds to the total financing instruments at home, almost all of China’s green-finance initiatives in low- and middle-income MENA countries has been loan-based. This is partly because the green bonds market in these countries is still underdeveloped and lacks maturity and regulatory rigour, which is expected to change in the future.
The transport and storage and energy sectors dominates China’s green financing in these MENA countries. This is not surprising as one of the main strategic objectives of the BRI in the region is boosting infrastructure projects and energy security, which aligns with local priorities.
In the energy sector, Chinese financiers are keen to diversify their instruments to mitigate risk and maximize gain, with equity playing an increasing role in their strategies. Equity (including combined with other debt tools, especially sustainability-linked bonds) can be expected to continue to take up an increasing share of China’s MENA financing portfolio.
Despite the government’s push to green the BRI, the majority of the energy projects financed by Chinese entities in low- and middle-income MENA countries have been fossil-fuel ones.
China sees green-finance initiatives in MENA as a mechanism to internationalize the renminbi, which it has pursued systematically since 2020, and the renminbi will likely continue to feature in many more future agreements.
