Beijing-backed lending boosts China’s dominance in clean energy minerals

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China has built up control of critical minerals across the developing world over the course of two decades through a network of at least 26 state-backed financial institutions, according to a new report that traces the country’s financing strategy.

Research published on Wednesday found that Chinese policy and commercial banks — working alongside private Chinese entities and some non-Chinese groups — issued loans worth nearly $57bn from 2000 to 2021 in 19 low- and middle-income countries for mining and processing copper, cobalt, nickel, lithium and rare earths, components critical to clean energy technologies such as electric vehicle batteries and solar panels.

The study by AidData at the College of William & Mary in the US, which was reviewed by the Financial Times, attempts to capture the extent of China’s financing of extractive projects in the developing world. The research highlights the scale of the challenge faced by the west in countering China’s control of the global supply chain for emerging green-tech industries.

“Given that China’s financing model enables its companies to outmanoeuvre competitors in capital-intensive mineral sectors, its rivals need to develop more compelling and competitive financing arrangements that are responsive to the preferences of host countries,” said Brooke Escobar, who leads AidData’s Chinese development finance programme.

The research shows that more than three-quarters of China’s state-backed transition mineral financing — via both debt and equity — in the developing world was channelled to projects where Chinese entities held ownership stakes in joint ventures and special purpose vehicles.

These entities have long-term control over the extraction and processing of strategic mineral deposits, including copper from the Democratic Republic of Congo and Peru as well as Indonesia’s nickel and Argentina’s lithium reserves.

The data was compiled from the loan recipients and is rarely disclosed by Chinese financial institutions.

China’s transition minerals financing differs from Beijing’s traditional lending practices in the infrastructure-focused Belt and Road Initiative, one of President Xi Jinping’s hallmark foreign development policies, the AidData researchers argued.

Unlike most loans made for BRI projects, which are dominated by a handful of Chinese development banks, the network of lenders to the mineral sector was much broader.

Beijing’s state-owned commercial banks, including the Industrial and Commercial Bank of China, Bank of China and Citic, play the largest role.

However, a much larger network of 86 entities, including 26 Chinese official sector entities as well as scores of private Chinese companies and some non-Chinese financiers, also provided financing alongside Chinese state-backed participants in syndicated loans. This represents a much more diversified creditor base than traditional BRI lending.

ICBC, BoC and Citic did not respond to requests for comment on the data, nor did seven other large Chinese banks contacted by the FT.

The minerals lending also mostly involved serial lending, rather than one-off loans, in contrast to the BRI. State lenders initially provided an acquisition loan to help a Chinese company gain an ownership stake in a mine, before further credit facilities were extended for development and to provide working capital.

The BRI has also been marred by the issue of low-income countries struggling to repay hundreds of billions of dollars and allegations of “debt trap diplomacy” after a spate of sovereign debt defaults.

But AidData showed that about one-quarter of China’s mineral lending was backed by a Chinese guarantor, compared with an estimated 4 per cent in Beijing’s broader overseas lending portfolio, reflecting an increased emphasis on risk mitigation and safeguarding investment returns.

The lending was mostly targeted at upstream resource extraction, AidData said. This helped secure China’s access to raw materials, creating a vertically integrated Chinese-controlled supply chain, while avoiding competing with its own domestic mineral processing industry.

The data showed that two-thirds of the financing went into JVs or SPVs where the host government held no significant level of ownership. Bypassing local governments reduced those countries’ financial liabilities but also potentially limited their access to future financial returns, the researchers noted.

China’s dominance in many cleantech sectors is expected to expand over the next 10 years, forecasts suggested, despite the US and Europe handing out hundreds of billions of dollars in industrial subsidies as well as rising protectionism via tariffs and bans on Chinese-made products.