‘Panda Bonds’ to help fund Africa’s energy transition: China-Africa Cooperation Forum

China’s commitment to supporting Africa’s green and low-carbon energy transition was a highlight of the 8th Forum on China-Africa Cooperation (FOCAC), which concluded on 30 November 2021 with a climate joint declaration.

The Declaration on China-Africa Cooperation on Combatting Climate Change provides the shape of future partnership in the energy sector. On coal, it reaffirms President Xi Jinping’s pledge, made at the UN General Assembly in September, to stop building new coal-fired power projects abroad, a move that was welcomed by more than 120 African community organisations and NGOs.

On clean energy, it includes a commitment from China to further increase investment in solar, wind and other renewables in Africa. The acceleration of Chinese support for solar and wind was also mentioned in Xi’s opening keynote and the Vision 2035 document, which was released at the forum.

The Declaration also states that “the two sides support qualified gas-to-power projects in accessing green investment and financing support”, though it remains unclear how China will scale financing and investment for natural gas and renewables in Africa.

Over the past two decades, Chinese financing and investment in solar and wind projects have been far smaller in Africa than in hydropower and fossil fuels. However, China’s pledge to stop investing in overseas coal could open up a space for solar and wind power to meet Africa’s growing energy demand.

A recent report by the African Climate Foundation, the Institute of Development Studies and the Open University calls for “innovative solutions” to accelerate China’s clean energy investment in Africa and diversify from traditional policy bank financing underwritten by Sinosure. This model has favoured large-scale hydro and fossil fuel projects.

The FOCAC Dakar Action Plan (2022-2024), released together with the Declaration, alludes to a similar uptake of “innovative ways of financing”. It calls on institutional investors and (sub-)regional development finance institutions, such as the African Development Bank, to step in. It welcomes “the issuance of panda bond by eligible African sovereign, multilateral and financial institutions in the Chinese bond market”.

A panda bond is a renminbi-denominated bond issued in mainland China by a foreign entity such as a sovereign or local government, multilateral development institution, financial institution or non-financial enterprise. Green panda bonds are those whose proceeds are earmarked for green assets or projects, in accordance with China’s 2021 green taxonomy and other documents.

The first green panda bond was issued in 2016 by the New Development Bank, a multilateral development bank established by the BRICS states (Brazil, Russia, India, China and South Africa). The five-year bond, with a coupon of 3.07%, raised 3 billion yuan (US$448 million) in China’s onshore bond market to support infrastructure and sustainable development projects in BRICS countries. 

In the context of financing energy transitions in Africa, multilateral development banks such as the New Development Bank and the African Development Bank are arguably more suitable than African countries as potential green panda bond issuers as they enjoy robust credit ratings (and hence lower interest rates)

The Green Development Guidance for BRI Projects – a traffic light-style environmental impact assessment system – gives a negative rating to gas-fired power generation projects, unless carbon capture, utilisation and storage technology is applied to contain emissions to less than 100g of CO2  equivalent per kilowatt hour.

The Guidance was commissioned by the BRI International Green Development Coalition (BRIGC), a cooperation platform jointly initiated by China’s Ministry of Ecology and Environment and international partners. It is currently only a research body but it has the potential to be adopted by Chinese policymakers as an authoritative policy document.

A solar power station in Arua, Uganda. “Panda bonds” could unlock funding for the expansion of renewable energy projects in Africa. (Image: Joerg Boethling / Alamy)

Source: Extracts from China Dialogue, 13 January, 2022. https://chinadialogue.net/en/energy/green-panda-bond-could-spur-chinese-investment-towards-africas-energy-transition/

Author: Yingzhi Tang(汤盈之)- she is a researcher at the Green BRI Center of the International Institute of Green Finance (IIGF) based in Beijing. 


CEN Editor’s conclusion:

The debate about whether natural gas projects should be eligible for green finance under any circumstances is likely to continue. Natural gas clearly has CO2 emission impacts, but produces around 50% less CO2 than black coal fired electricity generation, and is more flexible in responding to peak energy demand. A number of countries see natural gas as a “transition” energy source along the way to phasing out non-fossil fuels.  

Nigerian Vice President Yemi Osinbajo recently said “Natural gas doesn’t make sense in every African market. But in many, it is a crucial tool for lifting people out of poverty.”