Determinants of Chinese Outbound Energy Finance to Developing Countries

China is now one of the world’s largest nanciers and investors in the global electric power sector, and has made major inroads into global coal and hydropower electricity markets in developing countries. Drawing on and analyzing two new datasets, this paper is among the rst to perform an econometric analysis to examine the determinants of Chinese overseas energy nance in the power sector. We examine a number of ‘push factors’ –incentives in China that facilitate investment abroad—and ‘pull factors’ –incentives in host countries that facilitate Chinese investment into their own countries. On the push side, we nd that domestic overcapacity in the coal and hydro power industries in China plays a key role. On the pull side, we nd that key drivers of Chinese overseas electric power nance includes local demand for new power projects and the resource potential for coal, gas and hydro power in recipient countries. We also nd existing Chinese involvement in past power projects facilitates new Chinese overseas nancing. to analyze a vector of push and pull factors on two different mechanisms of Chinese overseas nance in developing countries’ power sector—foreign direct investment and development nance. The results shed light on some important factors driving Chinese development nance and Chinese foreign direct investment since 2005. With the expectation of a growing presence of Chinese nance in developing countries’ power sectors, our ndings enrich the discussion of energy development pathways in developing countries from the perspective of international development nance and the renewable energy transition.


Introduction
Although carbon emissions show signs of stabilizing and decreasing in some developed countries, emissions from most developing countries are rising as they strive to raise their country's standard of living (IEA, 2019). The energy sector is pivotal from both a climate and development perspective. While energy is a key driver of economic development, the energy sector is also the source of two-thirds of global greenhouse gas emissions. Redirecting nancial ows towards renewable energy technologies (RETs) in developing countries is crucial to minimize committed future emissions and to limit climate change to manageable levels ( Tao et al., 2020). In order to steer Chinese nance more towards RETs in the power sectors of developing countries, an understanding of the drivers of Chinese energy nancing is critical.
While the Chinese government does not publish a project-by-project breakdown of its overseas nance activities, extensive data collection efforts have identi ed two major mechanisms of Chinese nance in the global power sector. The rst mechanism is development nance (DF) provided by China's policy banks and Chinese export credit agencies (ECA) to host governments in developing countries in the form of trade credits, concessional loans, and non-concessional lending. In the DF mechanism, China's policy banks provide debt nance to sovereign governments and do not directly own the projects nor are they involved in the development of the power projects; the sovereign governments and the local developers which receive Chinese nance build and own the power projects. A second mechanism is foreign direct investment (FDI) made by Chinese power companies into new power projects in developing countries as project developers and owners. In this mechanism, Chinese power companies provide equity nance and directly own part or all of a project. For Chinese DF, the Chinese major state-owned policy banks-the China Development Bank and the Export-Import Bank of China-provide the vast majority of Chinese development nance. For Chinese FDI, Chinese state-owned enterprises are involved in 85% of all overseas power projects receiving Chinese FDI.
While signi cant work has been conducted to date that establishes the level of Chinese DF and FDI engagement in the power sector abroad, there is relatively less understanding of the determinants of Chinese energy nance. There have only been a handful of papers on the broad determinants of Chinese overseas nance across all sectors. Dreher et al., 2018 analyzed Chinese development nance to Africa from 2000 to 2012 and found the drivers of Chinese development nance to be largely driven by the market forces of supply and demand, rather than the geopolitical drivers that many assumed. This nding is supported by a more recent study that compares Chinese development nance in 157 developing countries from 2000 to 2014 with development nance from the World Bank. This study also found that Chinese development nance is driven by market forces to a larger extent than World Bank nancing (Morris et al., 2020). However, little research speci cally examines Chinese overseas nancing in the power sector. Kong and Gallagher (2019) developed a framework to qualitatively analyze various "push" and "pull" drivers of Chinese development nance in overseas coal power projects. Through eld research in several case countries,  argued that Chinese and other foreign nancing can be heavily in uenced by host country demand. They found domestic pull factors to be key drivers of such investment. Besides these qualitative studies, relatively little quantitative work has been conducted analyzing the drivers of Chinese overseas nancing ows in developing countries' power sector.

Analytical Framework And Potential Drivers
We utilize the "push and pull" analytical framework of Kong and Gallagher (2019) to analyze the effects of different drivers on both types of Chinese nancing, Chinese DF and Chinese FDI in the power sector.
"Push" factors are described as Chinese domestic drivers that "push" Chinese nance out to overseas markets. We are particularly interested in four potential push factors. First, industrial overcapacity in the Chinese domestic market is often discussed as a push factor that drives Chinese nance overseas and is . The third potential push factor on Chinese nance that we explore is the abundance of natural resources in the recipient country. Resource-seeking theory on foreign direct investment indicates that overseas nance could be driven by interests to secure strategic overseas assets, such as energy resources and we examine whether that applies to Chinese overseas nance (Foster et al., 2008;). We also examine how Chinese nance has been driven by the magnitude of bilateral trade between China and the host country, as the fourth push factor.
"Pull" factors are host countries' demand that "pull" Chinese nance into their market. We examine three pull factors. The rst pull factor is a host country's energy policies which usually determine the plan for new power projects for the next ve to ten years, including total capacity, energy mix and even siting for large projects. Through a series of case studies of Chinese nance abroad,  argued that foreign nancing can be heavily in uenced by local demand. They found domestic pull factors to be key drivers of such investment. Here we use the new power capacity built in host countries as a proxy for the local demand for new power projects. We also include local coal reserves, gas reserves and hydropower potential as the second pull factor to explain the different technology choices made by Chinese nanciers. For the overall economy, we examine the effect of gross domestic product (GDP) per capita as the third pull factor on Chinese nance (indicating total aggregate demand in the host country).
In addition to the push and pull factors, we also control for a number of other factors, including population, institutionalized democracy, the signing of a BRI memorandum of understanding (MOU) with China, existing trade with China in power equipment and power engineering services, and existing trade with major developed countries in power equipment and power engineering services.

Econometric Analysis On Potential Drivers And Summary Of Regression Results
We conduct an econometric analysis on the potential drivers described above using our newly created panel dataset which includes all power projects receiving Chinese development nance (DF) Table 1. For each driving factor, which are independent variables in econometric terms, there are two values we obtain from the regression model. The rst value, without parenthesis, is the coe cient shown in the rst row for each independent variable, describing the level and direction of the effect the independent variable has on Chinese nancing with positive (negative) values indicating correlation (anti-correlation). The p value is shown in parentheses in the second row for each independent variable and describes the possibility that we reject the null hypothesis that the independent variable has no effect on Chinese nancing. There are three thresholds for p values to describe the level of signi cance, 0.05, 0.01 and 0.001. The smaller the p value, the more likely the independent variable signi cantly affects Chinese nancing.
For some driving factors, there are endogeneity concerns where it is di cult to infer the direction of the causality from regression results. For instance, if we nd that the amount of power capacity receiving Chinese development nance is strongly related to new power capacity in recipient countries, it is di cult to tell if a fast growing electric power market in recipient countries drives Chinese nancing as a demand pull or if Chinese nancing drives the local electric power market's growth. To avoid such a concern, we lag three such driving factors (new power capacity in host country, added power capacity in the last Based on the regression results in Tables 1 and 2, we are able to quantitatively estimate how signi cant the effect of each independent variable is on the two mechanisms of Chinese overseas nancing. For the push factors we examine, overcapacity in Chinese domestic market is the only push factor we found to have a signi cant effect on Chinese overseas nancing and such effect is only applicable to Chinese development nance and not FDI. Our results indicate that an overcapacity in the Chinese domestic market pushes more Chinese development nance to other developing countries. For the other push factors (UN voting alignment between host country with China, resource rent in host coutry, or trade value), we do not nd any signi cant effect on Chinese overseas nancing. For the pull factors we examine (see Table 1), we nd the new power capacity additions in host countries to be a signi cant driver for both mechanisms of Chinese nancing. When we lag the new power capacity additions by one year as well as the other two control variables (see Table 2), we nd that new power capacity additions in host countries only have a signi cant effect on Chinese foreign direct investment. The lagged results are more credible as the endogeneity issue could threaten the results in Table 1. We nd power resource potential to have a signi cant and positive effect on Chinese development nance from the lagged results shown in Table 2. For GDP per capita, there is no signi cant effect on Chinese overseas nancing.
For the control factors we examine, we nd that the added power capacity in a given host country involving China in EPC or equipment supply in the last ve years has a signi cant and positive effect on both types of Chinese nancing in the same country. We also nd that added power capacity in a given host country involving EPC or equipment supply from U.S., Japan and Germany has a signi cant and negative effect on Chinese foreign direct investment. We nd population to have a signi cant and negative effect on Chinese development nance in Table 1 but the effect becomes insigni cant when we apply an one-year lag to the other three variables as in Table 2. For the rest of the control variables (signing of a BRI MOU with China or the level of instutionalized democracy), we nd no signi cant effect on Chinese overseas nancing. We discuss the signi cant drivers in more detail in the following section.   Our multivariate econometric models suggest that overcapacity in the Chinese domestic market could explain Chinese overseas development nance with statistical robustness but not in the case of Chinese foreign direct investment. Our results are consistent with case study research which found that China's development nance supported state objectives to export domestic overcapacity. These ndings are especially true in the case of coal power and hydropower projects (Kong and Gallagher, 2020 FDI). This is also seen in  Table 2. Although in the no-lag scenario shown in Table 1, both Chinese development nance and Chinese foreign direct investment are found to be positively driven by market demand in host countries, in the lagged scenario shown in Table   2, only Chinese foreign direct investment is found to be signi cantly driven by market demand in host countries. Since Chinese nance is not likely to have an effect on new power capacity additions the year before nancing is provided, such results suggest that Chinese foreign direct investment, instead of Chinese DF, is more likely to follow a growing market, rather than creating a new market. This supports the pro t-seeking nature of foreign direct investment when compared with development nance.

Pull Factor: Power Resource Potential In Host Countries
From our econometric analysis, we observe a positive and statistically signi cant coe cient for host country power resource potential on Chinese development nance but not on Chinese foreign direct investment. As further described in the methodology section, we measure power resource potential as the coal and gas fuel reserves and hydropower potential in a given country. This result suggests that abundant local power resources are an important pull factor for Chinese development nance. In a mature power market, the abundance of local coal and gas, and hydropower potential are important factors determining the feasibility and bankability of individual power projects. Abundant local resources in coal, gas or hydropower would attract investment in the corresponding type of power projects. However, among the poorest developing countries, the low demand for electricity and poor transmission infrastructure results in non-bankable power projects under market conditions, despite abundant local resources.  Infrastructure development is a key area for cooperation and many power projects receiving Chinese nance have been included in various BRI project lists. While many would expect that the development of BRI has been a strong driving factor pushing Chinese nance out to overseas power projects, our results do not yet show a statistically signi cant effect of signing a BRI MOU with China on the amount of Chinese nance received by a given country. The result is also consistent with knowledge from the eld that most power projects secured Chinese nancing before the host country signed the MOU. The projects listed in the MOU are simply a list of existing projects, rather than new commitments. It is important to note that we are only analyzing projects built from 2005 to 2018 and power projects usually have a long development cycle. Thus, it could take more time for the newly established BRI framework to have a visible effect on the quantity of Chinese overseas nance available to the developing countries' power sector.

Concluding Discussion
Combining two relatively new datasets from our previous work, we performed a statistical analysis to estimate the determinants of Chinese power plant nance in the developing world. We considered that such nance and investment would be a function of both the supply of Chinese nance-what we call 'push' factors, and the demand for such nance in host countries-what we call 'pull' factors. We deployed a xed effect model to analyze a vector of push and pull factors on two different mechanisms of Chinese overseas nance in developing countries' power sector-foreign direct investment and development nance. The results shed light on some important factors driving Chinese development nance and Chinese foreign direct investment since 2005. With the expectation of a growing presence of Chinese nance in developing countries' power sectors, our ndings enrich the discussion of energy development pathways in developing countries from the perspective of international development nance and the renewable energy transition.
We nd that Chinese FDI in the power sector is largely market driven, pulled by demand for electric power in developing countries. Development nance is naturally more driven by intermediate policy goals-to provide outlets for sectors that are facing overcapacity in mainland China, and to make inroads into countries that have abundant energy capacity but that are not yet market competitive. Although both Chinese development nance and Chinese foreign direct investment are driven by state actors, our analysis lends empirical support to observations that Chinese state-owned enterprises are largely pro t seekers, instead of arms of the state. Our results also contribute to the discussion of whether China has been pushing nance outward or the host countries have been pulling nance inward. Our results found no statistical robust evidence to indicate that push factors are driving Chinese foreign direct investment outward. The pull factors, and market demand in particular, are the primary drivers for Chinese foreign direct investment. In the case of Chinese development nance, we have found both push and pull factors drive Chinese development nance in developing countries' power sector. trade with other countries in the power sector); τ t stands for the year-xed effect and ε it is a stochastic error term. Data sources and description for each variable is shown in the Data collection section below. We converted the project-level data on Chinese nance and the potential driving factors (independent variables) into a panel dataset covering 35 countries from 2005 to 2018 for three power technologies (coal, gas and hydropower). We also ran the Hausman test to determine whether the xed effect or random effect model is more appropriate for our data set and thus chose the xed effect model.

Data collection
We use the Boston University Chinese Global Electric Power database as our source for Chinese  Added power capacity in the last 5 years involved with EPC or equipment from major players in global power industry (US, Japan and Germany) Platts