Analysis Eu investments in China

The dragon paradox: why space superpower China needs the EU’s financial help to grow trees on Earth

In the name of climate change, the grand treasurers of the Union, via the European Investment Bank (EIB), have been granting concessional loans to China, turning a blind eye to its blatant human rights violations. While the money – a large drop of water on the balance sheet of the EIB – may not be the problem, it may be the prelude of a problem.

Published on 6 May 2021 at 16:15

Grey concrete, cool glass, icy steel. Architecturally, one could argue that the headquarters of the European Investment Bank (EIB) in Kirchberg, Luxembourg, is rather cold and uninspiring. 

A low, cruciform monument to impregnability, flanked by the newer “glasshouse” said to be transparent at night – under the drizzly overcast of the Grand Duchy, the vibe is as endearing as an impassive bunker incongruously enlivened by a truncated chunk of an airport terminal. 

It is here that the “lending arm of the European Union” resides and officiates. Obscure to most, the decisions made by this powerful institution, at the discretion of a few, affect the lives of many, in Europe and beyond, while it pumps tens of billions of euro every year into the economy. 

Behind the scenes, this key weapon in the EU financial arsenal also plays centre stage to political rivalries between member states (the shareholders), as they compete for lending power (77 billion euro in 2020). The bank’s primary mission is to fund infrastructure projects in Europe, while setting aside a piece of the action every year for overseas operations (the External Lending Mandate, ELM).

So how does it work? 

In a nutshell, the EIB, thanks to the good credit of its shareholders, can borrow at low cost on the capital markets, and benefits, in most cases, from an EU guarantee which allows for risk premiums to be waived from its interest rates. 

Recipient countries, on the other hand, seek the opportunity to borrow at low rates, via their institutions or companies, to fund large-scale projects. Smelling profits, private players then step in, creating leverage. 

Beyond the EU, as the bank showers the world with soft loans on a not-for-profit basis. We can cite roads in Montenegro (320 million euro), metro lines in Cairo (600 million), a university in Morocco (70 million) or a water supply system in Bangladesh (100 million).

By and large, it makes sense. It helps achieve the EU’s “external objectives”, such as steering the Western Balkans toward the Union, addressing the root causes of migration in the “southern neighborhood”, or “fostering economies in Least Developed Countries (LDC)”. But not when it comes to China. 

The elephant in the room

China, it turns out, is also eligible for the scheme. In fact, it is the largest beneficiary in Asia, having borrowed 3.1 billion euro so far. The partnership goes back to 1995, when the EIB helped fund the Pinghu Oil-Gas Field on the East China Sea, as well as roads in Guangxi and a water treatment plant in Chengdu a few years later.

In addition, in some instances, the EU Bank’s subsidized loans made in various parts of the world vastly benefit Chinese interests, as is notably the case in Greece, Senegal and Scotland (SDIC Power), where Chinese corporations grabbed the lion’s share of open tenders. 

How come? 

At a glance, beyond the official narrative – the “saving the planet” story spun ad nauseam by the bank (more on that to follow) –the rationale is unclear and pointed questions are still to be raised. 

So, how come Beijing even needs the money? China just splashed out 209 billion euro on its military this year (three times more than India), 167 billion on public security and surveillance. Meanwhile, the country’s policy banks lavish tens of billions of euro in commercial loans across Belt & Road trade initiative, in a wild display of firepower. 

And how come a “strategic rival” is the beneficiary of Official Development Assistance (out of an allocated share of the EU’s Gross National Income), on an equal footing with Bangladesh, Nepal or Cambodia? A rival with whom Europe sustains an enormous trade asymmetry; whose party-state, via the Assets Supervision and Administration Commission (SASAC), owns and/or operates more than a dozen port terminals in Europe, and bought its way deep into the continent’s power grid (via a cryptic network of subsidiaries in Cyprus, Greece, Portugal, and Italy). 

A credible narrative

On paper, the official argument underpinning the bank’s Chinese policy is undeniably coherent. In line with the Paris Agreement, and pursuant to its External Lending Mandate (2014~20) – which requires the bank to allocate at least 25 percent in external lending to “climate change mitigation” – the EIB offers to finance large swathes of “forest” in China, as part of its mission to “preserve the planet”. 

The lender, moreover, is traditionally big on forestry. It already invested in a variety of ventures across Europe, from afforestation and land management to fiber processing. So, naturally the “climate bank” turned its expertise to Asia (hand in glove with Indufor, a Finnish private consultant) to extend credit worth 1.3 billion euro to China (for forestry alone, as of December 2020). 

Timberland, a fortiori, often makes for a bankable investment, as an “asset class” which, aside from the invaluable merit of shining green, offers both cash flow and capital appreciation. 

As for the Chinese, it’s a no-brainer: after over-harvesting their forests for decades and ruining their own resources, the authorities, via the National Forestry and Grassland Administration, had hardly any choice but to enforce massive afforestation plans (while deforesting other continents) in order to make up for the devastation — why would they ever decline the cheap loans, along with pro bono expertise, coming their way?

But here’s the thing: no matter how coherent that narrative, it’s only one side of the story. 

Let’s consider two cases, whose lending volume accounts for roughly a third of EIB loans to China (in forestry alone).

In Inner Mongolia, last year the bank agreed to lend 300 million (at 1.8 percent over 25 years, with a 5-year grace period) to “protect biodiversity and enhance resilience and adaptation to the negative impacts of climate change”, as the EIB states as the main purpose of the investments. 

And yet, out of the 138,000 hectares in targeted land area, 83 percent pertains to “the upgrading of existing plantations with rare and precious tree species”, says Chinese state media. 

In Anhui and Jiangxi, in 2018, it lent another 200 million, which were to “establish 32,000 hectares of new forests and to improve the quality of 75 000 hectares of existing forests”. 

But here again, “new forests” means “industrial plantations” for fiber and timber, as indicated by the project’s balance sheet (available on the Chinese web, in a commendable effort at transparency), where evergreen hardwood and softwood trees are mixed with coniferous. “Existing forests”, on the other hand, refers to the “upgrading of existing plantations with rare and precious tree species”. 


China — which has to import 50 percent of the wood it consumes (half of 631 millions m3 in 2019) in order to feed its large industrial base of paper and construction companies — is in a rush to reduce its over-dependence on foreign timber. 

This is especially true of “rare and precious species”, as the country’s growing needs for tropical wood rely heavily on the global South, at a time when supply chains prove frustratingly unreliable. 

Ecology, in other words, is only part of the objective, and by no means the only driver behind Beijing ’s afforestation policy, as China seeks to implement a grand national plan, conceptualized by the Chinese Academy of Sciences in 2014, calling for the establishment of 20 million hectare of “strategic reserve forests” by 2035. The ultimate goal? Self-reliance in timber.

This entails the following: 

First, carbon sequestration rates are notoriously much lower in industrial plantations than in natural forests. And while disappointing figures in Inner Mongolia (11kt/a) are attributed by the bank to low tree growth rate in the region, here again, that may be only part of the story.

Had the EIB not stepped up, its Chinese projects might have been financed anyway, as they largely coincide with the pre-planned “strategic forests”, to which the National Forestry and Grassland Administration has been steering loans (by 2017, the overlapping reached 87 percent in land area and 86 percent in budget). 

Given that context, either the China Construction Bank (CCB), the Agricultural Bank of China (ABC) or the China Development Bank (CDB) would have stepped in. The latter recently announced it will inject 19.3 billion euro (¥150 billion) into forestry across the country by 2024.

One EU, two standards

In light of the above, how far-fetched is it to assume that “climate change mitigation” is not much more than a catchy slogan? Isn’t it just empty rhetoric to justify the bank’s presence in China, a convenient decoy? 

Surely vast and powerful forces must be at work here, pressing privately to forsake the moral high ground, while credible reports of abuses in Xinjiang and Hong Kong keep surfacing. Concessional loans are a political act.

When Russia annexed Crimea in 2014, the European Council swiftly called on the EIB to freeze all new funding to Russia. Crimes against humanity in Xinjiang, however, including forced abortion and forced labor, only elicit a symbolic blacklisting of four Chinese officials years later. Meanwhile, impervious, the bank’s Chinese operation is expanding. 

In the name of “economic cooperation” (another official selling point), the EIB has continued to promote, in both words and deeds, the benefits to be derived from close ties with China. By all accounts, the bank played a key role in talking European states into subscribing to the Asian Infrastructure Investment Bank (led by Beijing). 

In sharp contrast, the Export-Import Bank of China (Eximbank; one of Beijing’s two institutional lenders) has been pursuing its transparent agenda — advancing Corporate China’s interests overseas — with undeviating commitment, and with little concern for not-for-profit “climate action”. 

When, eventually, a Chinese lender elects to invest in clean energy in Europe — as it so happened on the island of Crete last year (Minos 50MW solar farm; Industrial and Commercial Bank of China) — the collateral benefit of gratifying us with clean air proves unintended.

Consider this: when no one else would, Eximbank lent 613 million euro to utility firm EPBiH in 2019 to support Gezhouba, a Wuhan-based consortium, in building a coal power plant in Bosnia, and would have doubled down in Western Macedonia, had the Commission not weighed in on procedural grounds. At the same time, in partnership with the Chinese lender, the EIB provided 300 million euro in framework loan for green financing in China

Tip of the spear

In order to make sense of such oddities (double moral standard with Russia; lack of reciprocity with China), it stands to reason that the bank’s business model be taken into consideration.

To operate, the EIB needs to borrow massively on the capital markets (70 billion euro in 2020), and while it is hard to pin down how much of its bonds Chinese investors actually purchase in various currencies, Beijing, it turns out, is a major buyer. 

What are the ramifications? When the Iranian nuclear deal fell apart in 2018, and as Brussels pledged, in a salvage attempt, to maintain relations with Teheran, the bank freaked out, citing concerns over putting financial flows from the US in jeopardy. At a time of renewed Chinese efforts to lure more foreign investments, the EIB is seen acting as the tip of the spear, using its credibility to spur confidence among Western investors. 

This is clear from the fact that, since 2017, the bank’s leadership has been pushing hard for the standardization of “green bonds” between the Union and China, with the stated objective to remove a major barrier to cross-border debt investment. Beijing is counting on 290 billion dollars a year in “green funding”. 

Taken out of context, this may look mundane and of limited scope. However, the consequences could be far-reaching, as China is slowly opening up its financial sector — lifting restrictions on foreign ownership of securities, insurance and fund management — in what could trigger a tectonic shift in world finance. 

For Blackrock, the world’s largest asset manager, this is the opportunity of the century.

Though caution remains the watchword — foreign investors seem content for the moment with a mere fraction of the country's insurance and banking assets (5.8 and 1.6 percent, as of May 2019) — how long, past the test period, before a game-changing influx of Western capital to China? 

Only last year, overseas holdings of Chinese stocks rose by 62 percent to 3.4 trillion yuan (520 billion dollars) from 2019, bond purchases by 47 percent to 3.3 trillion yuan, and foreign investors bought another net 53.5 billion dollars worth of Chinese debt in January and February (source: Bloomberg). 

So here we are hearing that old tune again, while still bemoaning the aftermath of Europe’s great industrial impoverishment. 

That shrill voice from a Chinese opera at the turn of the millennium, singing the praises of the Great Market, upon which the future prosperity of the old continent depended. To what end? A wealth transfer of biblical proportions. 

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