Developing Nations Face Challenges Amid Rising Fossil Fuel Costs
As fossil fuel prices surge, developing countries are grappling with the consequences, including increased fuel subsidy costs, soaring food prices, and heightened borrowing expenses. This economic strain is widespread, impacting nations such as South Africa, Indonesia, Vietnam, and Senegal. In South Africa, inflation rates are rising, while Indonesia projected an additional $5.9 billion in energy subsidies. Vietnam is experiencing a slowdown in growth, and Senegal has prohibited nonessential government travel to mitigate financial strain.
The energy transition is increasingly seen as a matter of national interest rather than a purely environmental effort. Electrification, once mainly aimed at reducing carbon emissions, is now viewed as a means of managing sovereign risk. Deployments of solar parks, battery storage systems, and electric bus fleets offer not only lower emissions but also reduced vulnerability to geopolitical disturbances.
Electrification, once primarily a decarbonization strategy, is now sovereign-risk management.
This article explores policy options available to policymakers in the Global South seeking to finance their energy transition, which has become more pressing. Although Western financial offers have been inadequate, China’s proposition offers distinct advantages, providing access to affordable finance and clean energy technology through digital, smart contracts. Policymakers should seize this chance to develop onshore and offshore electrotech supply chains, aiming for genuine energy sovereignty while fully understanding the potential long-term effects.
The Western and Chinese Offers
The current Western support for clean energy transition in developing countries remains insufficient. Just Energy Transition Partnerships (JETPs), intended to combine loans, grants, and strict conditions, have not achieved the desired impact. Countries like South Africa, Indonesia, Vietnam, and Senegal have struggled with the fragmented nature of these partnerships, which fail to meet the scale of transition needs.
Alternative actors such as Gulf sovereign vehicles and Japan’s Tokyo International Conference on African Development are becoming increasingly engaged. Meanwhile, Western multilaterals have expanded their offerings beyond JETPs, but these often come with conditionalities, complicating decision-making for finance ministers.
China’s offer stands out due to its provision of cheap finance. The ten-year sovereign yield spread between U.S. and Chinese government bonds became positive in April 2022, allowing China to offer more affordable loans to the Global South. By April 2026, China’s ten-year yield was significantly lower than that of the U.S., providing a cost-effective alternative for emerging markets.
China’s cost advantage is expected to remain durable due to its demographic trends and economic dynamics. China’s aging population and high private-sector debts contribute to low interest rates, and its bond yields are unlikely to rise significantly in the near future.
Countries like Kenya and Ethiopia are already converting dollar-denominated loans into RMB loans, saving millions in financing costs. China’s ability to finance its manufactured electrotech products further strengthens its position in the clean energy transition.
China dominates clean-technology supply chains, with a significant share in solar panel manufacturing and electric vehicle battery production. In 2025, China’s monthly electrotech exports surged, driven by geopolitical tensions and expiring tax credits. The financing arrangements behind these exports highlight the importance of understanding monetary corridors and terms for developing-country policymakers.
A New Financial Architecture
China’s approach to the energy transition involves not only financial advantages but also a comprehensive system that includes contractors, export credit, policy banks, and RMB liquidity. This integrated approach transforms China’s lending advantage into a systems advantage, with an extensive network of bilateral swap agreements (BSAs) supporting currency exchanges.
The evolution of the digital yuan (e-CNY) adds another dimension to China’s financial architecture. The digital yuan’s programmability allows for predefined transaction conditions and automation, enhancing the efficiency and transparency of climate finance.
In the context of clean energy, programmable financing can ensure funds are used for eligible purchases, with payment corridors enforcing compliance. This system reduces transaction risks and makes the energy transition finance cleaner and more auditable.
Engaging China with Eyes Wide Open
While China’s finance ecosystem offers significant benefits, it also poses potential risks to sovereignty. Like Western initiatives, China’s climate finance is aligned with its strategic interests. Global South governments must remain pragmatic and negotiate favorable terms when engaging with China’s financial offerings.
If the dollar system is expensive, the multilateral pipeline slow, and the Western plate half-empty, the Chinese meal is not a trap—it is the only meal being served.
Finance ministers in the Global South must carefully consider conditions, terms, and control when negotiating financing agreements. By ensuring favorable terms and preventing technology dependence, developing countries can strategically import electrotech goods and build domestic capacity.
Original Story at carnegieendowment.org