Exclusive
Money Grows on Trees – Financing China’s Green Future
By Li Ang, Diego Montero | Updated: 2018-12-18 16:49
Li Ang
Diego Montero

With the 24th Conference of Parties coming to a close, the world has been looking toward Poland for new signs of hope in the climate change challenge. Saturday’s encouraging 200-country deal notwithstanding, recent reports show that not enough is being done to limit the global temperature increase to 2 degrees centigrade, which experts consider necessary to prevent the worst effects of dangerous climate change. In addition, the Trump administration in the United States has rejected climate science and wants to blow off the Paris Agreement, threatening to undermine the international cooperation that is critical to addressing one of the 21st century’s most urgent and complex global problems.

Other countries (and US sub-national actors), however, have not given up. Policymakers, researchers, and advocacy organizations around the world are pressing forward in the design and implementation of new climate solutions. One of the most promising areas of work is green finance – the effort to ensure that public and private investments in financial assets are both profitable and environment-friendly.        

It is estimated that China's green investment demand during the 13th Five-Year Plan period ranges from 6.6 to 14.5 trillion yuan ($957.57 billion to $2.1 trillion), but China’s national and local governments are only able to provide a fraction of this capital. To meet the need for green financing, China needs policies allow markets to provide clear signals of the environmental opportunities and risks of new products.  

In 2016, the People’s Bank of China, the National Development and Reform Commission, and other five ministries jointly issued the Guiding Opinions on Building a Green Financial System. In June 2017, a State Council executive meeting chaired by Premier Li Keqiang tasked five provincial-level regions – Zhejiang, Jiangxi, Guangdong, Guizhou and Xinjiang – to develop green finance reform and innovation pilot zones.

After slightly more than one year of implementation, the green finance work in the pilot zones has been fruitful. According to China’s central bank, as of the end of March 2018 the balance of green loans in the five pilot zones had reached more than 260 billion yuan ($37 billion), with a 13 percent increase since the initial approval of the pilot zones. This rate of increase is higher than other loans in the pilot zones. As the total volume has expanded, the non-performing rate of green credit assets was only 0.12 percent, 0.94 percent lower than the average non-performing rate in the pilot zones.

Each pilot has been tailoring policies to unique local conditions. For example, Huadu district in Guangzhou, Guangdong province, is highlighting overseas investment cooperation, especially financial cooperation with Hong Kong and Macao and the support of overseas investment in local green finance. While in agricultural province Guizhou, the green financial products and services are focusing on modernizing agriculture, rural water conservancy projects, and sewage treatment.

Pilot areas have established leading groups, and some of these leading groups are headed by provincial leaders. Many pilot zones have established robust policy frameworks consisting of provincial, municipal, district and industry regulations. But it is important to note that green finance involves not only the financial industry and regulatory authorities, but also the departments of environment, development and reform, agriculture, housing construction and transportation. Policy formulation requires information sharing and cooperation among these departments. At present, inter-departmental cooperation and policy coordination mechanisms are not clearly defined, but they are likely to appear in the “implementation rules” that will ultimately be issued in each pilot zone.

Some pilot zones have set up special funds to ensure the effective implementation of pilot work. In addition, they have established talent guarantee mechanisms and subsidies to attract new professionals to careers in the green finance industry. They have also given support to local green financial research institutions or platform institutions to strengthen exchanges and cooperation with other regions.

So far, so good. But what comes next? How can China’s green finance pilots be strengthened in the coming years?

At this stage, pilot areas are mainly focused on developing green credit. Pilot areas have carried out work in green project/enterprise identification, green credit performance evaluation systems, credit statistics systems, and environmental risk stress tests. This has improved key indicators such as the green credit balance.

However, low-carbon considerations do not currently play a prominent role in pilot area work plans. Although some pilot zones have proposed carbon actions -- forest carbon sinks, carbon stock assessment, carbon inventory, carbon emission rights collateral, and carbon funds -- these ideas currently lack the ambitious scale and comprehensiveness of green credit measures. 

With regard to the low-carbon infrastructure, green financial products need to be tailored to different types of infrastructure. The low-carbon infrastructure can be divided into purely public welfare projects, quasi-public welfare projects, and commercial projects, depending on the products and services provided by the infrastructure and the possibility of charging based on the services used.

Pure public welfare projects can be developed by special government funds and financial leasing. Quasi-public welfare projects such as water conservation, power generation facilities, water supply pipelines, waste treatment, and sewage treatment can cover costs with pricing, while government authorities guide the provision of capital. Commercial projects such as power transmission and distribution, and natural gas production and transportation can be mainly supported by private capital. One size does not fit all. 

Certification methods need unified and environmental performance emphasized. Almost all pilot zones have developed certification methods and established green projects/enterprise catalogs, but the standards have not yet been nationally unified. Additionally, public information about regional standards is limited, making it difficult to fully understand the specific conditions of each pilot zone. This diversity of standards is hampering market integration, coordinated development, and international cooperation.

The Financial Industry Standardization System Construction and Development Plan (2016-2020), released in 2017, lists green finance standardization as a key project. Standardization will lead to the adoption of product standards, information disclosure standards, and financial institution green credit ratings. The goal should be to build a complete green financial standards system, including national standards, industry standards, group standards, and corporate standards. From this perspective, the standards system adopted by Huzhou city of Zhejiang stands out as relatively complete, with certification methods and specifications including green projects, green enterprises, and green banks already established.

Pilot zones also lack adequate access to environmental information, and lack of knowledge about environmental protection, energy conservation, and emission reduction. During the 13th Five-Year Plan period, the core objective of China’s environmental governance is good performance in environmental indicators. Green finance pilot zones should incorporate environmental indicators into their performance appraisal systems.  

Green finance is off to a promising start in China. The implementation of a pilot program shows that policymakers are eager to understand the links between the financial sector and low-carbon development. The challenge now is to ensure that these pilots succeed -- and pursue the right goals -- so that China’s leaders feel confident in issuing a robust national-level green finance policy framework in the coming years.   

Li Ang is a senior analyst, and Diego Montero is a strategic advisor of innovative Green Development Program (iGDP), an independent, Beijing-based think tank dedicated to identifying China-specific solutions toward a zero-emission future.

Li Ang
Diego Montero

With the 24th Conference of Parties coming to a close, the world has been looking toward Poland for new signs of hope in the climate change challenge. Saturday’s encouraging 200-country deal notwithstanding, recent reports show that not enough is being done to limit the global temperature increase to 2 degrees centigrade, which experts consider necessary to prevent the worst effects of dangerous climate change. In addition, the Trump administration in the United States has rejected climate science and wants to blow off the Paris Agreement, threatening to undermine the international cooperation that is critical to addressing one of the 21st century’s most urgent and complex global problems.

Other countries (and US sub-national actors), however, have not given up. Policymakers, researchers, and advocacy organizations around the world are pressing forward in the design and implementation of new climate solutions. One of the most promising areas of work is green finance – the effort to ensure that public and private investments in financial assets are both profitable and environment-friendly.        

It is estimated that China's green investment demand during the 13th Five-Year Plan period ranges from 6.6 to 14.5 trillion yuan ($957.57 billion to $2.1 trillion), but China’s national and local governments are only able to provide a fraction of this capital. To meet the need for green financing, China needs policies allow markets to provide clear signals of the environmental opportunities and risks of new products.  

In 2016, the People’s Bank of China, the National Development and Reform Commission, and other five ministries jointly issued the Guiding Opinions on Building a Green Financial System. In June 2017, a State Council executive meeting chaired by Premier Li Keqiang tasked five provincial-level regions – Zhejiang, Jiangxi, Guangdong, Guizhou and Xinjiang – to develop green finance reform and innovation pilot zones.

After slightly more than one year of implementation, the green finance work in the pilot zones has been fruitful. According to China’s central bank, as of the end of March 2018 the balance of green loans in the five pilot zones had reached more than 260 billion yuan ($37 billion), with a 13 percent increase since the initial approval of the pilot zones. This rate of increase is higher than other loans in the pilot zones. As the total volume has expanded, the non-performing rate of green credit assets was only 0.12 percent, 0.94 percent lower than the average non-performing rate in the pilot zones.

Each pilot has been tailoring policies to unique local conditions. For example, Huadu district in Guangzhou, Guangdong province, is highlighting overseas investment cooperation, especially financial cooperation with Hong Kong and Macao and the support of overseas investment in local green finance. While in agricultural province Guizhou, the green financial products and services are focusing on modernizing agriculture, rural water conservancy projects, and sewage treatment.

Pilot areas have established leading groups, and some of these leading groups are headed by provincial leaders. Many pilot zones have established robust policy frameworks consisting of provincial, municipal, district and industry regulations. But it is important to note that green finance involves not only the financial industry and regulatory authorities, but also the departments of environment, development and reform, agriculture, housing construction and transportation. Policy formulation requires information sharing and cooperation among these departments. At present, inter-departmental cooperation and policy coordination mechanisms are not clearly defined, but they are likely to appear in the “implementation rules” that will ultimately be issued in each pilot zone.

Some pilot zones have set up special funds to ensure the effective implementation of pilot work. In addition, they have established talent guarantee mechanisms and subsidies to attract new professionals to careers in the green finance industry. They have also given support to local green financial research institutions or platform institutions to strengthen exchanges and cooperation with other regions.

So far, so good. But what comes next? How can China’s green finance pilots be strengthened in the coming years?

At this stage, pilot areas are mainly focused on developing green credit. Pilot areas have carried out work in green project/enterprise identification, green credit performance evaluation systems, credit statistics systems, and environmental risk stress tests. This has improved key indicators such as the green credit balance.

However, low-carbon considerations do not currently play a prominent role in pilot area work plans. Although some pilot zones have proposed carbon actions -- forest carbon sinks, carbon stock assessment, carbon inventory, carbon emission rights collateral, and carbon funds -- these ideas currently lack the ambitious scale and comprehensiveness of green credit measures. 

With regard to the low-carbon infrastructure, green financial products need to be tailored to different types of infrastructure. The low-carbon infrastructure can be divided into purely public welfare projects, quasi-public welfare projects, and commercial projects, depending on the products and services provided by the infrastructure and the possibility of charging based on the services used.

Pure public welfare projects can be developed by special government funds and financial leasing. Quasi-public welfare projects such as water conservation, power generation facilities, water supply pipelines, waste treatment, and sewage treatment can cover costs with pricing, while government authorities guide the provision of capital. Commercial projects such as power transmission and distribution, and natural gas production and transportation can be mainly supported by private capital. One size does not fit all. 

Certification methods need unified and environmental performance emphasized. Almost all pilot zones have developed certification methods and established green projects/enterprise catalogs, but the standards have not yet been nationally unified. Additionally, public information about regional standards is limited, making it difficult to fully understand the specific conditions of each pilot zone. This diversity of standards is hampering market integration, coordinated development, and international cooperation.

The Financial Industry Standardization System Construction and Development Plan (2016-2020), released in 2017, lists green finance standardization as a key project. Standardization will lead to the adoption of product standards, information disclosure standards, and financial institution green credit ratings. The goal should be to build a complete green financial standards system, including national standards, industry standards, group standards, and corporate standards. From this perspective, the standards system adopted by Huzhou city of Zhejiang stands out as relatively complete, with certification methods and specifications including green projects, green enterprises, and green banks already established.

Pilot zones also lack adequate access to environmental information, and lack of knowledge about environmental protection, energy conservation, and emission reduction. During the 13th Five-Year Plan period, the core objective of China’s environmental governance is good performance in environmental indicators. Green finance pilot zones should incorporate environmental indicators into their performance appraisal systems.  

Green finance is off to a promising start in China. The implementation of a pilot program shows that policymakers are eager to understand the links between the financial sector and low-carbon development. The challenge now is to ensure that these pilots succeed -- and pursue the right goals -- so that China’s leaders feel confident in issuing a robust national-level green finance policy framework in the coming years.   

Li Ang is a senior analyst, and Diego Montero is a strategic advisor of innovative Green Development Program (iGDP), an independent, Beijing-based think tank dedicated to identifying China-specific solutions toward a zero-emission future.