The Chinese government strongly promotes “green finance,” which the People’s Bank of
China defines as “financial services provided for economic activities that are supportive of environmental improvement, climate change mitigation and more efficient resource utilization.”1In September 2016, the People’s Bank of China (PBoC) promulgated Guidelines for Establishing the Green Financial System—the first time any nation’s central bank had issued such guidelines. As host of the G20 in 2016, the Chinese government launched a Green Finance Study Group and included the topic of green finance in G20 communiques for the first time. A recent report found that China “arguably has been the most proactive country in the world in pursuing a coordinated and comprehensive approach to greening its financial system.”2
China’s green finance policies promote investment in a wide range of assets including renewable energy projects, water treatment plants, recycling facilities and mass transit. In 2017, China’s green finance policies helped mobilize hundreds of billions of RMB (tens of billions of dollars) for qualifying projects.3
PBoC’s Green Bond Endorsed Project Catalogue includes “clean utilization of coal” as an eligible project category. This has created controversy. International standards for green bond investments do not include coal projects among the eligible categories.4
This chapter summarizes and discusses China’s green finance policies.
The capital required for pollution control and climate mitigation in China is enormous. PBoC estimates the need at RMB 2–4 trillion (roughly $310–$620 billion) per year. To help mobilize that capital, PBOC issued its Guidelines for Establishing the Green Financial System in 2016. In its opening paragraphs, the Guidelines states,
“The establishment of the green financial system requires the internalization of environmental externalities by appropriate incentives and restraints with the support of policies, laws and regulations in the financial, fiscal and environmental areas. It also requires more innovations by financial institutions and financial markets in developing new financial instruments and services, to address the problems of maturity mismatch, asymmetric information and lack of analytical tools for green investment.” 5
The Guidelines call for policies and actions in seven areas:
green development funds,
markets for pollution control rights,
local government initiatives, and
- international cooperation.
Many provincial and local governments have also issued green finance guidance documents. This includes Beijing, Shanghai, Guangdong, Inner Mongolia and Gansu. At least five pilot green finance zones have been set up, where financial institutions receive a variety of incentives to fund clean and low-carbon industries.6
Perhaps the greatest amount of green finance activity in China has been in the area of green bonds. In 2017, RMB 248.6 billion (roughly $37 billion) of green bonds were issued in China (the second highest total of any country, behind only the United States). This was an increase of 4.5% over green bond issuances in 2016, despite a significant drop in corporate bond issuances overall.7
In 2017, roughly 30% of China’s green bond proceeds went to solar and wind projects, and roughly 22% went to low-carbon transport. Roughly 23% of China’s green bond proceeds went to projects that did not meet international green bond standards. This included large hydro projects as well as larger, more efficient coal plants replacing smaller, less efficient ones.8
Policies concerning green bonds are set forth in PBoC’s Guidelines for Establishing the Green Financial System (September 2016), NDRC’s Guidelines for Issuing Green Bonds (December 2015) and the China Securities Regulatory Commission’s Guidelines for Supporting Green Bond Development (March 2017). These documents call for guarantees, credit enhancement mechanisms, disclosure requirements and third-party verification. They call on provincial and local governments, as well as rating agencies, to participate actively in establishing a green bond market.9
Commercial banks issued more than half the green bonds in China in the past two years. Corporations (including China Three Gorges and Century Concord Wind) issued roughly 20%. Government banks (including China Development Bank and the Agricultural Bank of China) have also been issuers. In 2017, some local and regional banks issued their first green bonds.10
In 2016, roughly 2% of total Chinese bond issuances were green bonds. That percentage rose in 2017, as total bond issuances fell and green bond volumes grew slightly.11
Green credit is another important part of China’s green finance strategies. (The volume of bank lending in China far exceeds bond issuances.) In 2017, roughly 9% of outstanding loans in China were for green projects, including energy efficiency and emissions reduction. PBoC’s Guidelines call for “vigorously develop[ing]” green credit with tools such as central bank relending, guarantee mechanisms and securitization. In March 2018, a team from PBoC visited London for talks on ways to securitize green loans for sale to international investors.12
China Development Bank’s website states that “CDB is one of the earliest advocates of green credit practice in China, which aims to support environmental protection and energy conservation through its designated loans and investments.”13
Relationship to Climate Goals
Climate mitigation is an important priority within China’s green finance policies. PBoC’s Guidelines for Establishing the Green Financial System and other green finance policy documents specifically highlight the importance of climate mitigation and low-carbon development. In 2017, China’s green finance policies helped channel tens of billions of dollars into renewable energy and low-carbon transport projects.14
China’s policies with respect to the use of green bond proceeds for coal-fired power plants have created controversy. Those policies allow green bond proceeds to be used for coal-fired power plants in some circumstances, such as when larger, more efficient coal-fired power plants replace smaller, less efficient ones. Some see this as consistent with climate mitigation goals, since carbon emissions are reduced in the short term. Others see this as inconsistent with climate mitigation goals, since larger coal-fired power plants tend to lock in carbon emissions for the medium and long term, and less-polluting alternatives may be available.15
Work is underway to harmonize Chinese and international green bonds standards. (Leading international standards prohibit the use of green bond proceeds for coal-fired power plants in all circumstances.)16
Meeting the climate goals set forth in the Paris Agreement will require trillions of dollars of capital over several decades. China’s green finance polices are intended, in part, to help meet that need. Those policies are relatively new and will continue to evolve in the years ahead. How they do so will could play an important role in the world’s response to climate change.
1.People’s Bank of China, “Guidelines for Establishing the Green Financial System” (September 2, 2016) at 1(1), http://www.pbc.gov.cn/english/130721/3133045/index.html
2. Sean Gilbert and Lihuan Zhou, “The Knowns and Unknowns of China’s Green Finance,” The New Climate Economy (March 2017) at p.1, http://newclimateeconomy.report/workingpapers/wp-content/uploads/sites/5/2017/03/NCE2017_ChinaGreenFinance_corrected.pdf. See Nick Robins, “2017: What next for green finance?,” China Dialogue (January 24, 2017), https://www.chinadialogue.net/article/show/single/en/9571-2-17-What-next-for-green-finance-
3. Peiyuan Guo and Agnie Liu et al., “Study of China’s Local Government Policy Instruments for Green Bonds,” Climate Bonds Initiative (April 2017) at pp.1,6, https://www.climatebonds.net/files/reports/chinalocalgovt_02_13.04_final_a4.pdf; Weihui Dai, Sean Kidney and Beate Sonerud, “Roadmap for China: Green Bond Guidelines for the Next Stage of Market Growth,” Climate Bonds Initiative (April 2016) at p.6, https://www.climatebonds.net/files/files/CBI-IISD-Paper1-Final-01C.pdf.
4. Dai, Kidney and Sonerud, “Roadmap for China,” (April, 2016), appendix 3 at p.23; ICMA Group, “The Green Bond Principles” (June 2017), https://www.icmagroup.org/assets/documents/Regulatory/Green-Bonds/GreenBondsBrochure- JUNE2017.pdf; Climate Bonds Initiative, “Climate Bonds Standards” (undated, accessed June 7, 2018), https://www.climatebonds.net/files/files/Climate%20Bonds%20Standard%20v2_0%20-%202Dec2015%20(1).pdf.
5. People’s Bank of China, “Guidelines for Establishing the Green Financial System” (September 9, 2016), http://www.pbc.gov.cn/english/130721/3133045/index.html
6. Guo and Liu et al., “Study of China’s Local Government Policy Instruments,” (April 2017) at pp.7–8; Reuters, “China launches five ‘green finance’ pilot zones” (June 26 2017), https://www.reuters.com/article/us-china- environment-finance-idUSKBN19I060.
7. Alan Xiangrui Meng and Ivy Lau et al., “China Green Bond Market 2017,” Climate Bonds Initiative (February 14, 2017), https://www.climatebonds.net/files/reports/china_annual_report_2017_en_final_14_02_2018.pdf; Andrew Whiley; “2017 GB Issuance: USD155.5bn: New Record!...,” Climate Bonds Initiative (January 10, 2018), https://www.climatebonds.net/2018/01/2017-gb-issuance-usd1555bn-new-record-all-2017-numbers-count-our-green-bond-highlights; See also International Institute of Green Finance—CUFE, “中国绿色证券市场2017年度总结” (January 8, 2018), http://iigf.cufe.edu.cn/article/content.html?id=360; Climate Bonds Initiative, “Green Bond Highlights 2017” (January 2018) at p.2, f.
8. Meng and Lau et al., “China Green Bond Market 2017,” (February 14, 2017) at pp.4,6.
9. See generally Ma Jun, “Improve the Environmental Information Disclosure System,” China Finance Journal (March 17, 2016), http://www.aisixiang.com/data/98002.html.
10. Meng and Lau et al., “China Green Bond Market 2017,” (February 14, 2017) at p.5.
11. Guo and Liu et al., “Study of China’s Local Government Policy Instruments,” (April 2017) at p.3.
12. Maggie Zhang, “Green financing to be included in Chinese banks’ performance ratings,” South China Morning Post (April 7, 2017), http://www.scmp.com/business/companies/article/2085821/green-financing-be-included-chinese- banks-performance-ratings; Sean Gilbert and Lihuan Zhou, “The Knowns and Unknowns of China’s Green Finance,” The New Climate Economy (March 2017) at p.11, http://newclimateeconomy.report/workingpapers/wpcontent/uploads/sites/5/2017/03/NCE2017_ChinaGreenFinance_corrected.pdf; Cecily Liu, “China looks to bundle its green loans for sale to investors,” China Daily (March 21, 2018), http://www.chinadaily.com.cn/a/201803/21/WS5ab13aa6a3106e7dcc143f2f.html.
13. China Development Bank NEWS, “Power plant just part of bank’s ‘green credit’s plan” (July 26, 2016), http://www.cdb.com.cn/English/xwzx_715/khdt/201609/t20160906_3628.html.
14. Meng and Lau et al., “China Green Bond Market 2017,” (February 14, 2017) at p.6.
15. See, e.g., Melanie Hart, Pete Ogden and Kelly Sims Gallagher, “Green Finance: The Next
Frontier for U.S.–China Climate Cooperation,” Center for American Progress (June 13,
2016), https://www.americanprogress.org/issues/security/reports/2016/06/13/139276/ green%ADfinance%ADthe%ADnext%ADfrontier%ADfor%ADu%ADs%ADchina%ADclimate%ADcooperation/6/13.
16. European Investment Bank—Green Finance Committee of China Society for Finance and Banking, “The need for a common language in Green Finance” (November 11, 2017), http://www.eib.org/attachments/press/white-paper-green-finance-common-language-eib-and-green-finance-committee.pdf; Yao Wang and Mathias Lund Larsen, “International investors eye China’s green bonds,” China Dialogue (February 7, 2018), https://www.chinadialogue.net/article/show/single/en/10387-International-investors-eye-China-s-green-bonds; FTSE, “How far and how fast can China build its green bond market?” (February 9, 2018), http://www.ftseglobalmarkets.com/news/how-far- and-how-fast-can-china-build-its-green-bond-market.html