China’s green finance market is at a nascent stage but well poised for rapid growth – supported by the steady development of its green finance system, government policies, and initiatives like the carbon trading market and green finance pilot zones. Moreover, China’s dual carbon strategies – achieving carbon peak by 2030 and carbon neutrality by 2060 – establishes long term appeal for foreign investors assessing green industry opportunities and the viability of green finance products.
After decades of breakneck economic growth, China has now made it a priority to develop a green, low-carbon, and circular economy. In a speech to the United Nations General Assembly in September 2020, Chinese President Xi Jinping announced that the country would peak carbon emissions before 2030 and achieve carbon neutrality before 2060.
Accomplishing these goals require significant social and economic transformation and vast investment. Throughout this transition, the green finance market in China will play a critical role in mobilizing and utilizing the investments to fund China’s green industries. Future economic development in China is also likely to feature expansion of the green finance sector. In this article, we will analyze the prospects of the market, based on China’s rollout of policies and initiatives.
What is green finance?Green finance is defined by the People’s Bank of China (PBOC) as “financial services provided for economic activities that are supportive of environmental improvement, climate change mitigation, and more efficient resource utilization.” Put simply, any structured financial activity – a product or service – that’s been created to encourage the development of green projects, minimize the climate impact of regular projects, or a combination of both, can be regarded as green finance.
Green finance offers market-oriented solutions to address the gap between the supply and demand for sustainable economic transition. More specifically, it mobilizes financial resources to facilitate the use of green technologies and clean energy.
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. Ultimately, green finance enables a smooth transition towards a low-carbon and sustainable future.
According to the China Banking and Insurance Regulatory Commission (CBIRC), key sectors for green credits include green transportation (37%), emerging industries (about 21%), renewable energy (about 20%), and industrial energy saving (about 5%). Of the green bonds issued since 2016, 59% served multiple purposes (such as transportation, energy production and energy saving), while 13% were issued specifically for clean energy projects and 11% were for clean transportation.
How big is China’s green finance market?Though relatively young, China has advanced rapidly in developing its green financial system and markets. The country’s green bond market is now the second largest in the world, after the U.S. As of December 31, 2021, there were 1,643 green bonds in China, with a total balance of RMB 1,727 billion (US$270 billion).
The ongoing global green transition requires substantial funding to support industries. As for China, official data show an outstanding green credit of RMB 15.1 trillion (US$2.37 trillion) at the end of 2021. To achieve the country’s carbon peak by 2030 and carbon neutrality target by 2060, it is estimated that RMB 3-4 trillion (US$ 450-570 billion) of green investment is needed annually.
China's green finance market presents good growth potential. For instance, the green bonds account for less than 1% of China's overall bond market in 2020. Under the dual carbon strategies (the 2030 / 2060 pledges), tremendous investment and financing needs associated with the green economic transition will create huge growth opportunities for the banking and insurance sectors.
The next five years will be a critical period in achieving China’s carbon pledges, and the central bank will continue to lay the ground for the green finance framework by supporting a national carbon accounting system and improving green finance standards. The market size of China’s green finance sector will grow further.
China’s policies on green financeChina’s involvement in green finance started in 2015 when the Party’s Central Committee and the State Council issued the “Integrated Reform Plan for Promoting Ecological Progress” to establish a systematic and complete institutional framework for promoting ecological progress. It was the first time that establishing China's green financial system was clearly put forward in a high-level, official document.
Since then, related development has been evolving fast. China has been speeding up its efforts in developing and standardizing the green finance market to facilitate its transition to high-quality and sustainable development. The 14th Five Year Plan (FYP) for 2021-2025 also outlines the need to accelerate the green transformation of development, build a green development policy system, and vigorously develop green finance.
Below are some key policies concerning the industry:
|September 2016||Guidelines for Establishing the Green Financial System||PBOC||The guidelines encourage more private capital into green sectors and stem investment that might pollute the environment. Supportive policies would offer government interest subsidies via refinancing and professional guarantees and setting up national green development fund, which reduce investors' financing cost.|
|March 2017||Guidelines for Supporting Green Bond Development||China Securities Regulatory Commission||The guidelines call for guarantees, credit enhancement mechanisms, disclosure requirements and third-party verification to establish the green bond market.|
|Opinions on Supporting Green Development of Private Enterprises||MEE and All-China Federation of Industry and Commerce||The opinions propose to establish a national green development fund, encourage local green development funds, improve environmental liability insurance, enhance the corporate environmental credit assessment mechanism, and encourage private enterprises to set up environmental VC fund.|
|Green Investment Guidelines (Trial)||Asset Management Association of China (AMAC)||The guidelines provide a reference framework for environmental information disclosure of listed companies and formulate a self-evaluation system for green investment.|
|Green Financial Performance Evaluation Plan of Financial Institutions||PBOC||The plan strengthens the incentives and management of green finance in the country’s banking sector.|
|Guidelines for Financial Institutions Environmental Information Disclosure (JR/T 0227—2021)||PBOC||The PBOC issued China’s first green finance disclosure standard. The Standard will be managed by the China Financial Standardization Technical Committee (CFSTC).|
|September 2021||Green Bond Endorsed Projects Catalogue (2021 Edition)||PBOC||The catalogue removes some carbon-intensive activities related to coal, coal-fired power, and oil and gas exploration equipment, signifying a unification of domestic standards for green bonds.|
China’s green initiatives to facilitate the development of green financeChina has also made some progress in launching green-related initiatives and programs, which will assist expansion of the green finance market and ease trading practices for businesses engaged in the sector.
Carbon trading marketLaunched on July 16, 2021, the carbon trading market aims to decrease emissions by offering financial rewards and punishments in the form of credits, allowances, or quotas that can be purchased and sold in a marketplace. Under the carbon trading scheme, each company is allowed to emit a certain amount of CO2 emissions each year.
At launch, the carbon market covered over 2,225 companies that operate coal and gas, most of which are state-owned enterprises (SOEs). Together, these companies are responsible for about half of China’s energy-related emissions. As of December 31, the carbon market reported a total turnover of RMB 7.66 billion (US$1.21 billion) and a trading volume of 179 million tons. The average carbon quota price at the market was RMB 42.85 (US$ 6.43) per ton, with a compliance rate of 99.5%.
Currently, power generation is the only participating industry in the carbon market. Regulators have long planned to add other industries, namely iron and steel, nonferrous metal, and building materials. Nonetheless, the MEE has postponed [May 2022] the release of the latest batch of permits due to fraud issues in the emissions data submission.
Green Finance Pilot ZonesChina's green finance pilot zones are part of the country’s efforts to build a robust green financial system. The first set of green finance pilot zones were launched in Zhejiang, Jiangxi, Guangdong, Guizhou, and Xinjiang in June 2017. Since then, China has added Lanzhou to the list in December 2019. The key goals for the pilot zones are to enhance the role of green finance in domestic financial institutions, promote green credit / green insurance / green bonds, explore setting up markets for environmental rights, and developing green finance risk control mechanisms.
In March 2020, Huzhou was named China's first pilot city for the coordinated development of green buildings and green finance. In addition, further expansion and development of regional green finance pilot zones like the Greater Bay Area and the Yangtze River Delta offer a glimpse of the future for green finance pilot zones.
Carbon Emission Reduction Facility (CERF)In November 2021, the PBOC introduced a carbon-emission reduction facility (CERF) to enable commercial and retail banks to borrow 60% of qualifying green loans from the central bank at an interest rate of 1.75% with a one-year maturity, with an option to rollover twice. Considering that the normal PBOC loan prime rate is closer to 4%, the carbon reduction facility is a significant benefit to the green economy.
The PBOC has issued the first batch of funds worth RMB 85.5 billion (US$13.42 billion) via the facility in support of financial institutions' issuances of carbon emissions reduction loans totaling RMB 142.5 billion (US$ 21.4 billion). It is estimated that the loans will help more than 2,000 companies to cut carbon emissions by about 28.76 million metric tons, according to PBOC.
What are the opportunities for foreign investors?China has also been pushing for harmonization of green taxonomy both at home and abroad to enhance the quality of green bond evaluation and certification, and to develop green bond instruments in a regulated manner. In November 2021, China and the EU unveiled their Common Ground Taxonomy – Climate Change Mitigation. It provides a framework to compare and identify commonalities and differences between some features of the two taxonomies. The document also reveals China’s enthusiasm to participate in the international marketplace. Foreign investments could be a strong boost to China’s portfolio to demonstrate the attractiveness of its green finance market.
In achieving the green transition, China cannot afford to act on its own. As a significant amount of capital investments (estimated US$450-570 billion) is required to achieve the country’s green targets, China is opening its market to foreign investment and expertise to match international standards.
To this end, it has granted unlimited access to qualified foreign institutional investors to the Chinese securities market since June 2020, positioning the country's green bond market – which only accounted for less than 1% in the overall bond market in 2020 – for further expansion. Following the country’s effort to cap use of coal, strategic investment opportunities lie in the green infrastructure and clean energy sectors (such as the development of wind and solar power generation), where green finance is expected to play a bigger role in the near future.
Looking forwardTo facilitate green finance, China has combined top-down and bottom-up approaches to ensure that the government plays a guiding role while the market plays a decisive role in resource allocation.
The green finance sector has already played an important role in helping the country control pollution and ecological damage through environmental information disclosure requirements, green product innovation, and other green incentive mechanisms. Nevertheless, in the process of China’s green transition, there are still many areas in need of improvement, such as the establishment of a unified green bond disclosure system. Business engaging in China’s green finance market should keep a close eye on such developments.
Yet, China has already demonstrated great potential in green finance, with its vast market size and encouraging policies. Strong determination from the top level to ensure China’s green transition also serves as a fresh boost for the green finance market and will grant more opportunities for businesses to leverage sustainable development.