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Fueling Healthier Development
Green finance has emerged as a driver for China's pursuit of sustainable growth
By Deng Yaqing | NO. 19 MAY 12, 2016

Since last October, the main public transit operator in north China's city of Tianjin, the Tianjin Public Transportation Group, has purchased 500 electric buses worth 1 billion yuan ($154.5 million). The deal was partially funded by national fiscal subsidies worth 250 million yuan ($38.63 million) and long-term, low-cost financing totaling 469 million yuan ($72.46 million), which was jointly provided by the Shanghai Pudong Development Bank (SPDB) and the SPDB Financial Leasing Co. Ltd.

The preferential lending came from the SPDB's newly increased capital pool dedicated to supporting clean energy and environmental protection sectors. In January, the bank issued 20 billion yuan ($3.09 billion) worth of green bonds, which pay an annual interest of 2.95 percent during their three-year term. The bonds were oversubscribed, resulting in an estimated 20.4 billion yuan ($3.15 billion) worth of unmet demand. By the end of March, over 60 percent of the collected funds had been invested in eligible projects, including the electric bus purchase deal in Tianjin.

Since green bonds are issued with lower interest rates than their standard counterparts, corporations can secure loans for environment-friendly projects at preferential rates, which greatly reduces their financing costs, said Zhang Yong, President of SPDB's Tianjin Branch. A special examination and approval track has been opened to save time and improve capital usage efficiency for clients who apply for green project loans, he added.

In international markets, green bonds are a major financing instrument within the area of green finance. Ma Jun, chief economist of the Research Bureau of the People's Bank of China (PBOC), China's central bank, believes green bonds will not only provide financial institutions and qualified enterprises with a brand new and low-cost financing channel, they will also alleviate the liquidity pressure banks face due to the mismatch between deposits and lending while increasing their capacity to provide mid- and long-term green credit.

Though China started tapping into green bonds relatively late, the country has cut an outstanding figure in the sector after its interbank market was launched last December. The PBOC and the National Development and Reform Commission have jointly promulgated supportive policies for the issuance of green bonds.

"In the first quarter, a total of $8 billion of green bonds was issued in China, accounting for almost half of the global issue volume during the same period," said Zhou Xiaochuan, PBOC Governor, at an international forum in Washington, D.C. on April 16. He added that over the next few years, China will establish green investment funds, require listed companies to publish environmental information and introduce green interest rate subsidies.

In the world's largest developing nation, huge potential still awaits exploration. According to a study by the Finance Research Institute under the Development Research Center of the State Council and the International Institute for Sustainable Development, green development in China needs investment totaling 17.4 trillion yuan ($2.69 trillion) from 2015 to 2020, which equates to 2.9 trillion yuan ($448.05 billion) annually. Assuming that 20 percent of this huge investment will come from bond markets and that 50 percent of the bonds issued will be classified as green, green bonds worth 290 billion yuan ($44.80 billion) will need to be issued annually.

New approaches

Despite the great achievements China has made since reform and opening up, severe ecological problems have piled up and begun to hinder its development. It has become a national strategy to intensify environmental protection and ecological management, said Chen Yulu, PBOC Vice Governor, at a green finance-themed forum in Beijing in April. He revealed that the PBOC and other parties concerned will team up to accelerate the building of China's green financial system.

According to international practice, green finance encompasses two main elements; financial products and services such as credit, securities and insurance that support enterprises engaged in environmental protection, and mechanisms and systems that seek to restrict greenhouse gas emissions by leveraging the power of financial markets and tools such as the carbon trading market and carbon-finance-related products and services.

As China is still in the process of industrialization, it now faces unprecedented pressures connected with economic transformation, environmental protection and resources. This has created an opportunity for the fast development of green finance.

On the one hand, green finance continues to diversify. On top of environmental protection and energy conservation financing, carbon-related financial products, an environmental protection industry index and environmental risk management, the nascent bond market has taken shape and experienced robust expansion since the beginning of this year.

On the other hand, the top-level design of green finance has gradually improved. After more than one year of preparation, the State Council, China's cabinet, identified for the first time in September 2015 a strategy to build a green financial system.

Although the volume of green bonds issued this year has surpassed 50 billion yuan ($7.73 billion), more policy guidance and support is needed to foster the sustainable development of the green financial market, according to market observers.

"After several rounds of reorganization, China's green industry has taken on the trend of rapid and stable development. The promotion and utilization of matured new technologies and products needs massive financial support," said Shi Chenyu, a financial commentator. "However, our green financial system is still in its infancy. There is a lot of work to be done in terms of devising policies and regulations, developing products, and promoting the concept of green finance," he added.

China's cooperation with foreign countries on green finance has also progressed. As the host of the 2016 G20 Summit, China has called on the world's major economies to set up a joint research group, which is expected to study in-depth the best practices, policies and measures that can bring about green transformation as well as the major barriers that currently stand in the way.

Problems and challenges

According to the 2014 Annual Report on China's Low-Carbon Financial Development, published at the Second Shenzhen International Low-Carbon City Forum in June 2014, green credit provided by the top 18 Chinese commercial banks accounted for just 1.81 percent of their total assets. Moreover, the value of green bonds amounted to less than 1 trillion yuan ($154.5 billion), a small fraction of China's 50-trillion-yuan ($7.73 trillion) bond market.

"As a fledgling industry, the development of green finance still faces several problems," Shi said.

Currently, green credit in China is concentrated in government-led environmental protection projects, and small and medium-sized enterprises have only a minor share. Moreover, as financing products are primarily geared toward large enterprises as well as projects for clean energy development, energy conservation and emissions reduction, individuals and families can rarely participate in green finance. Consequently, it's difficult for those financial products to permeate through all social sectors, according to Shi.

Worse still, the positive effects of green projects have not been fully appreciated by the whole of society. While many people benefit from clean energy projects, for instance, not all of them pay for those benefits. As a result, the earnings generated by such projects usually fall short of market expectations. In addition, since the average debt duration is a mere six months, banks have difficulty providing large loans for long-term green projects, Ma said.

Beyond that, a lack of synergy exists. Though the country has endorsed a strategy that integrates promoting environmental protection and energy conservation with advancing economic transformation and ecological progress, a supporting environment encompassing awareness-raising, legal statutes and information sharing has yet to be put in place, Shi said.

Investors' inadequate ability to conduct green analysis is another obstacle hindering the development of green finance. The lack of access to accurate information means investors have no idea about which enterprises are truly environment-friendly and which ones come up short. Thus, people who wish to invest in projects with a positive environmental impact find that making suitable investment choices is difficult. To overcome this issue, Ma calls for efforts to establish third-party certification and green ratings and to carry out environmental stress tests.

Copyedited by Chris Surtees

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