Taking stock of China’s approach to sustainable finance
Jan 24, 2020
As the world’s top polluting country embarks on a green revolution, its bold environmental commitments are placing it on the forefront of climate action. Already the largest producer and exporter of renewable technologies including solar panels, wind turbines and electric vehicles, China is sprinting to lead on sustainable finance—but on its own terms. In only 5 years, China has created the world’s largest carbon trading exchange, accelerated issuance of green bonds, and spurred innovative mechanisms to structure its own sustainable finance model, by launching national and local policies aimed at developing a green financial system. However, there are still many gaps to fill in China’s green schemes; especially when it comes to attracting international investors, getting foreign governments on board with their plans, and alleviating global concerns with its Belt-Road Initiative (BRI).
In its ambitious efforts to reverse the environmental destruction caused by decades of unbridled economic growth, China pushed forward an official mandate in 2015 to include a green finance system into its five-year strategic plan. As such, China has become the first in the world to release a broad framework for green finance policy. By producing a national roadmap for reform involving financial and environmental stakeholders in China’s governance systems, the central government has been successful in directing large flows of public and private capital into sustainable infrastructure projects. For example, in 2016, China became the world’s largest issuer of green bonds, issuing 40% of global green bonds worth $32.4 billion. Similarly, in 2017, China announced the launch of its carbon trading market, which aims to cover 8 billion tons of CO2 emissions—making it the biggest in the world. The carbon trading market has an initial focus on the coal-fired power industry, with the first trade expected in 2020. To prepare for the national launch, policymakers developed pilot trading platforms across seven regions (including: Beijing, Guangdong, Shanghai, Hubei, Chongqing, Shenzhen and Tianjin), which guided the design and roll out of the national market. The central government also set up five additional pilot zones to promote green finance on the local level by experimenting with different mechanisms and models. In Zhejiang, for example, the city of Huzhou pioneered a tech platform for green finance that, along with other credit policy incentives, increased its green credit volume 9% higher than the national average of 13%.
Despite the progress, however, observers identify significant hurdles that hold back China’s greenhouse gas (GHG) emissions reductions. A major point of contention lies in China’s varying standards of green finance. According to Climate Bonds Initiative, only $31.2 billion of the $42.8 billion of Chinese green bonds from last year met global guidelines for climate-friendly investing – as most of the international community do not view “clean coal” as a sustainable investment. This lack of harmonization will hinder foreign direct investments (FDI) into China, especially as many international financiers are reducing their coal portfolio.
China also lacks a national consensus in defining green projects. As bureaus and departments on varying levels of government hold different standards for categories such as sustainable agriculture and green technology, the effort to mainstream the green finance movement in China is hindered. Until China’s financial regulatory bodies release further uniformed measures, it will be difficult and more costly to identify green projects.
Furthermore, countries like the U.S. are deeply concerned with China’s involvement in financing fossil fuel projects under BRI, namely coal. So far, most Chinese funding for BRI infrastructure have gone towards fossil fuel. From 2014 to 2017, China Development Bank and China Eximbank invested $37 billion in fossil fuel projects overseas, totaling 61% of BRI energy projects financed exclusively by the two largest Chinese lending institutions. And of the $25 billion in syndicated BRI loans from Chinese banks in the same period, 54% ($14 billion) was used to finance fossil fuel projects including coal, oil, and gas, while only 30% ($9.1 billion) was used for renewable energy. With another $14.6 billion proposed for coal projects, China’s financing activity for coal-fired capacity overseas continues to raise concerns over its green finance agenda.
China has made a valiant head start in the move towards greening its financial system. However, tensions between China’s green finance initiatives and its foreign loan portfolio present key challenges to mobilizing foreign investments and global support for its sustainability efforts. To continue leading in sustainable achievements, a standardized, official, classification system for green projects is needed along with harmonizing foreign energy investments with domestic policies. Establishing such rules and regulations to enforce environmental criteria will go a long way in strengthening China’s new green finance mechanisms and attracting international investors.
About the author
Beverly Chan
Former Associate Research Fellow
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