Rub of the Green

Aboom in green fi nance has been the high- light of China’s financial sector in recent years, with the emergence of a variety of innovative credit products. However, China’s green fi nancial system still needs its incentives and regulatory frameworks improved.

Green fi nance refers to fi nancial services that fund economic activities supportive of environmental improvement, climate change mitigation and more efficient resource utilization, according to a joint document released by the People’s Bank of China (PBC), the central bank, and several other ministerial departments.

International leader

Chen Yulu, PBC Vice Governor, said China’s green fi nance is becoming a world leader, dem- onstrating accelerated development in an all- round way.

According to Chen, the market’s top- level design and primary institutional arrangements are both improving. In 2016, the PBC and other six ministries and com- missions jointly issued guidelines on building the green fi nancial system, which defi nes the scope of green projects and the standards for green fi nance.

China’s green finance market grew steadily last year, with its basic systems upgraded and its support to the green econ- omy enhanced.

In June 2017, the State Council an- nounced the establishment of eight pilot zones for green fi nance reform and innova- tion in the four provinces of Guangdong, Zhejiang, Guizhou and Jiangxi as well as Xinjiang Uygur Autonomous Region, to ex- plore models which can then be replicated in other regions. In the meantime, tools for green investment and financing have become increasingly diversified, and the financial environment further optimized. Initiatives raised by the G20 Green Finance Study Group have been incorporated into the G20 Leaders’ Communiqué at the 2016 Hangzhou Summit of the world’s largest ad- vanced and emerging economies, which will rapidly increase global recognition of green fi nance.

Studies show that green investment focusing on climate and the environment usually have higher returns but lower fluc- tuations, and among the hundreds of green projects in recent years, most are profi table, according to Ma Jun, Director of the Center for Finance and Development at Tsinghua University and Chairman of the Green Finance Committee of the China Society for Finance and Banking.

According to Ma, more than 260 green funds have been set up, and innovations in green financial products, such as green asset-backed securities (ABS) and green ex- change trade funds, are booming in recent years.

Lu Zhengwei, chief economist with China’s Industrial Bank Co. Ltd., believes ecological progress and green development will become trends in China’s economic and social transformation over the next fi ve years. Battles against pollution are underway in several parts of the country, and the pilot zones for the innovation and reform of green finance will explore the most suitable path for green development in the future, he said.

“As the national strategy advances, green industries will have more promising prospects, and financial innovations and the guidance of the regulatory authority will also encourage financial institutions to increase investment in the green sectors,” said Zeng Gang, Director of the Banking Research Institute at the National Institution for Finance and Development (NIFD).

Scale and innovation

“As ecological progress enters a new era, the banking sector is facing great challenges,” said Li Yang, NIFD Chairman.

First, financial institutions must change their business concepts. Commercial banks regard profi t as their ultimate goal, but in the future they must change this idea and take into account more non-economic factors.

Second, the business models of the banking sector must be reformed. Currently commercial banks primarily rely on favor- able taxation policies or subsidies from the government to provide green credit. This is necessary at this early stage, but commercial banks must explore sustainable business models for the future. The banking sector must cooperate with related government departments to establish green standards for granting credit while exploring new busi- nesses such as carbon trading.

“The banking sector has realized fast growth in the scale of green financing, and as the basic systems and standards are im- proved, the sector will serve as the support for establishing the green fi nancial system,” Lu said. He believes that in the future the banking sector will accelerate the innovation of green financial products, such as green ABS, a combination of green credit and fi- nancial leasing, green investment and credit, mortgages and environmental property rights.

According to Lu, as the scale of green fi nancing grows, green assets are being rap- idly accumulated. The development of green investment businesses such as green funds, assets administration and property manage- ment is important to increase the liquidity of green assets and improve the overall ap- peal of the market. Against the backdrop of advancing mixed banking operations, the fi nancial institutions’ efforts to promote the development of green fi nance and establish an integral array of green fi nancial products will significantly facilitate their business transformation. Banking institutions must set up and improve their internal manage- ment systems for green finance, establish appropriate business procedures, strengthen market studies on green fi nance and effec- tively identify and evaluate environmental risks.

Zeng said the banking sector’s backup to green fi nance involves innovation in both products and business management. For example, some commercial banks have set up new departments or business units for environmental fi nance.

Policy support

Chen believes that in the future the govern- ment must focus on making green finance more sustainable so as to better serve the country’s development goals. Key measures include better deploying the role of incentives such as macro prudential assessment and enhancing the appeal of the green fi nance mar- ket. More efforts should also be made to build uniform and executable green project standards and green fi nance standards, enhance China’s international leadership in green finance and intensify innovations of green fi nancial products and service systems in order to better satisfy the diversifi ed investment and fi nancing demands.

Lu said if government policies can bet- ter combine “green” and “fi nance,” then the market-driven development of green fi nance will be accelerated considerably. He sug- gested the government reduce the required reserve ratio for commercial banks specifi- cally for green fi nance businesses.

At present, although many green proj- ects are profitable, they are still unable to source enough funds, and the rate of return for most green projects is not high due to ex- ternal reasons. To solve these problems, the government must provide more incentives, such as discounted and guaranteed loans.

Zeng believes green finance should be a multilevel and diversified system, which includes not only the support of bank credit, but also direct fi nancing, equity investment and the trading of carbon emission rights. Since there may be fi nancial derivatives and the participation of funds from the insurance sector in the future, green finance needs more guidance and incentives from the regulatory authority.