The response to climate change is driving a global transformation that has the potential to reshape geopolitics as countries around the world reorient their economies toward low-carbon and sustainable development. At the forefront of this shift is China, which is positioning itself as a leader on climate action as the U.S. federal government retreats, and is turning to the green finance market to fund its environment-friendly industries, achieve sustainable growth, and advance social well-being.
China has become a major player in the global green finance market, promoting environmentally-friendly policies and investing strategically in clean technologies. The country is also not only attempting to improve trade links through the ambitious Belt & Road Initiative, but also creating new green infrastructure investment opportunities in its development, and using the green finance market to court favor and expand its influence.
In our view, however, China still has a long way to go to transform its massive economy from being a major polluter to a green power. These challenges are compounded by the widespread air, water, and soil pollution that the country continues to face, and given its position as the largest emitter of greenhouse glasses globally, the biggest coal consumer, and second-largest user of oil. That said, we expect China to reap considerable benefits from its emphasis on green development, both at home and abroad, and its role in the green finance market and the global stage is likely to become more prominent as it executes its green strategy.
"Beautiful China": More Than Political Rhetoric
Chinese leaders have ramped up their emphasis on environmental issues as national priorities, elevating pollution control to make it one of the top three major battles that the nation must fight, alongside financial risks and poverty.
Along those lines, China has been making a major pivot toward a low-carbon and environmentally friendly development model encapsulated in legislative efforts, Five-Year plans, and in blueprints at the provincial and local levels. To tackle pollution, China has escalated its efforts to create a comprehensive suite of laws and strict standards to remedy air and water pollution, along with new legislation on soil pollution prevention and control. Its climate agenda, outlined in its most recent Five-Year plan, includes ambitious targets to reduce absolute and relative carbon intensity and a peak in its carbon dioxide emissions by 2030. The country has also introduced what is likely to be one of the largest carbon emissions trading schemes and is targeting 675 gigawatts (GW) of renewable capacity installed by 2020.
The Chinese government has recognized that green finance is a powerful instrument to fund the county's next stage of development through its top-down government guided approach. President Xi Jinping has expressed China's commitment to build an ecological civilization and explicitly called on green finance to buttress its green agenda. The central bank, the People's Bank of China (PBoC) has also articulated this sentiment in its Guidelines for Establishing the Green Financial System, in which it outlines its support for a number of forms of green financing. Various financial regulatory authorities have further encouraged this trend by providing guidance and improving transparency to market participants on green bond issuance and climate financing. China also launched a green finance reform in June 2017 and green finance innovation pilot zones in five provinces that each have specific initiatives or targets for promoting green financing. In our view, these are important signals from the top-down decision-making bodies that will support further growth of the Chinese green finance market.
A Bank-Dominated Green Finance System
We expect banks will continue to play an overwhelming role in China's green finance system under the helm of the PBoC. Apart from bank loans, green finance in China also comprises bonds, equities, insurance, and funds. By the end of 2017, the total balance of green loans extended by 21 major Chinese banks was over Chinese renminbi (RMB) 8 trillion (nearly 10% of total loan book), representing more than 90% of total green financing in the country.
The PBoC spearheads the setting of standards and regulations for green finance in China, and represents the country's top-down approach to promoting green bonds, especially in the early stages of development. In December 2015, the PBoC published the Chinese Green Financial Bond Guidelines and Catalogue to guide the issuance of green bonds by Chinese banks. Shortly after, the National Development and Reform Commission also issued Guidelines for the Issue of Green Bonds by corporates. Both guidelines stimulated the take-off of China's green bond market in 2016 and made the nation the largest issuer that year.
Supportive government policies have further enabled China to reach nearly the top of the league table in 2017 as the second-largest issuer of green bonds, representing 15% of new issuance globally with about $23 billion of internationally aligned new issuance (US$37.1 billion total issuance). This put China behind the U.S., which issued $42.4 billion, closely followed by France, with $22 billion. China has already issued $13 billion in the first half of 2018, a 14% increase year on year (data from the Climate Bonds Initiative).