Daniel Slotta
Research expert covering Greater China
Green finance in China - statistics & facts
Green finance is a rapidly growing industry in China, reflecting the country's commitment to reducing its carbon footprint and promoting sustainable development. After more than two decades of double-digit economic growth, Beijing witnessed the era of high growth approaching its end. Furthermore, as the world's largest carbon emitter and a major contributor to climate change, China has recognized the need to shift towards a low-carbon economy and has changed its policy objectives.
For the implementation of economic policies, Beijing relies on a proven method: utilizing the state sector. Since state-owned enterprises are under the control of the government and are not subject to market economic rules in the same way as ordinary companies, they are the ideal tool to introduce sustainable policies into the financial market. Data shows local and central state-owned enterprises are the main drivers behind the issuance of new green bonds. After the green financial market has reached a certain maturity, the strategy is that private enterprises will follow.
Besides these shortcomings, with an inadequate regulatory framework, green bonds have the potential to actually have adverse effects on the green transformation of the economy. For instance, state-owned energy companies produce a lot of energy from coal but are also big issuers of green bonds. However, because of transparency issues and lax rules on the use of the proceeds, there is a clear risk that funds can be used to maintain fossil energy infrastructure or at worst expand it. Ultimately whether the weaknesses in the current system are growing pains or genuine weaknesses on the behalf of regulators, the governance of green finance products will determine the future of the industry.
Making finance green
The construction of a green finance system aligns with China’s broader political strategy as the leadership under the guidance of Xi Jinping calls for high-quality growth. Therefore, the central government has codified the importance of green and sustainable development in policy papers and Five-Year Plans. Under this top-down approach, China saw the establishment of a green bond, green credit, and green fund market along with the development of unified standards and information disclosure systems.For the implementation of economic policies, Beijing relies on a proven method: utilizing the state sector. Since state-owned enterprises are under the control of the government and are not subject to market economic rules in the same way as ordinary companies, they are the ideal tool to introduce sustainable policies into the financial market. Data shows local and central state-owned enterprises are the main drivers behind the issuance of new green bonds. After the green financial market has reached a certain maturity, the strategy is that private enterprises will follow.
Green washing or genuine environmentalism
While the industry is growing, there still is a big issue with monitoring and reporting. Especially SOEs use loopholes in green bond regulations. According to the latest guidelines, state companies are allowed to place up to half of their green bond proceed in non-environmental projects which not only defy the purpose of the bond but also create an uneven playing field between SOEs and regular companies. In addition , it makes the product less appealing to sustainability-minded investors domestically and abroad.Besides these shortcomings, with an inadequate regulatory framework, green bonds have the potential to actually have adverse effects on the green transformation of the economy. For instance, state-owned energy companies produce a lot of energy from coal but are also big issuers of green bonds. However, because of transparency issues and lax rules on the use of the proceeds, there is a clear risk that funds can be used to maintain fossil energy infrastructure or at worst expand it. Ultimately whether the weaknesses in the current system are growing pains or genuine weaknesses on the behalf of regulators, the governance of green finance products will determine the future of the industry.
