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Rub of the Green
Innovations in financing methods are supporting China's ecological progress
By Wang Jun | NO.7 FEBRUARY 15, 2018

A staff member inspects solar panels installed under a new-energy demonstration project financed by the BRICS New Development Bank in Shanghai on July 12, 2017 (XINHUA)

A boom in green finance has been the highlight of China's financial sector in recent years, with the emergence of a variety of innovative credit products. However, China's green financial system still needs its incentives and regulatory frameworks improved.

Green finance refers to financial 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 finance is becoming a world leader, demonstrating 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 commissions jointly issued guidelines on building the green financial system, which defines the scope of green projects and the standards for green finance.

China's green finance market grew steadily last year, with its basic systems upgraded and its support to the green economy enhanced.

In June 2017, the State Council announced the establishment of eight pilot zones for green finance reform and innovation in the four provinces of Guangdong, Zhejiang, Guizhou and Jiangxi as well as Xinjiang Uygur Autonomous Region, to explore 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 advanced and emerging economies, which will rapidly increase global recognition of green finance.

Studies show that green investment focusing on climate and the environment usually have higher returns but lower fluctuations, and among the hundreds of green projects in recent years, most are profitable, 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 exchange 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 five 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).

Villagers discuss a green finance program backed by the government in Pingxian County, Fujian Province, on June 15, 2017 (XINHUA)

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 profit 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 favorable 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 businesses 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 improved, the sector will serve as the support for establishing the green financial 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 financial leasing, green investment and credit, mortgages and environmental property rights.

According to Lu, as the scale of green financing grows, green assets are being rapidly accumulated. The development of green investment businesses such as green funds, assets administration and property management is important to increase the liquidity of green assets and improve the overall appeal of the market. Against the backdrop of advancing mixed banking operations, the financial institutions' efforts to promote the development of green finance and establish an integral array of green financial products will significantly facilitate their business transformation. Banking institutions must set up and improve their internal management systems for green finance, establish appropriate business procedures, strengthen market studies on green finance and effectively identify and evaluate environmental risks.

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

Policy support

Chen believes that in the future the government 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 finance market. More efforts should also be made to build uniform and executable green project standards and green finance standards, enhance China's international leadership in green finance and intensify innovations of green financial products and service systems in order to better satisfy the diversified investment and financing demands.

Lu said if government policies can better combine "green" and "finance," then the market-driven development of green finance will be accelerated considerably. He suggested the government reduce the required reserve ratio for commercial banks specifically for green finance businesses.

At present, although many green projects are profitable, they are still unable to source enough funds, and the rate of return for most green projects is not high due to external 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 financing, equity investment and the trading of carbon emission rights. Since there may be financial derivatives and the participation of funds from the insurance sector in the future, green finance needs more guidance and incentives from the regulatory authority.

Copyedited by Laurence Coulton

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