Green finance in China: Enabling a sustainable recovery

China is one of the world's largest markets for green finance. The country's central bank is set to play a key role in China's transition to a low-carbon economy, especially in promoting a "green" financial system.

Wang Xin, head of the Research Bureau of the People's Bank of China (PBOC), told CGTN that the country needs to leverage green stimulus for a more environmentally-friendly recovery.

Greening the financial system

During the past few years, China's central bank, the PBOC, and relative ministries have launched a package of policies for green finance development. An updated "Green Bonds Endorsed Projects Catalogue" was announced in June to govern China's green bonds market in a significant consolidation that has implications for investors as the market grows.

There were a lot of discussions on the role of central banks in the transition to a low-carbon economy and especially "greening" the financial system, Wang confirmed it as "essential," concerning supporting green development and tackling climate-related financial risks to safeguard financial stability.

China is at the top of the world in terms of the market size of green loans and green bonds. "As of the end of first half of 2020, outstanding of green loans and green bonds amounted to 11.1 trillion and 1.2 trillion yuan, respectively," Wang introduced.

The PBOC has also been playing the leading role in establishing Green Finance Pilot Zones to foster green finance reform and innovation. "Now we have this kind of pilot zones in six provinces. The local governments and financial institutions are very innovative to develop new green finance mechanism and products. Their good experiences will be applied to the whole county in due course," Wang added.

Suggestions for drafting the 14th Five-year Plan

The global oil markets took a massive hit as a result of coronavirus-induced lockdowns. The pandemic has provided an opportunity for economies to speed up their transition into a more energy-friendly future.

Wang suggested that top policymakers should take more targeted approaches when drafting the 14th Five-year Plan. He proposed to set a clear carbon emission target during the 14th five-year Plan period, and support a number of regions setting time frame targets for peaking carbon emissions and net zero emissions.

On the investment front, Wang called for supporting investments in such industries as green buildings, clean transportation, and renewable energy. "We could raise funds for renewable energy development by issuing special government bonds, financial bond, and corporate bonds. The central bank can provide a favorable liquidity environment for bond issuance. At the same time, we will promote green consumption on new-energy cars, green home appliances," Wang added.

New evaluation system for banks

Another recent news is that the PBOC will start reviewing how banks are performing in the green finance sector on a quarterly basis from next year, as the world's second-largest economy steps up efforts to promote sustainable finance.

Wang said that the evaluation of green credit has covered about 70 percent of depository financial institutions by now. Because of this, financial institutions have been attaching more importance to the green credit business.

"Now we have a new green finance performance evaluation plan, which is the extension and improvement of the previous green Credit Performance Evaluation Plan. The new evaluation plan mainly makes adjustments in the following ways: first, it also includes the performance evaluation of green bonds. Secondly, the quantitative evaluation method had been improved. Thirdly, the evaluation results can be used in Central bank's rating of financial institutions," he further elaborated.

Attract more investors for socially responsible investment

Green investing is both a good deed and a good deal. ESG (Environmental, Social, and Governance) is are attracting an increasing number of investors. ESG has long been valued in developed markets and emerged as investment darling in China, talking about how to attract more socially responsible investment to China and gradually shape this concept among domestic investors, Wang believed the key point is to make it very clear the benefits of ESG.

"ESG could actually bring financial benefits to investors. According to an empirical research, in China's A-share market, stocks with higher ESG scores have outperformed those with lower ESG scores in terms of return rate by more than 10 percentage points in the past two years. It is also the case after the COVID-19 pandemic," Wang added.

He also suggested bringing more institutional investors on board, including pension funds, insurance funds and other long-term institutional investors.