Financial reform necessary to boost green industry

Subsidies and nongovernmental capital needed to encourage investment

Green industry should serve as one of the major drivers of China's economic growth. This also conforms to the views of Ma Jun, chief economist of the People's Bank of China's research bureau. But this is a daunting task to fulfill because of the huge void in green financing in China.

On the one hand, China's green industry needs at least $2 trillion yuan ($311 billion) in investment per year. On the other, green financing has become a hurdle for China's sustainable growth because about 85 percent of the green investments are nongovernmental in nature owing to the lack of financial support from the government.

This is not surprising, though, because the green industry is known for its relatively high risk and inefficiency in yielding the expected results. A self-sufficient photovoltaic power station of 5 megawatts, for instance, will provide poor returns (from 8 to 17 percent based on where it is installed), not to speak about the other difficulties such as power instability, change in ownership and insufficient supply of funds. The yields of some green projects, including those generating power from sewage and garbage disposal, are even lower than the average 8 percent.

Therefore, public subsidies from governments at all levels are necessary to boost China's green industry. More importantly, financial reform is necessary so as to involve more nongovernmental capital to reduce the costs of financing and investment. This could be done in a top-to-bottom manner, or the other way round.

But governments, for their part, have to initiate institutional reform to ensure green loans enjoy favorable interest subsidies or can be directly invested in industries. Internet-based financing is another option that could make green investments more attractive.

Noticeably, China's photovoltaic industry has witnessed a slew of innovations in financing, especially given that photovoltaic power stations are seldom taken as a stable asset capable of independently generating cash flows, because borrowers' status is still considered very important.

As a financing route of high interest rate and short period (involving individuals, and financial and nonfinancial institutions), crowdfunding is a feasible solution for distributed photovoltaic projects that yield decent returns and high electricity output and price. Yet unlike many person-to-person projects, photovoltaic power projects need more time to provide long-term benefits at relatively low expenditure.

Luckily, the equity crowdfunding business in China is now under proper management, as the China Securities Regulatory Commission issued regulations in August to create a healthy and orderly e-financing environment and to stop illegal activities.

The online crowdfunding platforms launched by Chinese e-commerce giants like Alibaba and JD.com raised much more money beyond market expectations. It is thus foreseeable that a reform is about to take place in the finance channels available to photovoltaic projects.

For many, apart from the public-private partnerships between governments and social capital, asset securitization is also a big investment and financing trend, because it focuses less on the status of enterprises, allowing those lacking creditworthiness to attract investment as long as they own prime assets to generate healthy cash flows.

Enterprises with decent creditworthiness might even spend less in getting funds from other sources than directly obtaining loans from banks, while providing tailored products to potential investors during a flexible maturity period. Still, China's green industry, as the aforementioned financing innovations in the photovoltaic power industry indicate, can get a real boost if it manages to use government-led financial reform along with the Internet-based finance channels.

The author is a senior campaigner on climate and energy for Greenpeace East Asia. The views do not necessarily reflect those of China Daily.