China’s policy-makers have consistently highlighted a commitment to tackling climate change through green finance, announcing that the country will strictly control coal in the next 5 years and then “phase it down.” They made this commitment at the following venues: a State Council press conference; People’s Bank of China–International Monetary Fund (PBoC-IMF) High-Level Seminar on Green Finance and Climate Policy; Boao Asia Forum; and the Global Leader’s Summit.
To achieve carbon neutrality, China will need to invest RMB 2.2 trillion (5% of 2019’s GDP) from now to 2030 and RMB 3.9 trillion (9.5% of 2019’s GDP) from 2030 to 2060. The ex-PBoC governor noted the need to balance GDP growth with carbon reductions. On green finance, four areas of work are repeatedly mentioned: 1) solutions for more capital to support sustainability; 2) climate risks and financial stability; 3) carbon markets; and 4) international cooperation. Details below.
At the (U.S.-led) Global Leader’s Summit on April 22, President Xi announced China will strictly control coal in the next 5 years and “phase it down” during the 15th Five-Year Plan period—the first time China set a timeframe for reducing coal power. In line with this, the former governor of the PBoC (Zhou Xiaochuan) emphasized risk management and control throughout the climate transition. A carbon market was also repeatedly mentioned as an important mechanism to guide investment.
Solutions to ensure green financing: With a clear message that government funding is insufficient to achieve carbon neutrality, China’s policy-making will ensure private capital’s participation by:
- Updating Green Bond Endorsed Project Catalogue (April 21): The PBoC, National Reform and Development Commission (NDRC), and China Securities Regulatory Commission (CSRC) jointly released the 2021 edition of the Green Bond Endorsed Project Catalogue, effective July 1, 2021, which lists the conditions for a security to be considered “green.” Compared to its 2015 edition, the revised catalogue further harmonizes domestic green bond standards and better aligns them with global standards. Regulators revised the scope of industries and projects eligible for green bond financing. The catalogue now includes areas like green agriculture, green construction, and green equipment manufacturing. Notably, so-called clean coal and secondary oil and gas extraction projects will no longer qualify for fundraising via green bonds. It also incorporates language around the Do No Significant Harm (DNSH) principle (taken from the EU Taxonomy) and indicates the possibility of rolling out a “transition finance” standard in the future.
- Green finance standards: The PBoC will work with the EU to complete the Common Classification Standard for Green Finance this year.
- Information disclosure improvements: The PBoC plans to set up a mandatory disclosure system with uniform standards and promote greater information sharing between financial institutions and companies. In this regard, the PBoC issued a notice to the Green Financial Reform and Innovation Pilot Zone to encourage financial institutions to disclose environmental information.
- New policy incentives: The PBoC will increase the allocation of green bonds in the country’s foreign exchange reserves and limit investments in high-carbon assets. They will launch a support tool kit to provide low-cost funds for carbon emissions reduction. The central bank will also put forward other incentive measures (such as changing commercial credit ratings, deposit insurance rates, or collateral for open-market operations).
- Further promotion and construction of green finance pilot zones.
Climate risk and financial stability: The PBoC is assessing the possibility of including climate factors in financial stress tests, gradually incorporating climate risks into the macro-prudential policy framework. It is also reviewing the green loan and green bond performance of financial institutions quarterly. Financial institutions are encouraged to evaluate and manage their environmental and climate risks. Zhou Xiaochuan noted that there are both micro- and macro-level risks stemming from expectations that climate change is not a threat.
Carbon market set up: To build a national unified carbon emissions trading market, the PBoC suggested the carbon market should be a financial market that allows carbon financial derivatives trading. The PBoC has started to explore the establishment of a national carbon accounting system.
- China will co-chair the G-20 Sustainable Finance Research Group alongside the United States and will strive to push the G20 to do more. China and the United States issued a joint statement committing to cooperating with each other and other countries during John Kerry’s meeting with Chinese climate envoy Xie Zhenhua last week in Shanghai. President Xi then confirmed his attendance at the Global Leaders’ Summit, held by U.S. President Joe Biden.
- The PBoC will work with the European Union on green finance standards (as above).
- Working overseas, China will further implement the Belt and Road Initiative’s (BRI’s) “Green Investment Principle” and “strictly control” investment in new overseas coal and power projects, as mentioned at the State Council press conference on April 1, the PBoC-IMF High-Level Seminar on April 16, and the Boao forum.
- China will promote green, low-carbon, and high-standard infrastructure projects with minimal environmental impacts (as well as extending debt relief to developing countries under the G20 Debt Service Suspension Initiative [DSSI] and push forward debt sustainability in developing countries through the BRI).
Impact on the Real Economy
Zhou Xiaochuan emphasized the need to balance GDP growth, wealth accumulation, and carbon reduction when reducing emissions while at the same time assessing the impact of climate change on stranded assets. More broadly, China announced that its policy should support the real economy (e.g., the energy sector).