Share the article
twitter-iconcopy-link-iconprint-icon
share-icon

China continues its green revolution

China is one of the world’s worst polluters, but its green credentials are improving. How serious is the country’s commitment to the environment, particularly in relation to responsible financing?  
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Everbright

China’s reputation as the world’s biggest emitter of carbon emissions precedes it. The country’s myriad factories and carbon-fired power plants mean it uses half of the world’s coal, with electricity production and the steel industry the biggest consumers. 

Carbon emissions also have a significant impact on the country’s air quality. Air quality tracker AirNow reports the Air Quality Index (AQI), as defined by the US Environmental Protection Agency. According to AirNow, during 2019, Beijing had an average AQI of 119. However, it rose as high as 152 in February that year. Any number over 101 is considered to be dangerous to the health of people in sensitive groups, and poor air quality can have a significant social, as well as environmental, cost. 

Acknowledging this, the Chinese government has pushed for the adoption of greener strategies. The People’s Bank of China (PBOC) has outlined plans to remove fossil fuels from the list of programmes that can be funded through green bonds; previously, they were allowed if fossil fuels were used in a ‘clean’ way. The plan also brings into line the standards of the PBOC, the National Development and Reform Commission (NDRC) and the China Securities Regulatory Commission. 

Major steps

Sean Kidney, CEO of the Climate Bonds Initiative (CBI), says China has been making positive moves. “China is determined to reduce pollution and address climate change, but it’s a challenging job in such a complex and polluted economy,” he says. “Big steps have been taken. No new permits have been given for the development of coal-fired power stations, but existing permits will be completed. There is a strong push towards electricity and to green the grid as they go. Over the past seven years, China has invested more in renewables than fossil fuels.” 

This push comes from a number of institutions. Nicholas Zhu, vice president-senior credit officer, financial institutions group at Moody’s Investors Service, explains: “The NDRC is the main driver in reducing the financing of polluting industries. They have a multi-year programme to phase out polluting industries, which guides banks to reduce the financing to polluting projects. There’s a lot of emphasis on financial institutions to support the green development programme.” 

A defining feature of the green movement in China is that it has not been market-driven, which has given it features not seen in other markets. Mr Kidney says: “The green push is top down, but the approach is different to what may be considered green elsewhere. [China’s] pollution clean-up challenge means they include a lot of things we don’t have to worry about in places like Europe, and they’re still working on some of the climate-related components. Green financing can help support these sorts of projects.” 

Bank support for a green approach

China’s banks have taken the call to go green seriously, and with quantifiable results. Gloria Lu, senior director of infrastructure ratings at S&P Global Ratings, says that, at the end of 2019, the balance of loans supporting green projects from 21 major Chinese banks amounted to Rmb10,220bn ($1447bn). 

For individual banks, this is a result of significantly increasing their attention on green projects. Liu Jin, president of China Everbright Bank (CEB), says: “From 2017 to 2019, CEB’s balance of green credit has increased by more than 20%, and the number of projects concerning energy conservation and environmental protection has mounted up by over 80%.” 

This has enabled banks to calculate not only the green financing provided, but also the empirical impact the funds have had on the environment.

Zhang Jinliang, chairman of Postal Savings Bank of China (PSBC), says: “By the end of 2019, the balance of PSBC green loans, specifically loans for energy conservation and environmental protection projects and services, was Rmb243.3bn, an increase of 27.78% over the previous year-end. We supported green projects through credit and other financial products and services, which helped save 5 million tons of standard coal, reduce 11.5 million tons of carbon dioxide emissions, and achieved good environmental and social benefits.” 

Li Fuan, chairman of China Bohai Bank, says the bank has established a department specifically to monitor its green finance business. “The leading group has its office housed in the inclusive finance department, responsible for organising, managing, coordinating, and facilitating green credit work in all aspects,” he says. “The inclusive finance department of each branch is responsible for implementing green credit-related policies formulated by our head office and carrying out information collection, data statistics and evaluative reporting.” 

China Minsheng Bank (CMBC) has adopted different credit practices for companies depending on their environmental credentials. Hong Qi, the outgoing chairman of CMBC, says: “In 2019, the bank declined to renew contracts with 21 projects, involving Rmb11.4bn, in the high-pollution, high-energy consumption and overcapacity industries. As at the end of 2019, the outstanding balance of loans to industries of overcapacity only accounted for around 3% of the corporate loans of the bank.” 

China’s aims for developing its green business stretch beyond the renewable energy or recycling sectors that might be the main focus of other countries. 

Mr Liu says: “With an emphasis on the recycling economy, new energy and other green fields, CEB’s green credit mainly goes to key areas of national environmental governance, including projects on the prevention and control of water pollution in major river basins and key water conservancy projects recommended by NDRC, with a variety of preferential policies in thresholds, approval and authorisation, capital charges and provision assessment.” 

To keep on top of the changes in the industry requires banks to carry out regular internal reviews on the implementation and management of their green financing business. Ping An Bank has done this by establishing a green credit assessment accountability system to evaluate the effectiveness of its green credit. 

“The evaluation results are used as an important basis for credit rating, business access evaluation and personnel performance evaluation in accordance with relevant laws and regulations,” a Ping An spokesperson says. “To ensure the ongoing effective development of [our] green credit business, as of the end of 2019, the total amount of green credit granted by Ping An Bank reached Rmb5.72bn and the loan balance totalled Rmb25.2bn.” 

Green bonds 

China's Industrial Bank (IBC) has taken a strong lead in pushing green financing, pledging in 2016 to increase its green financing portfolio sizeably by 2020. The bank stated its balance of green financing was Rmb1019.9bn at the end of 2019, with 14,764 green finance customers providing 19,454 enterprises with a total of Rmb2223.2bn of green financing. The assets are high quality, with the non-performing loan (NPL) rate about a quarter of the bank’s overall NPL rate. 

CBI's Mr Kidney is quick to note the work done by the bank: “Of the big banks, Industrial Bank probably has the strongest green finance business lines, having been an early mover. It is currently the biggest issuer of green bonds in China.” 

The success of green bonds in China is bolstered by government support. “Issuing green bonds has become an attractive option as the government has instituted a range of incentives,” he says. “One province even pays for a third of the coupon. This has underpinned the growth in demand.” 

The new outline for defining green projects, as laid out by the PBOC, comes with the aim of attracting further overseas investment, as it will bring China in line with international standards. This could have a big financial impact. The CBI reported that, during 2019, China raised $31.3bn through issuances that met international standards. However, a further $24.2bn in green bonds were issued that only met domestic standards. In meeting international criteria, China would become level with the $51.3bn in green bonds issued by the US in 2019. 

China coming up to standard would have significant appeal to foreign investors wanting to enter the Chinese market – investors China needs to meet its targets. “What China needs now is to import capital,” Mr Kidney says. “In order to meet the financing demands of its projects there needs to be an influx of foreign investment over the next 10 years. The arrival of international investors can bring useful capital market experience, and support the needed further development of Chinese capital markets.” 

Reaching new heights 

Expanding the reach of green financing will require some more innovative thinking. S&P’s Ms Lu says the finance market needs to be supported by the requirements of investors, which could be done by cultivating a body of institutional investors who embed green into their investment decisions. 

“For green bond issuers or green loan borrowers, more tangible incentives, such as sharing the administrative costs and providing certain tax benefits, could be beneficial,” she says. “In 2020, China’s regulator aims to implement mandatory environmental, social and governance (ESG) disclosures for all listed companies, which will make China ahead of many other markets in ESG disclosure.” 

Even with the support already given, there is room for greater expansion that could promote the use of green bonds to an even wider pool of issuers. “Most support is on the policy front, rather than direct financial benefits to incentivise issuers and investors in the green bond market,” Ms Lu says. “Chinese issuers can enjoy fast-track approval of green bond issue applications, but currently there are no financial incentives offered by the regulators, such as reducing or subsidising the administrative costs associated with green bond issuance or maintenance.”

As she notes, the regulator is pushing for all companies to provide ESG disclosures. CBI's Mr Kidney says this is now being effectively implemented. “Companies with an environmental protection agency (EPA) violation are listed on the National Credit Database. Banks are not allowed to lend to companies with an outstanding violation,” he says. “When they first introduced it there were few violations registered, because the EPAs report to provincial leaders, who didn’t want trouble. So the central government made the provincial EPAs report directly to the national EPA, and now the violations are being recorded.” 

Making large changes also means looking out across the whole country, not just focusing on the key hubs. “The government is looking to get more resources into the provinces, allocating Rmb1000bn to infrastructure projects. The investment will create new projects, and upgrade existing infrastructure,” says Mr Kidney. 

Working around Covid-19 

However, as with all best laid plans for 2020, the green bond market has had to take into account the impact of the coronavirus pandemic. 

“Green bonds were affected by the outbreak of Covid-19, with less issuance in the first few months of 2020,” S&P’s Ms Lu says. “China is set to increase investments in infrastructure and encourage consumption to reduce the fallout from Covid-19. For example, new infrastructure projects, such as 5G, data centres, and other information technology and innovation-related projects, are usually energy intensive. However, it could be  a challenge for policy-makers to envisage those changes and take measures to integrate new infrastructure projects with green energy development.” 

The coronavirus is not an excuse for banks to allow standards to slip in meeting green credentials. CEB’s Mr Liu says: “During the pandemic, CEB continues to conduct the vetoing policy on green credit, ensuring that all projects failing to meet environmental protection requirements or having a significant adverse impact on the environment would be rejected.” 

Mr Liu says the bank has used this as an opportunity to step up its assessment of its green financing operations: “Since the outbreak of Covid-19, we have enhanced our monitoring over our green credit customers’ operational and financial status, and have seen no material adverse impact caused by the pandemic. In 2020, we will continue to promote green finance from a strategic perspective, while optimising our customer base and adjusting our business model to better support the green economy.” 

No detours

CMBC’s Mr Hong says the outbreak of Covid-19 brought an unprecedented impact on economic and social development, which in turn affected some businesses and projects. “However, the national stance will not change in supporting energy saving and environmental protection industries, and in restricting industries that are high pollution, high energy consumption and overcapacity,” he adds. “As the resumption of work and production is accelerating, the bank will further optimise the green credit policy and improve the green finance business, with the aim to build a green bank.” 

PSBC has increased its focus on green projects during Covid-19, not allowing the pandemic to derail its aims. Mr Zhang says: “As of the first quarter of 2020, the balance of green loans reached Rmb267bn, an increase of 9.92% over the prior year-end, and 4.53 percentage points higher than the growth rate of all loans.” 

Coronavirus has made banks more innovative in how they are meeting the demand for green products and services. Mr Liu says: “By actively exploring market demand, CEB is one of the first banks in China to underwrite a new type of green bond for epidemic prevention and control to support projects related to medical relief and people’s livelihoods.” 

Was this article helpful?

Thank you for your feedback!

Kimberley Long is the Asia editor at The Banker. She joined from Euromoney, where she spent four years as transaction services editor. She has a BA in English Language and Literature from the University of Liverpool, and an MA in Print Journalism from the University of Sheffield. Between degrees she spent a year teaching English in Japan as part of the JET Programme.
Read more articles from this author