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WorldMarch 18 2019

Is China leading the global green charge?

Having announced a war on pollution, China is now carving out a role as an advocate for environmental policies and, more importantly, a source of green finance. But will stalling domestic growth dampen its newfound fervour? Adrienne Klasa reports.
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China pollution

As China rises to the forefront of the international economic system, it can sometimes feel to Western perceptions that the world has turned upside-down. 

The communist country is quickly gaining on the US to become the world’s largest economy. A place that embraced isolationism for centuries, it is now a leading advocate for global trade rules and multilateralism. Furthermore, the country previously known for having air so polluted that its schools sometimes need to be closed is now leading the global charge on climate change – as the US under the Trump administration continues to deny its impact.

Global force

China’s rise as a force for a leaner, greener economic future may have its roots in domestic issues, but its ramifications are being felt on a global scale. Its international green finance agenda is both genuine, according to most observers, and riddled with contradictions.

“Until 2018, coal made up slightly less than 60% in total energy consumption in China. [This is] down from 69% in 2010, and today China is the biggest investor in renewables. Rome wasn’t built in one day,” says Yao Wang, director-general of the International Institute of Green Finance (IIGF).

The urgency of transforming the global economy should not be underestimated. The Paris Climate Agreement of 2015 secured global buy-in for limiting warming to 2 degrees Celsius above pre-industrial temperatures. However, a landmark report by the UN Intergovernmental Panel on Climate Change, published at the end of 2018, argued that the catastrophic impacts of climate change will be felt at 1.5 degrees of warming.

“This report by the world’s leading climate scientists is an ear-splitting wake-up call to the world. It confirms that climate change is running faster than we are – and we are running out of time,” UN secretary-general Antonio Guterres said on the report’s release. “This will take unprecedented changes in all aspects of society – especially in key sectors such as land, energy, industry, buildings, transport and cities.”

But while US leaders have turned away, questioning climate science and threatening to withdraw from the Paris Agreement, the search for the financing to pay for this transformation has found an unlikely champion in China.

Smog lifting?

Before 2008, air quality data was a closely guarded secret in China. Faced with China’s reticence, the US embassy in Beijing installed an air quality monitor on its roof and began tweeting out pollution readings several times a day. The data set off a diplomatic firestorm, but it confirmed what people living in Beijing already suspected: that on bad days, air pollution levels were dangerous to the population’s health. In 2010, readings were deemed “crazy bad” after they exceeded the Environmental Protection Agency’s air pollution safety scale.

Following these revelations, a sea change took place in China. The country’s citizens grew increasingly angry about a succession of revelations about contaminated air, food and water. Rapid industrialisation may have lifted hundreds of millions out of poverty, but it came at a cost, as China’s air, land and water was poisoned by pollution.

By 2005, China was the number one emitter of most conventional pollutants; by 2011, it was both the world’s second largest economy and leading emitter of carbon dioxide. Only three out of 74 cities that monitor for air quality could pass minimum standards in 2014, 60% of underground water is estimated to be poor quality and 19% of arable land is seriously polluted, according to researchers at Renmin University of China.

Very quickly, emissions became a political problem and source of embarrassment for the ruling Communist Party of China. Within a few years, the government changed tack from denying the country’s environmental problems to making cleaning up the environment a key policy objective. “We are resolutely [declaring] war on pollution as we declared war on poverty,” said premier Li Keqiang  during the 2014 gathering of the 3000-member politburo.

According to China’s leader, Xi Jinping: “[China] wants clear waters and green mountains just as much as golden and silver mountains. In fact, clear waters and green mountains are China’s gold and silver.”

“What I see now is that there is a very genuine desire to clean up their own system. The party sees [the pollution] as damaging to potential investment and to the image of cities such as Beijing and Shanghai,” says Roger Gifford, chair of the Green Finance Initiative of the City of London Corporation. “China also bought into the 2015 agreement; it doesn’t want to lose face by losing out on its global commitments.”

It’s easy being green

Ideas are one thing. Paying for them is another. According to estimates by China’s Ministry for Ecology, the country needs between $433bn and $577bn in green investment each year between 2015 to 2020 if it is going to transform its current carbon-intensive economy into a green, sustainable one. About two-thirds of this, or some $320bn per year, “will need to come from domestic and international financial and capital markets”, researchers at the UN Environment Programme and the International Institute for Sustainable Development concluded.  

China’s top-down, state-directed economic model means the government can pull levers to redirect the way the financial system allocates capital. That is beginning to happen. However, the scale of the problem also requires heavy private sector involvement from both within and beyond China’s borders.

“We’re seeing one of the two most sophisticated policy-led approaches to accelerating green finance coming out of China, the other being in Europe,” says Simon Zadek, principal of Project Catalyst at the UN Development Programme. “I think that rampart of ambition really began in 2013, which is when air pollution became a major domestic issue.”

China has a long history of radical policy interventions, and once environmentalism came to the fore it was no exception. By 2016, China was the world’s biggest issuer of green bonds, quickly surpassing the US and France. It continued to lead the next year: according to the Climate Bonds Initiative, China issued a total of $37bn in green bonds in 2017.

The size and frequency of China’s green debt offerings accelerated rapidly. Of bonds issued in the first half of 2017, the UN noted “the number and size of bonds grew 278% and 28%, respectively, compared with 2016”.

The country’s exponential growth in the green bond market has contributed to global trends. Climate Bonds Initiative data shows that green bond issuance hit $167.3bn in 2018, a steady rise from $37bn just fours years earlier. 

Observers anticipate growth in the issuance of green asset-backed securities (which currently make up about $2.3bn, or 7%, of the Chinese bond market) as well as in green panda bonds. “International companies are increasingly looking to raise capital on Chinese debt capital markets in renminbi, and vice versa there is an increasing interest from Chinese investors in diversifying their investments to include global assets. That’s a sweet spot for green panda bonds,” says the IIGF’s Ms Wang. Further work on building environmental, social and corporate governance (ESG) indices for China and standardising company reporting on ESG data is needed, and will help to further build the market, she adds.

Global agreements

Green bonds are considered low-hanging fruit for climate finance globally. However China is increasing its involvement in building the environment for global green finance markets.

Wide-reaching policy initiatives have paved the way. In 2012, the People’s Bank of China (PBOC), along with six other government agencies, issued the Guidelines for Establishing the Green Financial System, a blueprint for “establishing the green financial system is to mobilise and incentivise more social (or private) capital to invest in green sectors, while restricting investment in polluting sectors”. In it, they call not only for the development of green securities markets but also green insurance, environmental emission and trading programmes

By late 2014, the UN Environment Programme, in partnership with the PBOC, had set up China’s first green finance task force. Former PBOC chief economist Ma Jun was instrumental here, pushing green finance high up on China’s economic agenda and shepherding the issue into China’s G20 presidency in 2016. As China prepared to host the G20, in late 2015 its State Council adopted a list of 31 recommendations on green finance put forward by seven different ministries.

China’s G20 presidency was a watershed moment for green finance globally. Green finance was the only new topic that China added to the group’s finance track during its 2016 leadership of the forum. It also became a founding member of the Central Banks and Supervisors Network for Greening the Financial System, looking at the role of monetary policy in changing the direction towards greater sustainability.

“[The] finance track is the heartland of G20.... When China put green finance as the only new topic, it was an important message,” says Mr Zadek. The message was that “rather than trying to fix past problems it was time to look at how finance needed to change to create opportunities for the future”. 

“No amount of critique reduces the importance of Chinas green finance move and the signal and push that has given for other countries in the region to try to catch up,” he adds. “Then the question becomes… are [all of] these policies being implemented, and what has that meant in the market?”

Push and pull

With the US in retreat on environmental issues on the global stage, China’s leadership on green finance is bound to throw up contradictions. The first is that its continued economic growth – on which the ruling party’s tacit social contract with the public is predicated – still depends on the growth of so-called ‘dirty industries’ despite increasingly restrictive policies.

According to a study by researchers at Renmin University of China, between 2005 and 2011 the fastest growing sectors in China were “restricted” industries including coal, minerals, metals and chemicals. “China’s development continues to require natural resources… [and] consumption of some important resources has not reached its peak,” write the authors.

Not only is coal and other dirty fuels still key for domestic industry, but China is the world’s largest user and exporter of coal power. Despite its ambitious environmental goals, it financed more than one-quarter of all new coal power plants around the world in 2018; in all, Chinese entities financed $36bn-worth of coal-fired power in that period alone.

“The issue around coal is absolutely where the rubber hits the road because we are in the situation today where China is both a major producer and consumer of renewable energy and simultaneously its production and consumption of coal is second to none,” says Charles Donovan, director of the Centre for Climate Finance and Investment at Imperial College London.

The added complication is that China faces stiff competition for international coal power deals from its neighbours Japan and South Korea. “Clearly the world is not made up only of win-win moves. If China stopped exporting coal-fired generating technology tomorrow, it might hurt some Chinese companies in the short term, and might make little difference to emissions if the export opportunities were taken up by others, such as Japan and South Korea,” says Mr Zadek.

Growing pains

Sloughing off the old, carbon-intensive industries is further complicated by the current slowdown in China’s economic growth rate. Under pressure from global uncertainty and the US-China trade war, Beijing cut its growth forecasts for 2019 down to between 6% and 6.5% – the slowest the country has grown since its opening up and market reforms of the 1980s. As this sparks concerns about living standards and jobs, the temptation may be to continue to export carbon-intensive industrial production and infrastructure around the world. “China’s leadership on green finance is responsive to concerns about jobs, just like the US, even if that’s expressed in policy and practice in different ways,” says Mr Zadek, who adds: “There is a lot happening in China to build that political resolve.”

He points to the country’s broad industrial base as reason for optimism. “It has world leaders in renewables just like it has world leaders in coal technology, so I think the possibility is there to tip the balance, more than in – and I hate to say it – Europe, which doesn’t have a strong green technology export community.”

Ms Wang believes the direction of travel, at least at the high level of Chinese policy-makers, is irreversible. “Green finance policies are being implemented throughout the system and it has the backing of the top party leadership. Relinquishing on those policies now would neither help with economic growth nor the ongoing economic restructuring,” she says. 

Greening the Belt and Road Initiative

The biggest test of China’s resolve to lead the global green finance revolution will follow the path of the Belt and Road Initiative (BRI), the massive infrastructure investment drive that now spans some 70 countries around the world.

“Clearly the BRI is the area around which ambitions on infrastructure [converge], and how people are conceptualising what the next wave of infrastructure [will be],” says Charles Donovan, director of the Centre for Climate Finance and Investment at Imperial College London. “The rhetoric of green finance does not always match events on the ground. I think at the moment there is a lot of lip service, and this really cuts to the core of the question: what is green finance? Is it an aspiration, is it purely contained to a sense of opportunity, or does it extend to a sense of unacceptability about certain types of technologies or projects?”

Advocates of green finance believe that, if done right, the BRI could be leveraged to grow the market for green finance while ensuring the next wave of global infrastructure does not continue to rely on carbon-intensive technologies.

However, the pressure to provide export and capital opportunities for China’s old, carbon-intensive industries amid a less than stellar global economic outlook is real. “BRI countries remain quite rooted in old tech that is quite carbon intensive, both in its construction and its use,” says Simon Zadek, principal of Project Catalyst at the UN Development Programme.

Here, Western financiers can assert some influence. “You can’t tell Chinese industry what to do, or governments in Kazakhstan or Pakistan. But if a bond is floated or a loan made and Western institutions are involved, which is likely, that’s where we can exert influence. There will be a certain standard around what is expected from an environmental perspective,” says Roger Gifford, chair of the Green Finance Initiative of the City of London Corporation. 

Ensuring the BRI follows green principles is not just a matter of ethics. There are also practical, long-term economic considerations at stake to ensure the viability of projects over the long term. “Investors must plan for the financial sustainability of a project. This will serve to minimise the risk of stranded assets and aborted projects, maximise financial efficiency and secure our environment’s future,” China’s Green Finance Committee and the City of London Green Finance Initiative wrote in a recent report on financing the BRI and environmental concerns.

The importance of getting investment into the BRI right should not be underestimated. “The BRI could involve several trillion dollars of infrastructure investment – its environmental and climate footprint will be absolutely critical. It becomes binary: either one gets that right, or the Paris Agreement becomes a chimera,” says Mr Zadek.

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