Guest Analyst: Dr. Christopher R. Kaminker, Head of Sustainable Finance Research, SEB
Green finance
developments in China

Publicerad 2018-10-30

As the European Commission works to elaborate its Sustainable Finance Action Plan; with the aim of encoding sustainability into the DNA of the European financial system, it is useful to look to the experience of China, which has become a leading case study in greening a national financial system over the past years.  Green finance has moved from a niche concept to the mainstream over the last decade, with China leading the way through the establishment of a sweeping 14 principle plan to create a domestic green financial system.[1]

BY DR. CHRISTOPHER R. KAMINKER, christopher.kaminker@seb.se

The People’s Bank of China (PBoC) estimates that an annual investment of at least RMB2tn-4tn (USD320bn-640bn) will be required to address environmental and climate change issues.  This investment proposition is clearly related to China’s challenges and emergent solutions related to fostering economic growth and development in the face of pressing environmental and resource concerns, framed by urbanization, governance and financial market development initiatives.

A major element in the evolution of China’s role has been its recent nurturing of a massive green bond market, which functions in parallel to the green loan operations of the principal state development and commercial banks.  As an indicator of the scale and pace of change, the Chinese green bond market has become the fastest growing and largest globally with over USD 90 billion of issuance since the PBoC moved to create a green financial system in 2015.

Chinese issuance peaked in 2017

An analysis of moving Last Twelve Months (LTM) of green bond issuance shown in Figure 1 visualizes how over the last years the Chinese green bond market has featured around USD 30 billion of issuance per year (from Chinese domiciled issuers). Chinese issuance peaked twice at USD 34 billion in 2017 but has been falling since, dropping back through the USD 30 billion level over the summer as deleveraging efforts increased domestically.

At the same time, cumulative LTM figures for Europe (ex-Nordics) have been rising continuously over the last two years to reach USD 53 billion before dipping over the summer back to USD 51 billion, and the Nordics have almost tripled their contribution since October 2017 to USD 17 billion. This has been driven by European corporates, financial institutions and sovereigns, alongside increasing policy attention; as the European Commission adopted its sweeping Action Plan on Sustainable Finance and the Technical Expert Group on Sustainable Finance (where SEB is a member) started its work in July on making proposals in relation to the priorities of its Action Plan on sustainable finance.

At the same time, as can also be seen in Figure 1, LTM issuance from Asia-ex China has almost tripled over the last year, briefly passing Supranationals as a category to touch USD 14 billion in June, with Japan, South Korea, Indonesia, Hong Kong, Singapore, Malaysia and others making increasingly significant contributions as some of these economies add policy incentives to stimulate the market, following China’s lead.

Source: SEB analysis based on Bloomberg and SEB data.

The Chinese green bond market has been expanding alongside unprecedented domestic and international efforts directed at overcoming environmental and resource challenges, and broader moves geared at opening the overall Chinese bond markets to international investors. In 2019, China is also expected to become the world’s largest carbon market. Almost 40 countries and more than 20 cities, states and provinces already use carbon pricing mechanisms or are planning to implement them. The proportion of global greenhouse emissions covered by emissions pricing regulation is set to increase to almost 25% over the next few years as carbon pricing mechanisms expand in a number of countries, most notably China.

Green Investment Principles for Belt and Road Initiative

At the same time, much international attention has been focused on the Chinese-led Belt and Road initiative (BRI)[2]to create the world’s largest economic platform, through a USD 4-8 trillion rejuvenation of the 2,000 year old Silk Road(s).  Relatedly, the Chinese and UK Governments asked the China Green Finance Committee and the City of London, during the 9th China-UK Economic and Financial Dialogue (EFD) in December 2017, to develop a new set of “Green Investment Principles for the Belt and Road Initiative”; to improve the management of environmental and social risks for the investment in the BRI, with a view to ensure that the goals of the UN SDGs and the Paris Agreement are met.

This new BRI initiative follows The Environmental Risk Management Initiative for China’s Overseas Investment, jointly launched by the Green Finance Committee of China Society for Finance and Banking and six other industrial associations in China in September 2017. The Environmental Risk Initiative was developed to encourage and guide efforts by Chinese financial institutions and enterprises to accelerate the progress towards key sustainability goals, such as greening the BRI, achieving targets of the SDGs and the Paris Agreement, and implementing the aforementioned Guidelines for Establishing the Green Financial System, by adopting responsible investment principles and improving environmental risk management in overseas investment.

[1]See for instance the work of the Chinese G20 Presidency and the Chinese domestic “Guidelines for Establishing a Green Financial System”

[2]More information on the Belt and Road Initiative.

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