A green finance future

Source:Agencies-Global Times Published: 2017/8/27 17:03:39

Chinese govt commits to energy-saving projects, but experts say risk mitigation is needed to ensure healthy development

Photovoltaic panels are used by an eco-sightseeing tea plantation in Yichang, Central China's Hubei Province, to generate power and save energy. Photo: IC

China is aiming high when it comes to pursuing green development and boosting its energy-saving and environmental protection industries. And green financing is one of the key areas waiting to be tapped.

This goal, set out in the guidelines for the development of the environmental protection equipment manufacturing industry, was released by the Ministry of Industry and Information Technology last Wednesday to solicit public opinion.

Describing the industry as an ''important technical foundation for environmental protection'', the guidelines highlight fiscal and financial support for the sector, including tax breaks, and provide guidance on other financing instruments like green bonds and green credit.

The Chinese government has been pushing for the development of green finance in order to seek sustainable growth and to honor its commitments in addressing climate change.

In fact, the country is expecting output of its environmental protection equipment manufacturing industry to reach 1 trillion yuan ($150 billion) by 2020.

There has also been consensus among the top decision-making level down to related government departments, which, in return, has strongly enhanced the country's green financing and investment, Ma Jun, former chief economist at the Research Bureau of the People's Bank of China, said last year.

Green financing attempts

As such, detailed plans are being rolled out at local levels after the central government set up pilot zones in June to explore replicable ways of boosting green financing.

In Guian New District, Southwest China's Guizhou Province, one of the country's five pilot zones, a brokerage firm for green securities, where companies need to pass environmental inspections before they get listed or re-financed, has now been established.

Moutai Group, a renowned Chinese liquor maker in Guizhou, was one of the major players behind its establishment, according to the government's plans.

In Northwest China's Xinjiang Uygur Autonomous Region, local authorities are discussing a system which would provide green financial products, such as insurance for wind turbines and solar power generation indexes, and special credit for green mines.

In early August, Tianjin-based power producer, Tianjin SDIC Jinneng Electric Power Co Ltd, issued "green bonds" worth 1 billion yuan to finance a 2,000 megawatt coal-fired power plant. The short-term green bonds have been registered on the interbank market and the sales of them will be completed in the third quarter of this year, the company said in a statement.

The power producer said it was the first company to issue green bonds of this kind to be launched by China's thermal power sector.

Last year, China issued $23 billion worth of green bonds, up sharply from just $1 billion in 2015, according to the Climate Bonds Initiative.

Analysts say that the country's green bond boom reflects an official pledge for cleaner energy. Currently, just 2 percent of local Chinese debt is "green", Sherry Madera, the City of London Corporation's special adviser for Asia, said in a Reuters report.

It was also reported that Madera predicted the figures will rise tenfold amid the pollution fight.

Funding gap, potential risks

Despite this fast progress, however, Ji Xiaonan, former chairperson of the Board of Supervisors for Key Large-Sized State-Owned Enterprises, said there is still a huge funding gap within China's environmental sector.

He estimated that investment demands in China's green industries total at least 2 trillion yuan annually, but that only 15 percent of this number is fulfilled by government finance. Therefore, he advises that the rest needs to be covered by other funding sources.

According to credit rating agency Moody's, worldwide green bond issuance hit a record high of $93.4 billion in 2016, rising 120 percent from a year earlier, bolstered by China-based issuers.

China accounted for nearly 40 percent of new green bonds last year, followed by the US, France and Germany, said Moody's.

Ji said there should be more green insurance products, as industries related to noise, light and nuclear pollution have yet to be covered.

Meanwhile, as investment returns from green projects are usually slower to come than from other projects, the government needs to work on how to encourage private investment in the green financial sector, he said.

Experts have also warned of the possible risks stemming from the fast development of green finance. They have also said that a risk prevention mechanism must be established to ensure healthy development.

A system should be set up to check the details of green projects through project registration in order to monitor how funds are spent, according to An Guojun, an associate researcher at the Chinese Academy of Social Sciences.

Professional third-party agencies should step in and play a role to ensure green funding does indeed go to green projects, she said.

Lombard Odier's Global Climate Bond fund, for example, did not buy Poland's sovereign green bond issued last year over concerns about issuer responsibility and so-called ''greenwashing''- when an issuer promotes green initiatives but nevertheless operates in a way that damages the environment.

In China's case, only 10 percent of green bonds sold last year had independent verification for the use of proceeds, according to a Reuters report published on August 18.

One issue is that Chinese green bond guidelines allow funding for "clean coal" power stations, which do not qualify under other market standards. Such disparities may stifle cross-border green capital flows; currently, most buyers of Chinese green bonds are Asian.

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