How China is charting a path towards a green financial sector

As a lead author of the Mobilising Investment chapter of the recent Green Growth in Practice: Lessons from Country Experiences it became starkly clear how Governments at very differing stages of development and with widely different structural features are grappling with common financing and investment challenges.

The challenge is appropriately combining public policy and public finance to most effectively mobilise private sector investment for green growth. Of course, as anyone involved in shaping public policy or finance measures for transformational changes will testify, the challenge is far from simple. Rather a range of measures must be considered, particularly:

1.  The importance of an enabling environment for green investment characterized by:

• Clear, long-term, and binding policy and regulatory frameworks;
• Alignment of price signals;
• Active government programs for investable projects;
• Managed dialogue with stakeholders, including private investors.

2.  How to ensure effective use of public funds through: 

• Direct budget allocation, including through revenues or taxes, to sector agencies and sub-national governments and/or;
• Via public intermediaries and dedicated green funds.

3.  Smart use of financial instruments  to most appropriately tackle risks and return on investments which are:

• Integrated with the policy context;
• Targeted to provide most effective level of concessionality and;
• Transparent in how public financial incentives are provided as well as withdrawn;

The report also highlights the importance of long-term approaches towards financing green growth and financial innovation required to attract institutional investors into green assets. Further inquiry is also necessary to consider how financial regulatory frameworks promote and sustain long-term finance for green investments.  

Whilst undertaking such measures may exceed the technical capacity of most, if not all Governments, the chapter highlights these as considerations required for redirecting all financial flows towards a green economy. It also underscores the importance of leadership by Ministries of Finance and strong dialogue between public policy and finance decision-makers, including with private sector representatives.

At the same time as being involved in the GGBP assessment, I also led an E3G study on how China’s Green Credit Guidelines (GCG) , which are becoming pivotal to the Government’s drive to tackle air and water pollution,  are developing alongside the broader economic and financial reform agenda also underway.  

After decades of double-digit – and uncontrolled – growth, the Chinese Government is intent on ensuring greater economic efficiency in the allocation of public resources and an increased role for the private sector. That this coincides with the need to design public policy and finance for mobilising investment in riskier and mostly costlier technologies appears to present a dichotomy for decision-makers. Yet on closer inspection that may prove to be a false one. Emerging evidence suggests that there are many potential synergies between China’s green finance agenda and the objectives of financial reform. 

For example, the GCG mechanisms being created for monitoring, evaluating and ensuring compliance with these guidelines can increase the transparency and certainty that private investors require. Similarly, the policy and regulatory frameworks needed to support clean-energy technologies will help mobilise private investors and foster new public-private-partnerships that can ensure more efficient use of public resources. Furthermore, as new private banks are allowed to open they can bring the kind of local financial solutions that support SMEs and greening of supply chains.

Through its Clean Development Mechanism Fund, the Chinese Government is also making available relatively low cost debt to mobilise other forms of public and private finance for cleaner energy investments. Some of the commercial Banks that have championed the green credit agenda, notably the China Industrial Bank and the Shanghai Pudong Development Bank, consider that a wider range of financial instruments such as equity, guarantees and insurance, would allow them to be more effective in managing risks for scaled-up private sector green investment.

China’s green financial agenda has developed under the joint leadership of the China Banking Regulatory Commission, the Peoples Bank of China and the Ministry for Environment and Pollution. Their role has been and will continue to be essential to the success of China’s green finance agenda, yet maximising potential synergies with the financial and economic reform agenda will require deeper and broader engagement of Chinese decision-makers. Our report recommends a Chinese Platform for multi-stakeholder dialogue can help integrate relevant policy and financial innovations for a green financial sector that is commensurate to the green investment challenges China faces.