China’s Burgeoning Green Finance: Linchpin of Sustainable Development

By Alexander Ayertey Odonkor

There is strong evidence to suggest that China is indeed committed to meeting its targets for the reduction of carbon emissions, albeit not perhaps as rapidly as many would have hoped. Economist Alexander Ayertey Odonkor has some telling figures for us.

KEY TAKEAWAYS

A report from the People’s Bank of China1 (PBOC) released on 3 February 2023 reveals that China’s green finance, dominated by green credit and green bonds, continues to experience rapid growth. In 2022, green loans, representing the largest share of the country’s green finance, continued to expand. Outstanding green loans in yuan and foreign currencies amounted to CNY22.03 trillion (US$3.27 trillion), up 38.5 per cent year on year, reaching a growth rate of 5.5 percentage points higher than 2021, and 28.1 percentage points faster than the average growth rate of all types of loans. In a similar fashion, China’s green bonds have also expanded rapidly, surpassing the United States to become the world’s top issuer of green bonds in 2022². China’s green bonds, largely issued by financial corporates (representing 58 per cent of the entire total), amounted to US$76.25 billion in 2022, up from US$68^.1 billion in 2021³.

In fact, China’s burgeoning green finance, a strong indication of the country’s commitment to reaching peak carbon emissions before 2030 and attaining carbon neutrality by 2060 positions the Asian giant on a sustainable development pathway. With the transition to net zero, requiring a massive amount of green financing – about CNY 140 trillion (US$22 trillion), across electricity, steel, mobility, and construction and real estate for the 2020-2060 period – China’s rapidly developing green financial system and markets are crucial to closing the country’s US$6.7 trillion green finance gap (US$170 billion per year)⁴ over the next four decades.

At present, China’s green finance instruments have increased the level of financial flow to green transportation, renewable energy projects, recycling facilities, and water treatment plants, shifting investments from natural-resource-intensive industries to resource-efficient business models. Ultimately, green financing has been indispensable to efforts dedicated to accelerating green transformation, contributing significantly to the substantial drop in environmental pollution and enhancing biodiversity conservation, driving high-quality socio-economic development, and fostering remarkable progress towards a low-carbon economy and sustainable future.

For example, in 2021 PBOC, the country’s central bank, launched the Carbon Emission Reduction Facility (CERF)⁵ to provide loans based on market preferential rates to firms engaged in clean energy, energy conservation and environmental protection, and low-carbon technologies. The facility offers funds to financial institutions at preferential interest rate of 1.75 per cent with reasonable maturities. To date, the PBOC has granted more than RMB300 billion of credit under the CERF, enhancing the lending capacity of commercial banks to issue more than RMB510 billion in carbon emission reduction loans, which has helped in reducing China’s emissions by over 100 million tons of carbon dioxide equivalent in 2022, further reducing air pollution, promoting healthy ecosystems, and protecting biodiversity, including the well-being of people in China. According to the Energy Policy Institute at the University of Chicago⁶, from 2013 to 2020 particulate pollution in China dropped by 39.6 per cent, adding about two years to the average life expectancy. To put this into perspective, it took several decades and recessions for Europe and the United States to accomplish the same level of pollution reduction that China achieved in seven years – a remarkable progress, which most likely would not have seen the light of day without accelerated green finance.

Over the past few years, China’s rapidly developing green financial system has increasingly enhanced access to finance for projects that typically prioritise sustainable and inclusive socio-economic growth. The effect is to promote domestic green innovation and accelerate progress towards green transformation across various industries, especially in the energy sector, the epicentre of greenhouse gas emissions. In the energy sector, which contributes nearly 90 per cent of China’s total greenhouse gas emissions⁷, the rise in financial flows to green industries, which supports research and development (R&D) and drives domestic green innovation, has advanced green transportation and boosted the production of renewables and low-carbon technologies, contributing significantly to the country’s rapidly growing renewable energy output. In fact, China’s expanding green finance is increasingly shifting investments away from the fossil energy industry to renewable energy projects, a move that has yielded incredible results over the years. By the end of 2022, China’s newly installed renewable energy capacity reached 140 million kW⁸, as the country’s total installed renewable energy capacity exceeded 1.2 billion kW, extending its lead as by far the world’s largest producer of renewable energy. At the same time, newly installed wind power and solar power capacity surpassed 120 million kW, a record high. By the end of 2023, China expects total capacities for wind, solar, and hydro power to reach 430 million kW, 490 million kW, and 423 million kW, respectively, a projected clean-energy expansion that is strongly supported by green finance.

Similarly, in the transport sector, which is also a major source of greenhouse gas emissions, China’s expanding green finance has increased financial flow for green transportation projects (upgrading infrastructure and boosting production of electric vehicles), contributing greatly to decarbonising transport. In 2022, the production of new-energy vehicles (NEV) in China reached 7.06 million units, representing 96.9 per cent⁹ year on year, increasing the market share of NEVs in China’s automobile market to 25.6 per cent, representing an uptick of 12.1 percentage points from 2021. Also, by the end of 2022, China, home to the world’s largest number of installed electric vehicle chargers, had added 2.59 million units, bringing the total to 5.21 million charging points, up from 1.14 million in 2021¹⁰. By advancing green transport and accelerating decarbonisation of major carbon-intensive industries across key sectors, including energy, agriculture, manufacturing and construction, and real estate, China’s rapidly expanding green finance is the linchpin to realising a peak in carbon emissions by 2030 and carbon neutralisation by 2060. The green finance initiative, whose full potential could be unlocked by attracting more international investors, promotes high-quality social and economic development, reduces environmental pollution, and enhances energy efficiency, all of which are crucial to sustainable development.

Alexander Ayertey Odonkor is a global economist with a keen interest in the social, environmental, and economic landscape of both developing and developed countries, particularly in Asia, Africa, and Europe. He is a columnist for the China Global Television Network (CGTN), The Brussels Times, China Daily, The Diplomat, Business and Financial Times and several others. He holds a master’s degree in Finance and a bachelor’s degree in Economics and Finance, together with a comprehensive postgraduate education, spanning entrepreneurship, environmental and social management, mining, risk management, electronic trading, and business management, pursued at Harvard University, the Massachusetts Institute of Technology, Curtin University, the University of Adelaide, the New York Institute of Finance and Delft University of Technology, respectively.

References

1. China’s green loans see rapid growth in 2022, Xinhua, 3 March 2022 https://english.news.cn/20230203/7d54b255a4b54769aa92ff68d29a34e1/c.html
2. 2. China to keep lead in green bond market amid alignment with global standards, S&P Global, 12 February 2023 https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/china-to-keep-lead-in-green-bond-market-amid-alignment-with-global-standards-74039783
3. Leading countries in terms of green bonds issued in 2021, Statista, https://www.statista.com/statistics/1289016/green-bonds-issued-worldwide-by-country/#:~:text=Green%20bonds%20issued%20in%20the,of%20green%20bonds%20in
   %202021.
4. China’s Climate Challenge: Financing the Transition to Net Zero, World Economic Forum, https://www3.weforum.org/docs/WEF_Finance_the_Transition_NewZero_Future_China_2022.pdf
5. Speech by Governor Yi Gang at the Launch Ceremony of Building a National-level Green Exchange in Beijing Municipal Administrative Center, The People’s Bank China, http://www.pbc.gov.cn/en/3688006/3995557/4791152/index.html
6. China has Quickly and Sharply Reduced Pollution Since Enacting Strict Policies, EPIC, 15 August 2022 https://epic.uchicago.edu/insights/china-has-quickly-and-sharply-reduced-pollution-since-enacting-strict-policies/
7. An energy sector roadmap to carbon neutrality in China, IEA, https://www.iea.org/reports/an-energy-sector-roadmap-to-carbon-neutrality-in-china/executive-summary
8. China’s energy output in high gear in 2022, Xinhua, 8 January 2023 https://english.news.cn/20230108/3ce1c574816144c9939e0cd123f066f4/c.html#:~:text=The%20newly%20installed%20capacity%20of,million%20kW%2C%20a%20record%20high.
9. China’s EV charging points see rapid expansion in 2022, Xinhua, 18 January 2023 https://english.news.cn/20230118/4fb0b7738bf642ab99fd818f5d87ea19/c.html#:~:text=The%20rapid%20growth%20in%20charging,to%20about%207.06%20million%20units.
10. Number of publicly available electric vehicle chargers (EVSE) in 2021, by major country and type, Statista, https://www.statista.com/statistics/571564/publicly-available-electric-vehicle-chargers-by-country-type/