Chinese financial reform needed to meet environmental goals

China must experiment with new ways of mobilising finance for low-carbon projects to avoid a potential investment gap of $370 billion by 2030

On July 13, the Chinese government announced a series of measures to increase the uptake of new-energy cars in China, potentially creating a market worth 30 billion yuan (US$4.8 billion). These include a mandatory target of at least 30% of all public vehicles bought by central and selected local governments to 2016 to be electric, plug-in hybrids or fuel-cell cars, plus the construction of charging points to be incorporated into wider urban planning.

The announcement marks a new round of government-led low-carbon investment in China, following the country’s successful push to develop and deploy renewable technologies in recent years, and forms part of China’s strategy to find new sources of economic growth.

It comes hot on the heels of other signs of an economic shake-up. In May, for example, China’s State Grid announced it would open two of its business sectors, distributed power grids and electric vehicle charging equipment, to new investors including private companies. After decades of double-digit – and uncontrolled – growth, China is restructuring its economy to make future development more sustainable socially, economically and environmentally.

In doing so, China faces three main financing challenges. They are daunting. First, China must increase the scale and pace of investments to sustain economic growth. Second, it must find greater economic efficiency in the allocation of public resources and a greater role for the private sector. And third, it must promote investments in cleaner and low-carbon technologies in order to tackle local pollution as well as finding a lower carbon development path.

Moreover, moving to a slower-growth but more sustainable economy requires investors to shift resources away from traditional financing towards newer, less familiar business models. This is particularly the case with low-carbon infrastructure and may deter investment, especially private sector investment in China’s “War on Pollution” and low-carbon development. According to one estimate, China’s low-carbon investment gap – the difference between the money available and the money actually needed – could reach US$370 billion by 2030.  

It is therefore imperative to make the three financing priorities outlined above mutually reinforcing. How to do this will involve integrated thinking and policy design between the green and low-carbon finance agendas and China’s economic and financial reform agendas. This may be challenging, but will bring significant, overlapping benefits.

For example, through China’s green credit guidelines (GCG), which aim to direct money away from polluting projects and towards clean ventures, mechanisms for monitoring, evaluating and ensuring compliance can bring the increased transparency and certainty that private investors crave. With new private banks allowed to open, the sort of finance that small and medium sized enterprises prefer will become more widely available. And the policy and regulatory framework needed to support clean-energy technologies can also encourage new public-private partnerships that allow more efficient use of public sector resources.

Meanwhile, efforts to establish a robust and independent judicial system will further increase the confidence of private investors. Reforms such as moving budgetary control of local courts from local to provincial governments should therefore be implemented in parallel with the push for new public-private cooperation models in China. These are just some of the potential synergies that would help finance the level of investment required for China’s low-carbon development path. 

Driving efficiency

One of the challenges of getting cleaner and low-carbon investment is the significant amount of capital needed up front. China’s financial reform will be instrumental as it creates the space to experiment with innovative financing measures to mobilise resources. The GCG and the experience of the China Clean Development Mechanism Fund provide interesting examples of how finance available on lower interest rates are being used to increase investment in cleaner energy, by mobilising other forms of public finance and through leveraging private investment by commercial banks.

At the same time many banks, particularly those that are championing green credit, the China Industrial Bank and the Shanghai Pudong Development Bank, are ready to deploy a wider range of financial instruments such as equity, guarantees and insurance. These leaders on green finance can demonstrate how these financial instruments can be used to share risks to scale-up private sector investment.

To align China’s green and low-carbon policy and financing initiatives with broader economic governance, a recent E3G policy paper recommends the establishment of a new multi-stakeholder China Platform for Low Carbon Finance and Investment to increase dialogue on these issues. This would help capture and share the valuable lessons coming out of current policy and best practices on green investment. We believe it would also help to build more coherence between green finance, climate finance and China’s carbon market pilots.