MNI INTERVIEW: China’s Green Asset Push To Lure Global Capital

China’s policies aimed at accelerating a low-carbon transition could see it emerge as the world’s largest source of green assets, a lure for additional capital inflows from global investors hungry for higher yields, said Ma Jun, chair of the Green Finance Committee (GFC) of the China Society for Finance and Banking and Co-Chair of the G20 Sustainable Finance Working Group, in an interview with MNI.

“I am optimistic about the outlook for China’s green assets, which have been bolstered on both the supply and demand sides,” said Ma, former chief economist at the People’s Bank of China.

With CNY487 trillion of investment needed to fund China’s low-carbon transition over the next 30 years, according to GFC’s calculations, the creation of assets such as green bonds, loans and equity products will increase as the world’s largest emitter of greenhouse gases aims to hit peak emissions by 2030 and reach net-zero emissions by 2060, he said. (See MNI POLICY: Fiscal, Credit Support To Drive China Growth Plans)

The worldwide growth of investment mandates based on environmental, social and governance (ESG) criteria also means investors will seek out destinations that offer a large suite of compliant assets, Ma said.

“The yields on Chinese assets are expected to be higher considering China’s faster economic growth and the yuan’s potential to rally in the medium term, and the interest differentials between China and the U.S may reverse and widen again in the foreseeable future,” he said, noting the post-COVID Chinese economic recovery in 2023 will likely be "impressive".

The big opportunity is increased investment in transition activities in hard-to-abate sectors - such as steel, cement and petrochemical - supported by “transition finance”, as most green finance has been focused on “pure green” and near “pure green” projects. “Taking banks loan for example, loans for ‘pure green’ account for about 10% of China’s total loans, which means the other 90% is for ‘non-green’ activities, and a large part of them will need transition finance,” he said.

Apart from China’s steel sector, he highlighted coal-fired power generation, cement, non-ferrous metals, paper making, chemical engineering, petrochemicals, aviation, construction, and highway traffic, with the last two not covered by China’s carbon market yet. Transition finance will be indispensable for the carbon transition of these sectors.

POLICY INCENTIVES

Policymakers are playing a crucial role providing incentives to drive the transition. The PBOC introduced its “carbon emission reduction facility” in November 2021 to provide lenders cheap funds to help companies reduce carbon emissions.

The Bank had provided CNY240 billion of relending funds via this tool at the end of September, according to PBOC governor Yi Gang. The fund may be expanded to as much as CNY800 billion, people familiar with the operations said.

Ma said the tool currently targets “pure green” projects such as renewables and carbon, capture, utilisation and storage (CCUS) technologies, and there is a need to launch additional relending tools to support transition activities of carbon-intensive sectors.

Equity financing tools should be introduced, including transition funds created by both central and local fiscal authorities, Ma said. He highlighted regions challenged by the low-carbon transition like Shanxi, Inner Mongolia, and cities in the Northwest.

TRANSITION TAXONOMY

The near-term priority for developing transition finance is to introduce a national taxonomy, or classification system, to define criteria for transition activities of carbon-intensive industries, Ma said.

“The PBOC is working on a transition finance taxonomy, currently covering thermal power, steel, construction and building materials, and agriculture, and the Bank will include other carbon-intensive industries at a gradual pace,” he said. China will use the G20 Transition Finance Framework as a reference for developing its own transition finance policies, Ma added.

China is also working with other countries and organisations to facilitate cross-border green capital flows via developing “common language” to define green and sustainable activities. According to Ma, China’s big five banks have issued offshore green bonds based on the Common Ground Taxonomy (CGT), a joint initiative between the PBOC and European Commission.

“The activities in the CGT are recognised both by China and the EU, and has the potential to provide a basis for convergence of taxonomies between different jurisdictions,” said Ma.

GREEN INFLATION

Ma said concerns about green inflation sparked by the energy transition would ease over the longer term as innovation and wider adoption of green technologies would lower renewable energy prices and products such as EVs, batteries and green buildings. China’s massive market is conducive for large scale adoption of green technologies, thereby lowering cost of production, the economist noted.