MNI INTERVIEW2: PBOC Needs Green Finance Tools-Senior Advisor

The People's Bank of China needs to develop tools to cut the cost of green finance to encourage tens of trillions of yuan in green and low-carbon investment as the government works to achieve its pledge of carbon neutrality by 2060, a high-ranking advisor to the People's Bank of China told MNI.

While green bond issuance has slowed during the Covid outbreak, the PBOC should set up a relending mechanism to provide cheap loans to low-carbon projects, Ma Jun, chairman of Green Finance Committee of China Society for Finance Banking under the PBOC, said in an interview. It should also accept low-risk green assets as collateral for its monetary operations, include lenders' support for green finance in macro prudential assessments and lower risk weights for green assets, he suggested.

The country needs to invest over 2.5% of GDP in the low-carbon sector, a total of CNY138 trillion over the next 30 years, to honour its pledges under the Paris Agreement which aims to limit global warming to 1.5 degrees Celsius, said Ma, who is also a member of the PBOC's Monetary Policy Committee.

China President Xi Jinping has pledged that China would reach peak emissions by 2030 and achieve carbon neutrality by 2060.

China's sovereign wealth fund and the State Administration of Foreign Exchange should increase ESG investments, while local governments should provide more interest subsidies and guarantees to back projects which support Paris goals, Ma said.

Chinese authorities could also encourage local governments to issue green bonds in the domestic market, which Ma said could be more practical than following European nations in issuing green sovereign debt.

This year has been a difficult one for what had been a booming green bond market, with issuance tumbling after pandemic lockdowns earlier in the year.

GREEN BONDS

Sales of green bonds meeting Chinese domestic standards totaled RMB207.1 billion from January to November, a 20.7% decline from the same period of last year, according to China Lianhe Equator Environmental Impact Assessment Company.

Beijing should also seek to cooperate with the European Union to explore more ways of raising low-cost capital, as well as to introduce European low-carbon technologies into China, Ma said.

China is set to spend about CNY70 trillion in sectors such as renewable energy and zero-carbon technology by 2060, studies show. Total installed capacity of wind and solar power should rise to over 100 GW per year in the next five years compared with an average 62.63GW from 2015 to 2020, while sales of electric cars will likely grow 35% per annum from 2020-2025, Ma predicted

Growth in alternative energy could be even faster than expected, Ma said, adding that demand for green buildings is also rising, providing more environmentally-friendly investment opportunities. Chinese financial institutions are also increasingly developing innovative products for ESG investing, he noted.

Dirty industries, though, face increasing redundancy without reform. Financial institutions should prepare for possible default risks in sectors such as coal and help companies transition to producing alternative energy by providing low-interest loans, issuing green bonds or setting up private equity funds, Ma said.

China has tens of thousands of companies in its coal sector alone which will need finance to transform themselves, Ma said. As many as one in five of these may be forced to default by 2030, up from a default rate of about 3% in 2020, he said.