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China's green shift for the economy has pulled in all of the government's key economic agencies to assess the risks and rewards of spending trillions of yuan into the next generation to replace traditional energy, with the People's Bank of China playing a major role, policy advisors told MNI.

The PBOC has designed a policy package to support carbon emissions reduction, including lower cost relending and other monetary facilities, and may add new tools in its open market operations, an advisor familiar with monetary policy, who declined to be named, told MNI.

A cheap relending scheme would be launched soon, but the amount is not yet settled, the source said.

The PBOC will be focused on structural and targeted measures, such as a cut in the reserve requirement ratio for banks to bolster specific sectors or groups, including small businesses, while addressing issues such as green growth and social equity, he said.

"This means the monetary policy would have quasi-fiscal functions," the advisor noted, see: MNI Interview: Rate Cuts The Best China Growth Path-Advisor.

NDRC COORDINATES

The National Development and Reform Commission, China's top economic planner, is coordinating with other authorities, including the central bank, tech and transport authorities, for a national policy package named 1+N, said Li Junfeng, former director general of China's National Center for Climate Change Strategy and International Cooperation (NCSC) under the Ministry of Ecology and Environment, at the 5th Taihe Civilization Forum.

According to the NCSC, a goal of peak carbon dioxide emission by 2030 and carbon neutrality by 2060, will mean China needs to add about CNY139 trillion of investment in climate change funding, or CNY3.5 trillion per year, for the next four decades.

Li added that the investment will become a new driver of the economy. For example, China is accelerating the construction of a new electrical power system fueled with non-fossil energy to cover 75% of the whole energy system by 2060, see: MNI INTERVIEW: China Needs Green Gauges For Growth Goals.

"The investment will create a new growth pattern featured with a low-carbon and low-cost energy systems … but an urgent task for policy makers is to set up specific roadmap to guide the pace of cutting carbon emissions, which is a target lasting for decades … so we need to ensure the shift is stable and secure," said Li.

He added that "the participation of financial sector is indispensable, and the related financial rules will be included into the massive plan."

A clear plan can avoid a "campaign-style" carbon reduction program that sets unrealistic goals or penalises carbon-intensive industries randomly, he said.

GROUNDWORK

Dealing with massive finance needs to transition from carbon-intensive assets is an area where the PBOC will be instrumental, said Sun Tianyin, deputy-director of the Research Center for Green Finance Development at Tsinghua University, at the 5th Taihe Civilization Forum.

New financial products such as loans and bonds with floating rates and yields linked to the carbon emission performance of projects are options, he suggested.

In addition, the central bank could also use its quarterly macro-prudential assessment to encourage lenders to provide green loans or hold green bonds, which would be a positive to expand the green financial market, Sun said.

Incentives for financial institutions will also likely be considered, Sun said. Some banks have started lower cost relending efforts as pilot trials to support green projects, he noted.

RISKS

Another task for the central bank is monitoring and heading off the possible systemic risks.

For financial institutions, the challenge is avoiding a deluge of stranded assets in carbon-intensive industries, such as coal mining and coal-based power generation, that could face higher operation costs and lower market demand as carbon reduction policies are rolled out, said Sun.

He added, in some provinces, carbon-intensive sectors have significant bank loans outstanding and some are shareholders in financial institutions.

Even though President Xi Jinping has set the 2060 carbon neutrality target, shutting existing industries and suddenly scrapping projects could "create new risks", "Orderly transition must be fully taken into consideration," Sun said.

There are discussions in China about how to use the lower cost overseas funds to support the transition of traditional coal power generation companies, Sun said, noting some multilateral financial institutions, such as Asian Development Bank (ADB), and sovereign and pension funds, could also invest.