How China’s financial regulation is shaped by green commitments

In the second part of this two-part profile, we look at how China is taking the lead on green finance regulation and the role its central bank has played. Read part one. 

With China’s government setting clear goals on curbing emissions and tackling climate change, green financial regulation has become a huge focus for its central banks and regulators.

But what sets China apart from other countries is its holistic approach to green finance, said Xie Wenhong, head of the Climate Bonds Initiative’s China programme.

Its green financial regulation efforts have been largely spearheaded by the People’s Bank of China (PBoC), although other financial regulators have also played key roles. In 2014 the PBoC brought together a working group of financial stakeholders which set up five pillars defining how it approaches green finance: taxonomy, definition, incentives, disclosures and financial instruments.

“Ever since then, a lot of the work, either policy advancement or marketing innovations, has been around these five prongs,” Xie said.

How China approaches green financial regulation

The PBoC has done a lot on green finance, from designing a green financial framework and taxonomy to developing policy tools and risk assessment on bank performance. The pillars it set out in 2014 have also influenced how China has set up taxonomies or definitions of green transition finance both domestically and internationally.

The PBoC set up a green taxonomy aligned with that of the EU, called the EU-China common ground taxonomy, while it started to trial its first transition finance taxonomy in early 2024. The top 21 Chinese banks conduct climate stress testing although the information is not disclosed publicly. However, around half of China’s publicly traded companies are required to report their emissions, as well as risk and transition plans.

“[The PBoC] is making real change and beyond that [it] is also leading … the thinking of the whole financial policy makers and financial industries in China about what is beyond the current timeline,” said Ting Su, Chinese sustainable research associate at the World Resources Institute.

The PBoC has also included green financial bonds into its asset pool, which is eligible for collateral for its medium-term lending. This policy has had a significant impact on the market rates for green projects.

One study found that China’s collateral-based monetary policy led to a reduction in costs for green projects between 2017 and 2019, while another study found that including green financial bonds as collateral increased the spread between green and non-green bonds by 46 basis points.

While experts in China interviewed by Green Central Banking all agreed that the country has made significant progress on its green initiatives, there were areas where they said it could improve its efforts on climate finance, especially when it comes to nationwide coordination.

For example, local green subsidies have “been a little bit uneven”, with richer provinces and municipalities better positioned to support subsidies, said Xie.

“The central bank has been really driving this [green push] but it needs to coordinate well with other ministries and also the central government,” he said.

Domestic green bonds, for example, are regulated by different authorities and have different rules, with sometimes different definitions of what constitutes green. This has led to calls for more harmonisation and coordination between the PBoC and the China Securities Regulatory Commission (CSRC).

How effective are China’s green finance programmes?

Still, many of these efforts, such as the green lending scheme, have been effective. Outstanding green loans in China’s banking sector reached 35.75tn yuan (US$4.9tn) in the third quarter of 2024. While that is less than 15% of total loans, it’s still positive, said Cheng Lin, director of the Beijing Institute of Finance and Sustainability.

“On the other hand, around 85% of the existing banking assets are not green yet,” he said, but the PBoC’s support for green finance and China’s efforts on green financial regulation is not likely to falter any time soon. A lot of the demand is domestically driven, with EVs for example, accounting for 40% of total vehicle sales.

“[The PBoC] will be focusing on the green financing side, so at least not reducing its intensity in terms of financing support,” he said.

The PBoC extended its cheap credit to lenders funding green projects until 2027. The loans are offered by lenders at close to the PBoC’s benchmark, with the central bank providing up to 60% of funding at a rate of 1.75% for a year. By 2023, at least 880bn yuan ($123bn) was distributed to carbon reduction projects under this scheme.

The lending scheme has brought down funding costs for renewable energy producers and developers, Ting said.

“The major export pools now include quite a lot of renewable energy related goods and [there is also a lot of] evidence about China’s surge of installed renewable energies … This is all evidence that these [lending programmes] did change the picture [of green projects]”.

China’s cooperation internationally has also started to increase capital flows. Its competitiveness in the green market has also encouraged other countries like Japan to put forward green growth strategies, said Justine Leigh Bell, executive director at Anthropocene Fixed Income Institute.

“They’ve done that because of China, because China is now ahead of them in market competitiveness for deal flow and trade in south-east Asia, and that is a big risk to Japan’s own businesses. That’s how big this gets,” she said.

While many might focus on the increase in emissions and coal plants in China, “if you step back and look at the macro, Asia is going to run this agenda”.

“If the west [continues] backtracking on everything – watering down decarbonisation targets and strategies and net zero – well, then that is only delaying the inevitable, which is the fact that the capital markets are going to shift to Asia,” Bell said.