Understanding China's green finance triumph

Right timing and a top-down policy among reasons for system's success

China, according to Chen Yulu, deputy governor of the People's Bank of China, has made significant achievements in green finance to support ecological civilization and green development. Chen made the observation during a recent policy briefing press conference.

He summarized China's achievements in green finance as the world's fastest market growth and most comprehensive policy framework.

Chen also highlighted that China has implemented the world's most innovative regional pilots while being most active in pushing for global progress in this regard.

Indeed, after the release of the Guidelines for Establishing the Green Financial System, China has made a systematic change in greening its financial system, be it central governmental policy, local regulations, institutional structure, market and international cooperation. And the secret is worth disseminating globally for countries wanting to learn from China's experience.

As a long-term researcher in this area, I am on Chen's side and believe there are four key reasons for China's success in green finance.

First, it is the right timing. For all policymakers, timing is a primary factor when thinking about making structural changes. With sustainability becoming a common global concern, and ecological civilization weighing a great deal in China's economic and social development, it was the right time for China to plan a green financial system.

"Green" as an element has now been domestically incorporated into financial supply-side structural reform and the design of new megalopolis areas (such as the Yangtze River Delta Zone, the Greater Bay Area, and the Beijing-Tianjin-Hebei Region).

Another important event was the G20 summit hosted by China in 2016. The Guidelines for Establishing the Green Financial System were published just before this conference, giving China an important opportunity to show its dedication to green development and seek international stakeholders' cooperation.

Second, the top-down policy approach matters. Unlike the Western experience, in which green finance was incubated from the market side and has gradually pushed the policy side to make changes, the Chinese approach is more a "top-down" one.

As the first step, with the full support from the State Council, China's Cabinet, the top-level policy design was supported by seven different ministries, each of which was assigned a stake in the green financial system. Following the incentives from the policy side, stakeholders from the market, the press, and academia started to engage in various ways of practice and innovation.

At the same time, five local pilots were established to explore better ways to apply top-level policies. Within the national green finance framework, the pilots have developed localized incentives and penalties, encouraged green financial products innovation, and improved risk control.

As each of the five pilots have different geographic and economical conditions, they are representative of more areas in China. Indeed, today other cities and provinces in China have duplicated best practices from these pilots for green finance.

Third, China has made good use of international synergies. Considering the fact that a lot of Western countries have longer history and/or richer experience in green finance development, China has put attention to international cooperation.

On the one hand, it has improved the domestic green financial system by learning from international best practice and on the other hand, it has actively taken part in multilateral and bilateral dialogues.

By jointly initiating the G20 Green Finance Work Group, NGFS and the Green Belt and Road Initiative Investment Principle, China has not only gained an important role in international cooperation, but also become a leader in pushing forward the global agenda on green finance.

The initiatives listed above have brought together world leaders for better harmonizing international standards, coordinating joint supervision, and cross-border green capital flow.

Finally, China has paid attention to the balance of public good and profitability. In order to make "green" not only beneficial for public good, but also profitable for private sector, the key issue to address is the internalization of externalities (such as emissions and use of environmental resources).

To confront this challenge, the Chinese central government has published several monetary policies complemented with a macroprudential system. Within the guidance of this new management mechanism, local governments have used taxes, subsidies and bonus as policy incentives to push the market to perform "greener".

In addition, environmental pricing work has been put on agenda. The national carbon market was launched in December 2017 and is expected to be perfected with a three-step approach. Meanwhile, many of the financial product innovations, such as the environment pollution mandatory liability insurance and environmental tax, have helped drive the private sector to consider environmental risk.

In conclusion, the achievements of green finance in China have been hard earned. It's from strong political dedication, strategic planning, and down-to-earth practices.

These efforts are worth disseminating to more countries, especially developing countries with similar environmental, social and economic conditions.

The author is director of International Institute of Green Finance, Central University of Finance and Economics. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

(China Daily Global 08/22/2019 page13)