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Promoting Green Finance in China - Takehiko Nakao

Speech | 20 March 2016

Keynote speech by ADB President Takehiko Nakao at the China Development Forum 2016: China in the New Five-Year Plan on 20 March 2016 in Beijing, People's Republic of China

I. Introduction

Mr. Chairman, Honorable Minister Lou Jiwei, distinguished guests:
I am delighted to participate once again in this prestigious Forum. 
At the past two China Development Forums, I have discussed different aspects of public finance reforms which is of course integral and critical part of comprehensive reforms: in 2014 on tax reforms, and in 2015 on resource mobilization for sustainable urbanization.

I appreciate Minister Lou’s efforts since 2013 to lead major reforms in setting the foundation for a modern fiscal system in China. As Minister Lou has already explained, the value-added tax (VAT) has been broadened to cover the service sectors, which previously had been subject to a different business tax regime. Preparations have been started to introduce property taxation on houses. 

Improved budget disclosure for both central and local government helps the people to monitor the usage of taxes more closely. Government transfers from the central government to local governments were increased while transfers earmarked for specific purposes reduced. The rapid development of local bond markets is particularly worthy of mention. And local government borrowing from banks and other sources is now better regulated and local government debt situations are more transparent. 

I would like to encourage the Chinese authorities to sustain their fiscal reform efforts to support China’s inclusive and sustainable growth. 

The theme of this year’s China Development Forum is “China in the New Five-Year Plan”. The 13th Five-Year Plan (2016–2020) was endorsed by the National People’s Congress just recently. ADB is honored to have contributed to the preparation of the Plan at the invitation of the Chinese government. Key among the Plan’s objectives is changing the growth pattern toward a model that promotes innovation, inclusiveness, and sustainability. 

Today, I would like to focus on sustainability among these three objectives and discuss how to enhance investments in environment-friendly development and climate change actions through what we call “green finance”. Both a modernized fiscal system and effective mobilization of private sector resources are necessary. The general principle of “allowing the market to play a decisive role in resource allocation, clearly stated at the Third Plenum of the Central Committee of the Communist Party in 2013 should be adhered to in achieving sustainable growth in China. The market mechanism should be fully utilized.

II. Green finance

China has been making impressive and rapid development in these several decades. But it has come at a significant environmental cost. The 13th Five-Year Plan supports a vision for “ecological civilization,” which is a balancing of economic growth with environmental well-being and climate change considerations.

This vision requires investments in controlling air pollution, cleaning rivers and soil to reverse environmental damage, and recovering forests. It also requires investments in climate mitigation and adaptation measures. Investment in new technologies such as carbon capture and storage is also important. Mobilization of financial resources for such “green investments” can be referred to as “green finance”. 

Of course, the most important part of green finance is large-scale investments by the government itself. Recently, the National People’s Congress approved a plan to allocate CNY500 billion, or about $80 billion, from the 2016 central government budget for infrastructure, including many green investments such as high voltage transmission lines, smart grids, and urban metro systems.

ADB is supporting green investments through its lending. Indeed, ADB’s cumulative lending in green investments to China during the 12th Five-Year Plan of 2011–2015 amounted to $4.1 billion, or 55 percent of our total lending to China during this period of $7.5 billion.
Going forward, in addition to government investments, I would like to emphasize six important ways to promote green finance, including the greater mobilization of private resources and better use of the market mechanism.

First, strengthening policies and institutional framework. Ambitious environmental policies, laws, regulations and standards, and their effective enforcement will catalyze greater green investments by both the public and private sectors. 

ADB has been supporting environmental policies and regulations in China through our technical assistance and lending. One of the most important recent assistance in this respect is our first policy-based loan of $300 million to China for air quality improvement in the Beijing-Tianjin-Hebei greater capital area.

Under this policy-based loan approved last year, Hebei province issued a new emission standard for volatile organic compounds, which are chemicals that evaporate and become a key factor of air pollution. This policy action, which is targeting 121 factories in 11 key industries, will require factories to introduce pollution reduction devises into their production processes. Other policies under this loan include guidelines on converting coal to gas for power and heating, transport-related regulations, and enhanced environmental monitoring of polluting industries.

The fact that China has decided to request a policy-based loan from a multilateral development bank for the first time represents China’s strong commitment to work with the international community in tackling these environmental challenges.

Second, reducing subsidies and introducing “green taxes.” Energy is heavily subsidized in China, and the introduction of environmental taxes is still under discussion. This implies that the external cost associated with pollution and climate impact is not reflected in prices. In the process of modernizing public finance, it is urgent to reduce energy subsidies and introduce so-called “green taxes.”

Green taxes can be levied on CO2 emissions, mining activities, environmentally-damaging products, and industrial waste and pollution. Revenue from green taxes can be used to finance the scaling-up of green investments.

Third, promoting public–private partnerships. China’s huge need for finance in environmental improvement and climate change suggests that private sector resources are just as important as public funding. In this regard, public–private partnerships (PPPs) can play a critical role. China has valuable experience in implementing PPPs.
In wastewater treatment alone, there have already been about 3,300 PPP projects, some of which are supported by ADB’s private sector operations. In addition, there have been important PPP projects in renewable energy in the power sector and energy efficiency in buildings and manufacturing. PPPs can also be adopted in such areas as solid waste management and sustainable transport. 
The government should make further efforts to create an enabling environment for more PPP projects. In particular, the government should take a strong lead in setting appropriate tariffs and regulations to make such business commercially viable.
Fourth, developing green bond markets. Steps to encourage greater private sector participation must be supported by alternative financing instruments to bank lending. Green bonds have been a successful instrument for green finance in many countries.
In China, by issuing green bonds, companies and local governments can access financial resources at lower costs than through regular bank lending. At the same time, China’s local banks can issue green bonds to support favorable lending to green investments.

Fifth, further developing emissions trading schemes (ETS) for CO2. In 2011, China started 7 ETS pilot projects in Beijing, Chongqing, Shanghai, Tianjin, Guangdong, Shenzhen, and Hubei. Three of them are supported by ADB. Based on these pilot projects, China announced that it will launch a national emissions trading scheme by 2017.

This national emissions trading scheme will cover key industries such as steel, cement, power generation, and petrochemicals, and involve more than 10,000 firms. It will trade about 4 billion tons of CO2 emissions per year, which is half the country’s total. This is a welcome but ambitious target. To achieve this, the institutional framework needs to be strengthened. The government should prepare nationwide regulations, establish unified trading platforms among the pilot projects, and set up a national administrator.

Sixth, expanding “eco-compensation” schemes. China has already been pioneering so-called eco-compensation schemes. One example is the mechanism internationally known as “payment for ecological services.” Under this mechanism, for example, downstream water users such as municipal residents provide payments through their water bills to upstream farmers for the ecological service of preserving water quality by limiting the use of chemical fertilizers and pesticides.
ADB has been supporting several projects under this mechanism in China. In the Guiyang Integrated Water Resources Management Project, which was supported by a $150 million ADB loan approved in 2009, downstream residents in Guiyang municipality pay upstream farmers in Longli county CNY1 million per year for adopting ecologically-friendly agricultural practices.
China is promoting many other eco-compensation mechanisms including reforestation and converting cropland back to grassland. China has also established a knowledge hub on eco-compensation to share its experiences with other developing countries in Asia. 

III. Conclusion

Promotion of green finance is an urgent task for China. China has made a remarkable commitment at COP21. Addressing pollution and other environmental challenges is not only a national priority for China. It paves the way for a clean environment that is a public good with tremendous positive externalities for the region and the world. 

ADB will continue to be China’s reliable partner to achieve environmentally-sustainable growth. Indeed, in 2014, ADB signed two memoranda of understanding with the Chinese government to enhance cooperation in addressing climate change and in strengthening the control and rehabilitation of air, water, and soil pollution. ADB’s new Country Partnership Strategy for China for 2016–2020 has made climate change and environmental management its first priority in our continued lending to China.

To end my speech, I want to share with you an old rural scene described by a famous Chinese poet Du Fu (杜甫) in the Tang Dynasty more than 1,200 years ago. In one of his poems, he speaks of a slow spring day, with a beautiful river and mountains, and a warm wind carrying the fragrance of flowers. 

I hope we will make all possible efforts to preserve such a peaceful and beautiful landscape as China develops further.

Thank you.