China, People's Republic of: Bank of Xingtai Green Finance Development Project

Finance / Finance sector development

The breakneck speed of PRC's economic development over the past decades has led to rapidly accumulating ecological and environmental damages. According to Yale University's Country Environmental Performance Index, PRC ranked 120th of 180 countries across 24 categories that include air, water, soil, ocean, climate, and biodiversity. In 2018, average annual mean particulate matter 2.5 micrometers or less (PM2.5) and PM10 in the greater capital region were 60 g/m3 and 109 g/m3 (WHO standards are below 10 g/m3 and 20 g/m3 respectively). In fact, 66.3% of the 338 cities in PRC exceeded these standards in 2018. This environmental condition causes unprecedented health risks, more so on the poor, and made the Chinese cities less livable. In this connection, PRC Government requested the proposed project from the ADB to provide a successful development model showcasing how to promote green finance through leveraging the financial and technical resources in the domestic banking sector.

The concept of green finance was first developed by People's Bank of China or PBC (central bank), China Banking and Insurance Regulatory Commission or CBIRC (banking regulator), and Ministry of Ecology and Environment or MEE (environment protection agency) through a joint opinion on Implementing Environmental Protection Policy to Reduce Credit Risk (2007). This piece of legislation for the first time incorporated the environmental protection requirements in domestic financial institutions' lending practices. Thereafter, a number of more comprehensive green finance policies and regulations followed. In 2016, PBC issued its green finance definition as "financial services provided for economic activities that are supportive of environment improvement, climate change mitigation and more efficient resource utilization." Among the 21 major commercial banks in PRC, qualified green finance lending has reached an accumulative $1.17 trillion from 2013-2017.

Despite the rising green finance volume, the domestic commercial banking sector is still far from meeting the actual environmental challenges in PRC. The domestic green finance definition is not aligned with international best practices (e.g., from clean development mechanism or CDM) that exclude fossil fuel-based technologies such as "clean coal." The PBC, CBIRC, and MEE have not enforced qualified green finance lending. Most commercial banks do not have a functioning green finance policy to operate it in a systematic manner. As a result, the green finance lending is far from being mainstreamed into commercial banks' operation as an explicit product line. Few banks have an adequate environment and social safeguard system. In fact, only three commercial banks in PRC have adopted the equator principles. In terms of the certified green bond issues in 2018, PRC's $31 billion (or 14% of total global issues) ranked 2nd behind the United States' $34 billion. However, $10 billion (excluding the $31 billion in PRC) were not aligned with the international definition that excludes fossil fuel power stations, clean coal, coal efficiency improvements, and hydro projects. The benefits of issuing green bonds are not inclusive but centered on a limited number of progressive financial institutions such as Industrial Bank Company Limited, which issued certified $10 billion green bond alone in 2018. Overall, the green finance challenges in PRC centered on misalignment with international best practices, developing legal and regulatory frameworks, limited technical capacities, and the lack of long-term financing.

PRC faces environmental challenges covering a myriad of industrial sectors and subsector across a diverse region, some of which are still underdeveloped. Therefore, the push for international definition that excludes advanced fossil fuel-based technologies in the past may not have been practical. In addition, due to the lack of financial incentives (e.g., rationalized interest rates) to compensate for polluting industries' negative externalities, effective regulatory enforcement to mandate annual green finance lending targets was difficult. In PRC, commercial banks' technical capacity to undertake unconventional green finance lending is generally limited. Finally, there is a lack of long-term debt in PRC's domestic banking sector to support industrial and manufacturing corporate and project lending. This is because the corporate bond market in PRC is underdeveloped and unable to supply banks with the necessary long-term funding. These challenges are significantly amplified in smaller joint stock banks, city commercial banks, and rural commercial banks. This leaves a major green finance funding gap, estimated at about 50% of the total commercial banking sector.

Bank of Xingtai's green finance system established

Green finance lending by Bank of Xingtai initiated and increased

Bank of Xingtai's ESG and related institutional capacities improved