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Report: The push to transform China’s financial system

Haze in Dalian City, China

Developing a green financing system for China is crucial to speed the transition to a green economy, according to a new report. And while the cost of such a move enters the hundreds of billions of dollars, the pay off in terms of increasing quality of life and future growth prospects for the country is well worth the effort.

The synthesis report on Greening China’s Financial System was released by the Financial Research Institute of the Development Research Center and the International Institute for Sustainable Development at the recent China Development Forum in Beijing, which attracted high-profile guests including Henry Kissinger, Jeffrey Sachs and Joseph Stiglitz.

In 2014, China’s gross economic output exceeded $10 trillion. However high levels of pollution are putting China’s continued growth in jeopardy, with pollution damage costs estimated at between 3-6 per cent of GDP.

“Air pollution has become increasingly prevalent and serious in recent years, and is now a major obstacle to China’s economic and social development,” vice president of the DRC Liu Shijin said in the report foreword.

“To compound the issue, water pollution and land pollution have reached alarming levels; wasteful and excess use of energy and resources are still a common sight around the country.”

He said after three decades of quantitative expansion, China was entering a “new normal” where business as usual could not be sustained, necessitating a transition to a new system that allows for qualitative development, a crucial element of which is “green development”.

“Accelerating the pace of green development under the new normal will not only require the adoption of a new mindset – that green development represents a major transformation of the national growth model and limitless future potentials – but, more importantly, also the implementation and realisation of green philosophies, strategies and policies, so that we have both achievable targets and evaluation mechanisms for green development as well as the related incentive measures and support systems for facilitating a green economy. Against this new economic climate, actively developing green finance is an inevitable choice for China.”

The president Xi Jinping, he said, had once noted that China wanted “clear waters and green mountains just as much as golden and silver mountains”.

“In fact, clear waters and green mountains are China’s gold and silver,” the president said.

Key priorities for the government include clean energy, industrial energy conservation, building energy conservation, transport energy conservation, improvement of energy efficiency and environmental pollution control – but investment needs to be around $2.9 trillion yuan (AU$600 billion) a year from now until 2020. Because of fiscal limitations and other priorities, two-thirds (around two trillion yuan or AU$412 billion) needs to come from domestic and international financial and capital markets, it is estimated.

Because of the significant positive externalities green financial products such as green credit, green securities, green insurance and green bonds create, Mr Liu said they should be supported by the government.

“The investment necessary for the green transition is considerable, but not when compared with the cost to China’s society and economy of the environmental problems from which the country currently suffers,” director general of the Finance Research Institute of DRC Zhang Chenghui and president of the IISD Scott Vaughan said in their foreword.

They said the measures detailed in the report were practical and could be implemented on a relatively short time scale.

The report proposed a framework for action covering five key areas that if adopted by the government could promote the development of green finance. This involves:

  • Establishing and strengthen legal frameworks – including environmental laws and law enforcement that contribute to the demand for green finance
  • Improving coordination and information sharing between environmental, financial and industrial regulators and with third-party institutions
  • Developing comprehensive policy support for green finance:
    • Align monetary policy with sustainable development goals
    • Continue to strengthen green credit policies in banking
    • Provide incentives to grow the market for green securities, including green bonds
    • Expand the scope of green insurance and strengthen environmental liability insurance regulations
    • Use fiscal incentives to accelerate the development of green finance markets
  • Fostering the development of the information infrastructure with information on environmental costs and a green credit rating system
  • Green the policy banks as leaders in establishing markets and best practices for commercial banks

Read the full report.

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