China gears up for “green finance” to fight environmental crisis

By Mark Schwartz, Goldman Sachs
Financial Times 
February 24, 2016

In the 1990s, trade was the defining issue of the US-China economic relationship. Today, as much as any other issue, the environment binds the two giants of the global economy together.

This week, leaders from the international financial community are gathering in Shanghai for preparatory meetings in advance of the G20 summit in Hangzhou this September. Among the most prominent items on the agenda is green finance– public and private investment in environmental protection and climate change mitigation. The US-Chinese economic relationship stands at a critical point. For three decades, China has enjoyed unprecedented growth fueled by government-led investment and the export of manufactured goods, many of them to the American market. China’s leadership is now navigating a difficult transition from an investment-led to a consumer-driven model. In a nation of 1.4bn people with a $10tn economy, this transition is a significant challenge.

Green finance offers an important avenue for China to demonstrate its commitment while delivering positive results for its citizens. China’s environmental challenges are serious. Rapid urbanisation has left nearly two-thirds of China’s groundwater unfit for human consumption and a fifth of its arable land contaminated.

In Beijing alone, last December saw the Chinese leadership issue its first red alert warning citizens of dangerously high smog levels. Later in the month, they had to issue the warning again. Environmental challenges, moreover, can no longer be confined to any one country or continent. Carbon emissions or environmental degradation from China, as with those from any other country, pose a threat to the world’s shared environment.

The Chinese leadership recognises the severity of this challenge and has embarked on a series of green finance initiatives to respond. For the first time in Chinese Communist Party history, green finance was written into the party’s latest five-year plan last November.

The Green Finance Task Force of the China Council for International Cooperation on Environmental Development also released recommendations last year for establishing a modern green finance system. These included creating a green stock index, a green ratings system, public-private green funds, and nationwide carbon and pollution trading markets.

In December, the People’s Bank of China established a green bond market to complement green bank lending. China was also the first country to publish national guidelines on the issuance of green bonds.

Green finance in China presents a massive opportunity for international investors. The chief economist of the Research Bureau at the People’s Bank of China (PBoC), Ma Jun, and leader of the green finance effort for China, estimates that China will need to invest at least $320bn per year in green sectors over the next five years. Yet, current fiscal resources can cover no more than 15 per cent of that total.

The opening of China’s green market can bring significant private sector investment to meet this shortfall. Investors are interested: Goldman Sachs estimates that “green services” is a $1tn potential market over the next five years. Clean energy is another significant market opportunity. Harnessing market principles and innovative financial structures such as securitisations and yield vehicles can catalyze access to deep liquid public capital markets.

Green finance also offers an opportunity to further embed investment within the broader framework of US-China relationship, where the environment has been an important pillar of cooperation. In 2014, the United States and China signed a bilateral agreement on carbon reduction.

Our two countries worked closely with the international community to successfully reach a global climate agreement at the COP21 negotiations in Paris in November. I for one am optimistic that ongoing negotiations for a bilateral investment treaty can lead to further market opening in multiple areas, including green finance.

China is also making green finance a focus area of its G20 presidency. As part of these efforts, the PBoC, together with Bank of England, is chairing a Green Finance Study Group to develop recommendations to mobilise green investment globally.

Of course, China still has significant steps to take to align its green finance efforts with global standards. China’s current guidelines support some broader definitions for what green bonds can be used for and there is room for international harmonisation. Implementation and enforcement of green finance efforts have to follow.

Progress on green finance, nevertheless, can help restore international confidence that China is committed to a balanced and sustainable future — an outcome that China’s population and investors worldwide would welcome.

Mr. Schwartz is a vice chairman of the Goldman Sachs Group Inc. and the Beijing-based chairman of Goldman Sachs in the Asia-Pacific region.