‘Green’ financing to be included in Chinese banks’ performance ratings

China is poised to include “green” financing in the risk monitoring regimes of the country’s banks, to stimulate stronger financing of environmentally friendly projects, a central bank chief economist said on Friday.

The People’s Bank of China is planning to include the measure as part of its macro-prudential assessment (MPA) framework, and the new measure is likely to be included this year, said Ma Jun, chief economist at the PBOC’s research bureau, talking on Friday on the sidelines of a forum in Kunshan, Jiangsu province.

Green credit, such as loans to projects offering energy savings or emission reductions, currently account for nearly 9 per cent of total outstanding loans, according to Ma.

The MPA framework is a scoring system that assesses banks’ capital levels and monitors risks within the financial system. A higher MPA score can entitle banks to higher rates on reserves they hold with the central bank, and other privileges.

The PBOC already includes measuring small business and agricultural loans, which can lead to a higher MPA score, as the central bank encourages lenders to pump credit into sectors that are crying out for more finance.

“The central bank can offer low-cost capital to commercial and policy banks to offer low-cost financing for green projects,” Ma told the Duke International Forum 2017, being held at Duke Kunshan University.

China issued 230 billion yuan (US$33.3 billion) worth of green bonds – 200 billion yuan of onshore and 30 billion yuan of offshore bonds – last year, accounting for 40 per cent of global green bonds issuance last year, making it the world’s largest, he said.

Yet despite the take-off in 2016, it still accounted for only 2 per cent of China’s total bonds issued, suggesting huge growth potential, Ma added.

China is now aiming to increase the returns on equity and the accessibility of financing for green projects, he said, noting the nation can do more in insurance, guarantees and industry funding, for instance, to boost investment in environmentally friendly projects.

China needs investment of between 3 and 4 trillion yuan in green investments annually in sectors such as clean energy, green transport and architecture, he added.

While the government is expected to account for 10 to 15 per cent of that, there is a huge need to set up a “green financial system”, to further stimulate and encourage private investment in such projects, he said.

Many commercial banks across the country have expressed an interest in financing green sectors, amid China’s economic transformation, as they tend to help improve and diversify clients bases.

But some forum participants also said including green financing measurement in the MPA framework could prove challenging, as institutions still need more technical details on how they can be evaluated and implemented.