Letters | Help Chinese SMEs make green transition to hit carbon neutrality goal

Readers discuss ways to help China’s small firms close the financing gap, the chances of a general election in Malaysia, and fixing interest rates

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A Tangsteel rolling mill in Laoting, in northern Hebei province. Small and medium-sized firms generate a large portion of China’s carbon emissions but lack the necessary support to make the green transition, potentially holding back hopes of achieving China’s carbon neutrality goal. Photo: Xinhua

Published: 2:30pm, 23 Sep 2022

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As illuminated in a report by the World Economic Forum, China faces a US$6.5 trillion green financing gap to reach its goal of carbon neutrality by 2060.

Looking into the gap, small and medium-sized enterprises (SME) – the major contributors to carbon emissions in China at 65 per cent of the total – are not efficiently financed for green energy transitions. In fact, there is a limited range of suitable financing products that fit the needs of SMEs in such a niche green market.

Take for example corporate loans, which are commonly used financing instruments for firms. Corporate finance is structured in such a way that makes lending to SMEs for green projects risky and unprofitable as many of them lack a sound financial basis to underpin solvency.

Further, the SMEs themselves might not see the significance of going green. Economically, there are no incentives for them to do so as most national policies in China monitor big companies’ carbon emissions in specific industries.

For instance, China’s national carbon trading scheme, launched last year, imposes emission quotas on companies and allows heavy emitters to buy additional permits from more efficient companies to cover the amount exceeding the quota. However, currently only 2,162 companies in the power generation sector, almost all of them state-owned enterprises, are included in the scheme, leaving most of the SMEs unregulated.