China’s central bank warned that climate change and a global transition to a low-carbon economy could bring risks to domestic financial institutions and called for stronger regulation on green finance, as reported by Reuters on December 10. Xuan Changneng, deputy governor of the People’s Bank of China (PBOC), said loans to carbon-intensive industries make up a relatively high proportion of lending for financial institutions in China. Therefore, a rapid exit from high-carbon assets will increase risks during the transition, while a too-slow exit would also raise risks. Xuan also called on the central bank to enhance financial regulation, conduct stress tests on climate risks, and guide financial institutes to improve their green financial capabilities under China’s carbon peak and carbon neutral timetable, to realize the orderly low-carbon transition of the economy. 

China vows to peak carbon dioxide emissions by 2030 and reach net-zero emissions by 2060. However, the transition is challenging due to the country’s heavy reliance on fossil fuels and current level of economic development. Xuan outlined five measures to facilitate the economic transition, including developing transition finance standards, tightening climate information disclosure requirements, enriching and improving tools for transition finance, strengthening the incentive and constraint mechanism, and pushing for a just transition, namely securing the rights and interests of workers in carbon-intensive sectors while transitioning to a green economy. These measures involve the banking system’s support to businesses seeking to move away from carbon-intensive practices. According to central bank data, the outstanding value of loans to environmental, social, and governance (ESG) projects in mainland China topped RMB20.9tr (USD3tr) in the first nine months of 2022, rising 41.4% YoY.

Sources:

https://www.reuters.com/business/sustainable-business/china-cbank-calls-green-finance-regulation-be-strengthened-2022-12-10/

https://www.caixin.com/2022-12-11/101976943.html

https://www.businesstimes.com.sg/international/china-central-bank-official-calls-orderly-carbon-reduction

https://finance.yahoo.com/news/chinas-esg-financing-demand-could-093000012.html