30 Nov 2023
China’s transition towards a greener economy remains a priority, even as the economy faces a number of cyclical and structural headwinds. One of the reasons for this has been a shift in mentality among many stakeholders from viewing the green transformation as solely a cost to recognising it as a source of opportunities. Meanwhile, policymakers remain committed to its dual carbon goals of reaching peak carbon emissions by 2030 and carbon neutrality by 2060.
All of this means we estimate China’s total green financing will more than double to reach over 15% of its total social financing (TSF), a broad measure of credit, in the next five years. That should help to offset a structural decline in property and traditional infrastructure spending. In particular, green lending – which makes up the bulk of current green financing – has risen by about 40% y-o-y since the beginning of 2022. If the current pace were to be sustained, this would lead to an increase in green lending by over RMB8trn this year.
Green bonds are another growing source of funding, although in contrast to other economies, China’s green bond issuance is still a relatively small share of green financing. However, this looks set to improve as there have been several developments in recent years that will help to facilitate further bond issuance.
It is important to note that while the future looks promising with regard to China’s green transition, significant progress has already been made over the past three years. For instance, China has made aggressive plans for renewable energy and aims to phase out coal plants gradually. Its installed capacity of renewable energy increased from 650m kilowatts to more than 1.2bn kilowatts by the end of 2022, accounting for 47.3% of the country’s total installed power generation capacity and surpassing coal power (43.8%) for the first time in history.
Meanwhile, China’s share of clean energy (i.e. such as solar, wind, nuclear, hydro, and biomass) consumption has increased from 20.8% to 25.5% over the past five years, with energy consumption per unit of GDP decreasing by 8.1% during this period.
And aside from public-led capacity investment, China is pushing for increased green consumption. More policies are being rolled out aimed at increasing sales of green smart appliances, new electric vehicles, and green building materials in the countryside. Sales and exports of new energy products have also become bright spots for China’s economy in recent years.
To accelerate China’s green transformation from here, we believe the government needs to not just ramp up policy support but also incentivise the private sector more. Policies that clarify “green” activities and outline transition finance industries can help ensure sufficient funding is available for heavy emitters to reduce their carbon footprints, while progress on carbon trading will incentivise faster decarbonisation. Opening up more channels for private sector funding in primary markets can also help to increase funding and support innovation in green technology.
Additional disclosures
1. This report is dated as at 17 November 2023.
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