Western financial analysts generally misunderstand China’s current restructuring as negative news. China’s President Xi Jinping has committed to transforming China from a resource and pollution intensive economy to a green economy as a strategic priority, including clean energy, energy conservation in industry, buildings and transport, with overall energy efficiency and pollution control. Premier Li Keqiang stated at the Third Plenary of the 18th Central Committee this policy “to resolutely declare war on pollution as we declared war against poverty.” This means that greening a country’s financial system is not an “additional” performance requirement but concerns the efficiency and effectiveness of the whole system. A lack of green financing delivers poor allocation of capital, mispriced risks and weaker long-term performance, creating stresses that lead to financial market instability and underperformance.
Over the past 30 years, China grew to become the world’s second largest economy in GDP terms of 10% annually. As in other countries, this GDP scorecard omitted growing environmental and social costs now burdening all industrial societies. China developed a “Green GDP” over five years ago which showed that up to 3% of that “growth” was actually uncounted costs. These costs should be deducted by all countries as I have argued for decades.
Today, even as many provincial Chinese leaders incentivized by GDP growth measures dragged their heels, leaders Xi Jinping and Li Keqiang are steering toward a circular economy, using a realistic rate of “qualitative development” as they account for environmental costs (see for example Qualitative Growth). Additional trillions of RMB are needed to invest in a new green infrastructure, green sectors and cleaner, less wasteful forms of sustainable development. President Xi’s agreement on reducing polluting emissions with US President Obama is another signal of China’s new direction.
More impressive are the new reports years in the making of how China is redesigning its financial system to meet the goals of this green transition to sustainable development. An overview of this wholesale overhaul of finance (still much needed on Wall Street, in London and Frankfurt) is the new Greening China’s Financial System Synthesis Report, co-directed by China’s Development Research Center of the State Council; Canadian-based International Institute for Sustainable Development; the UNEP Inquiry Into the Design of a Sustainable Financial System and the Fridtjof Nansens Institutt of Norway, co-authored by their respective lead researchers Zhang Chenghui and Chen Ning, Mark Halle and Simon Zadek.
This focus on redesigning financial systems is crucial since current obsolete assumptions, models and metrics allowing “externalizing” social and environmental costs have steered both companies and national governments into excessive waste, pollution and social harm by mispricing products, assets and natural resources. This still results in ever more waste, pollution and leads to rising inequality and massive market failures such as climate change. Greening China’s Financial System pinpoints all the current errors in mainstream finance and lays out priorities for reform and an action plan to rapidly shift financial resources from wasteful, obsolete, legacy industries to the new green economy sectors and infrastructure.
The emerging lessons cited include: broader assessments of risk to include environmental pollution and waste; how central banks and financial regulators need to align their policies with such broader assessments; integrating sustainability into financial risk management; reprioritizing monetary policies; developing new standards, metrics and regulatory frameworks.
As these policies are implemented, green finance is already developing, as reported in Growing a Green Bonds Market in China, authored by Sean Kidney and Padraig Oliver, just co-published by the Chongyang Institute for Financial Studies at Renmin University of China; the International Institute for Sustainable Development and the Climate Bonds Initiative, based in London, along with a step by step guide: How to Issue a Green Bond in China.
As with our Green Transition Scoreboard®, this focus on “Green Bonds Growing Green Infrastructure” is a key place to start underpinning what I term the global transition to the Solar Age. While our model calls for at least $1 trillion of new investments annually through 2020 to scale all the green technologies, these new Chinese reports estimate the investments needed to build China’s new circular green economy are for RMB 2 trillion ($460 billion) annually from 2015 to 2020. As all nations report on their commitments to phase out subsidies to fossil fuels at the UN in September’s General Assembly sessions on their Sustainable Development Goals, 2020 may auger the arrival of cleaner, greener, knowledge-richer economies worldwide.