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Establish a Green Finance System

Date: Aug 10, 2010      Source: IEEPA      

To establish a green finance system, we shall consider three aspects, shown as following:

Wang Yuanlong, Director of Overseas Department of the Bank of China


First, China's economy calls for the establishment of green finance system.

Green finance means the financial service offered to the green development of China's economy, and four reasons therein are shown in the following:

1. Long-term development of China's economy requires that China has to conform to the trend of the times, and tread down the road of green and sustainable development, which is the core of green and sustainable development, and is scientific outlook on development. In the course of economic development, China is faced with increasingly severe problems of environmental pollution, energy consumption, and the development of green economy is an irresistible general trend. Therefore, the development of green economy conforms to the China's long-term development, and is conducive to the realization of the goal of scientific development, better-off life and sound ecology. Despite the world economy currently has shown signs of recovery. As a result of worldwide financial stimulation on a large scale, it is evidently fragile and difficult to continue. It is an important task for various countries including China to seek sources of sustainable development of world economy in the course of economic recovery. The development of green economy will be an important propellant to sustainable development of the world economy, and financial crisis has triggered economical revolution. green recovery is expected to bring about new growth power for global economy, therefore, green recovery and development also require corresponding green financial system.

2. It is the requirement of the transition of domestic economic development model. In order to transit development mode, achieve green development,impulse economic development including adjustment of economic structure, we shall obtain the support of green financial system.

3. It is favorable to optimize China's financial system. As a new carrier of financial system, green finance is favorable to optimize China's financial system, improve the cooperation level between China and overseas financial institutions, for instance, the mode of innovative operation of financial institutions has objectively boosted innovative ability commercially. Therefore, green economy is inevitable in terms of optimizing domestic financial system.

4. It is in favor of accelerating the globalization of RMB. Green finance, including the emergence of carbon deal and the vast potential of energy, is becoming the turning point of boosting currency diversification. In the past G20 summits, President Hu Jintao mentioned that we were bound to push forward international financial system, reform international monetary system and diversify international currency. As an important aspect of international currency diversification, the development of green finance and carbon trade, especially for carbon credits, is likely to become staple products in excess of petroleum, and bring unprecedented chance to RMB globalization by binding with energy price. Therefore, to establish green financial system, and to make RMB a currency for pricing carbon deal, are important channel for RMB globalization.

Second, the fundamental frame of green financial system covers the following four aspects:

1. We shall establish a green financial market. Capital supply and demand in financial market are achieved by circulating dealing capital of both parties, realizing money credit and handling various of bills and securities. Financial market is a kind of mechanism which may trade and ascertain financial assets, and the distinctive sign of green finance is a location for green financing. According to the forecast of UN and World Bank, the total amount in global carbon trading market in 2010 will reach 140 billion euro, or 190 billion US dollars. The capacity of such market will exceed oil markets and become the first trading market, and the traded carbon will become the first largest commodity in the globe. As estimated, the amount of global carbon trading market will reach 3.5 trillion US dollars by 2020, therefore, corresponding financial market is inevitable for such amount.

2. We shall foster green financial institution. Financial institution serves as important intermediary to support development of green finance. As for the credit market,credit bank and commercial bank, green financial institution is conspicuously embodied in green credit. From the perspective of current condition of domestic financial institution, numerous financial institutions have laid stress on offering loan on energy conservation environmental protection projects, and emphasized credit structure during credit delivery, presented key supports to projects under construction, strategic emerging industry projects, reasonable citizen demand for consumption, strategic planning of regional development, and enterprises' going abroad, which reflected the requirements of sustainable development and green economy. From the point of financial institution, some credit projects have been strictly controlled on the industries with high pollution, high emission and over capacity. As for some financial institutions, and commercial bank in particular, some authentications and identifications of environmental protection have been made for clients who applied for loan, which gave good explanation that financial institutions are transiting to green financial institution.

3. We shall develop green financial instruments. Green financial instrument means financial assets which can be traded in the green financial market, with a view to certifying the refinancing of money balance between lenders and debtors. The basic elements are payment amount and terms of payment. The green financial instruments are mainly divided into cash financial instruments and its derivatives. Internationally, developed countries, with an focus on carbon credit, made an attempt to establish carbon transaction currency as well as series of financial instruments including direct investment and financing, bank loan, carbon index dealing, carbon futures, so as to support carbon finance system. Carbon finance system, as a matter of fact, is an integral part of green financial system. In spite of rapid development internationally, China currently lacks mature carbon trading system and mechanism even though it has abundant and potential carbon emission reduction resource and market, carbon trade and relevant place are starting up, without financial derivatives and innovation products, as well as profit sharing mechanism like carbon securities,carbon futures. As a result, China is facing the challenge of national carbon credit mechanism, and the development of green financial instruments is imminent. From the perspective of green financial product innovation, China is still in the start-up phase: incomplete recognition on carbon trading value, lack of carbon emission trading platform, monotonous green financial products. Despite financial institutions began to advocate and operate green credit, there are many drawbacks: there is no uniform standard for green credit, there are no detailed guidance list for green credit, there are no sufficient departments and talents on environmental risk rating standard.

4. We shall enhance the supervision on green finance, which means financial supervisory authority carries out overall and usual inspection and supervision, in order to promote financial institutions to sound operation and development by law. According to existing laws and regulations, financial regulatory authority will carry out surveillance and management on the whole financial industry including financial institution and financial business.

Third,Policy advice on establishing green finance system. There are two suggests shown as followed:

1. We shall optimize the macroeconomic policy environment, which covers four following aspects: (1) We shall formulate excitation mechanism, whose projects are likely to conflict with green finance and credit. As a result, it is necessary for the government to draw up rational preferential policy, giving incentive to financial institution. (2) We shall improve the laws and regulations, which is an important guarantee for standardizing the development of green finance. From the present condition, laws and regulations on green finance are yet complete, and there are not sufficient corresponding principles for right and obligation of green finance players, which imposed policy and law risks in the regard of green financial service. As a result, ministries and commissions concerned shall enhance the harmony, and further establish and improve operation guide and relevant laws and regulations, which may ensure the development of China's green financial service in a standard and sound way. (3) we shall establish trading platform, which is in favor of reducing transaction cost, for example, gold equity exchange and energy exchange serve as excellent communication and bargaining place for both sides of carbon emission right. In consideration of incomplete China's trading mechanism, we shall accelerate the improvement of exchange system, advance the development of trading players on the basis of existing environmental energy exchange and emission right trading in the regard of business operation and development. (4) we shall cultivate intermediary structure. Green financial service, especially for CDM projects, requires professional service of intermediary organs in terms of project establishment and construction because of their long chains and complicated relationship. The project appraisal calls for appraisal agencies, project financing for guarantee agencies, contract conclusion for law enforcement agencies. As a result, we shall encourage professional intermediaries to participate in green financial operation, which can reduce effectively transaction cost,project risk, and improve the development of green financial business.

2. We shall establish microeconomic foundation. (1) we shall change the concept, improve the organs and train the talents, especially for establishing agencies. (2) we shall make positive innovation to develop green financial business. Based on the current situation, we have implemented financing projects with CDM no-project cash flow as main repayment source, as well as financing products on carbon emission right. More business modes, as well as intermediary service mode are necessary for China's financial institutions, especially for commercial banks, with a view to meeting diversified financial demands; other innovative services cover financial leasing service, advisory agency and project coordination service, carbon fund trusteeship service and so on. (3) we shall control risk to ensure sound development of financial business. Green finance, especially for carbon financial business, belongs to new business. In order to reduce risk, financial institutions shall adopt pre-risk analysis means, and commercial banks shall make careful investigation when selecting projects, and explore other modes like personal risk and commercial insurance and so on. (4) we shall adopt flexible operation to cope with the change of green financing mode. In company with China's increasing say in global climate problem, China also expand the range of financial business correspondingly. As a result, financial institution shall pay close attention to the change of the policy concerned, transform the service flow of business mode timely, and expand business field. Green financial institutions shall coordinate each other, enhance new products and service, carry out education, and strengthen the capacity of adjustment and response to the change of green financing mode.

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