Guo Ye, Vice Dean of the School of Economics, Xiamen University: China has four important principles for actively developing green finance in the future

At the 2024 China Finance Association Annual Conference and China Financial Forum held on December 2nd, Guo Ye, Vice Dean of the School of Economics at Xiamen University, delivered a keynote speech on “Four Important Principles for China’s Active Development of Green Finance in the Future”.

The full text is as follows:

The construction of China’s green finance system has achieved remarkable results. We have made great progress in green finance standards, environmental disclosure, incentive and constraint mechanisms, products, markets, and international cooperation. As Director Ma just mentioned, we have not only improved the domestic standard system, but also made good attempts to align with international standards. I want to mention that a few years ago, the People’s Bank of China included qualified green loans and bonds in the Collateral framework of monetary policy in 2018. We conducted an examination of the green effects. We examined whether this policy has truly improved the availability and cost of green loans for some companies. We used the commonly used DID method in academia and found that after the implementation of the policy, companies have indeed seen improvements in loan availability and cost. Overall, the construction of China’s green finance system has been very effective.

Today I would like to share with you the second main point. We believe that there are four important principles for China’s active development of green finance in the future: First, adhere to a systemic concept; Second, highlight key issues; Third, coordinate development and security; Fourth, properly handle the relationship between government and the market.

First, the financial market is a whole. The financial system in China is mainly banks, but besides banks, there are also green bonds and various other financial forms. This study was published in 2022 in the World Economy, and our team published an article discussing the current situation in banks. We listened to several industry experts and made many attempts in green credit policies, including various policies of the People’s Bank of China. We have used some credit methods to suppress the rapid rise of two industries and set environmental access thresholds in the field of financial credit. Therefore, we can see that commercial banks have provided several data in the process of promoting the implementation of green credit policies. The number of customer exits in the industry’s loans in 2008 and 2009 exceeded 1,000 and 2,000 respectively, and the decline in related loan balances is also very large. But in this process, we have raised several questions. We know that banks have pre-loan, mid-loan, and post-loan stages. What impact does green credit policy have on the green credit behavior of enterprises? We just said that the financial system is a whole. If they cannot obtain bank credit, enterprises will autonomously or automatically adjust their financing structure. Then, why do various ministries and commissions have a consistent green system, and they can engage in green arbitrage in other aspects? Second, what impact does green credit policy have on the financing structure of enterprises? We may have blocked them in green credit, but other financing methods have begun to emerge. Third, in this case, let’s look at the relationship between enterprise financing structure and environmental investment. This model is not shown.

What is the general logic chain? Our idea is very good. We talk about green credit. We can constrain and incentivize these enterprises to make investment behaviors to improve their environment, including low-carbon and transformation, but companies can also make other feedback behaviors on their own. So we have two other paths. First, companies will definitely reduce investment, including reducing environmental investment, so there is not much demand. Second, they can change their financing structure, not necessarily fully relying on banks for credit, but obtaining funds from other financing channels if the green standards are not consistent. After we implement the policy, we can see how companies respond, but the model is not shown to everyone. The result is that the green credit policy can indeed make some contributions to low-carbon emission reduction; on the other hand, companies will also respond to the policy and change their financing structure. Therefore, in terms of equity refinancing and bond financing, we need to establish unified environmental access standards. You cannot block one side and let them go to the other two sides. Third, if this company is financing-constrained, then the green credit policy will have a very good effect. If the company itself does not have too many financing constraints, the effect of implementing the green credit policy and lending money to enter the green industry may not be particularly good. Therefore, in the process of banks implementing green credit, the overall financial system is a whole and requires systematic thinking.

Second, in the current process of digital economic development, we need to emphasize some key points in our green transformation. I believe that achieving carbon peak in a short period of time is possible. All aspects are being done very well here, although we are highlighting some aspects, such as electricity. In the current fast development of the digital industry and the new energy industry, the green transformation of the electricity industry is actually a very important issue, which is currently being researched by our team.

Let’s take a look at the digital investment, power dependency, and spillover effects of various industries. Currently, our research findings show that the degree of power dependency varies in different industries. The digital industry has the highest dependency, followed by the tertiary sector, secondary sector, and primary sector. This is the current situation. Therefore, with the development of the digital economy, our reliance on electricity may increase compared to the original energy structure, which relied on coal and oil. Thus, the new energy industry will have a greater reliance on electricity. Therefore, the low-carbon transformation of the power industry, including the national unified electricity market and the marketization of electricity prices, may be a very important part of the present or future. Currently, our team is conducting big data analysis in collaboration with the State Grid Corporation of China. We have mainly focused on the low-carbon transformation in Fujian Province, exploring what can be achieved in terms of power dependency in the low-carbon industry and the green transformation of the power industry. Our team has been cooperating with the State Grid for two years since two years ago.

Thirdly, we need to coordinate development and security, as we bring new risks such as climate risks during the development process. Therefore, we need to coordinate the relationship between development and security.

The fourth point is to handle the relationship between the government and the market correctly. Of course, this is an eternal topic because the government needs to lead the green transformation, and on the other hand, we need to play the role of the market well so that enterprises can spontaneously do some green things. Therefore, we have currently written an article studying whether the policy of banks making green credit can lead enterprises to engage in green innovation.

In leading the enterprise’s green innovation behavior within Financial Institution, what are the several responsibilities that banks can undertake? First, provide financial support. Second, collaborative development. Green finance is definitely not a standalone existence. In our five major areas, we actually consider it as a collaborative development including Financial Technology, green finance, and digital finance. Third, banks including the People’s Bank of China need to optimize the policies of green finance. Therefore, we have just published an article on green regulation and enterprise green innovation this year, proposing a question: What impact does green credit policy have on green innovation? We found that if the bank has a low tolerance for the short-term failure of its green innovation, it will actually inhibit its green innovation.

Everyone knows that innovation is a long-term behavior, which is why we say that innovation can bring some risks. That’s why we talked a lot about patient capital this year, and we must have the tolerance for short-term innovation failures. Of course, banks may be different in this process because banks are ultimately deposit-taking institutions and are very special enterprises. So, how our banks can work together with other institutions to encourage these enterprises to autonomously engage in green innovation is a good direction for future research.

So this is a short 10-minute, to introduce everyone to some research currently being done and what may be done in the future, thank you very much for listening, thank you!

Source: Xinhua Finance

Author: Xinhua Finance