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China’s green transition
The run-up to COP28
China’s transition towards a greener economy remains a priority, even as it faces a number of cyclical and structural challenges.
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. Another is stronger government support for China’s green financing landscape. Plus, Beijing remains firmly 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.
15%
China’s green financing as a portion of total credit in the next five years
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 was 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, the consumption share of China’s clean energy – such as solar, wind, nuclear, hydro and biomass – 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 Beijing needs to ramp up not just government support but also incentivise the private sector more. Policies that clarify classifications and outline transition finance industries can provide more funding support for heavy industrial sectors to cut their carbon footprint, while progress on carbon trading will also 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.
As the world’s largest carbon emitter, China is set to play a key role at the upcoming COP28 climate negotiations in early December. We expect the China to contribute towards successful talks but ensure its green transition remains flexible where needed.
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The following analyst(s), who is(are) primarily responsible for this document, certifies(y) that the opinion(s), views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Jing Liu, Wai-Shin Chan, CFA, Erin Xin, Lulu Jiang and Heidi Tang
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