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China’s Green Finance Strategy: the Policy and the Market Financial policy, Capital market

Author Jiyoung Moon and Hyojin Lee Series 22-05 Language Korean Date 2022.12.30

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China is a leading nation in the area of green finance, deeply recognizing that carbon neutrality should be accompanied with green finance to boost development of the green industry and actively working to develop green financial markets. In 2016, China published the “Guidelines for Establishing the Green Financial System,” which provides core guidelines for establishing the domestic green financial market. These guidelines define the concept of green finance in China, namely as providing financial service to support projects such as for environmental protection, renewable energy development, and green infrastructure construction for response to climate change and efficient use of resources in economic activities. Viewing green finance as an important strategic policy tool for China to achieve its carbon neutrality goal, this research explores China‘s green finance strategy in terms of policy establishment and market formation, the tools for supporting domestic green industry development, and global cooperation, while also aiming to provide suggestions for Korea-China cooperation in the green finance field.

Chapter 2 studies China’s policy establishment and market status in terms of green loan and bond markets, which are the main components of China’s green finance market. China’s green loan market is largely operated by state-owned banks and some large commercial banks as major players. These provide loans for domestic green projects to boost China’s green economy development. The support provided by these banks has increased the size of China’s green loan market to over 15.9 trillion RMB, making it the largest market in the world in 2021. China’s green bond market, as well, is one of the largest in the world. Its size recorded 1.56 trillion RMB in 2021, and according to the Climate Bond Initiative it is the second largest green bond market in the world after the United States. In China’s green bond market, local governments and corporations act as major suppliers of green bonds. According to the issuance type and purpose of use, China’s green bonds can be classified into various categories including finance bonds, intermediate bills, commercial bills, corporate bonds, and enterprise bonds. Also, there are various management guidelines according to the bond type and entity ownership. These guidelines have different requirements about supervisory authority, requirements of information disclosure, and necessity for evaluation, and are adopted based on the issuing entity. One of the characteristics identified in this study is that China’s green bond market is largely led by state-owned companies. This may because of the government’s differentiated management structure for state-owned companies and local governments, which benefits them more than non-state-owned companies by providing relatively lenient requirements when issuing green bonds. 

Chapter 3 analyzes China's green finance utilization strategies in terms of supporting green industry development, attracting foreign green investment, and expanding foreign cooperation channels. First, China uses green finance to support green development, especially focusing on clean energy development, renewable vehicles, and green architecture. Various supportive measures are provided, including credit evaluation standards to expand green project financing, encouraging green architecture through local government financial support, and green loans and subsidies to increase the consumption of renewable energy vehicles. Second, in order to boost domestic green economy development, China also implements financial policy support measures to attract foreign investment in green industries. The main method is to enlist emerging green industries in the “Catalogue of Industries for Encouraging Foreign Investment,” which includes areas such as renewable energy; hydrogen power generation; green transportation; carbon capture, utilization, storage (CCUS); environmental protection; and resource circulation. These emerging industries are significant for green economy development but still require massive capital support to solve technology bottlenecks. Therefore, the Chinese government has opened its green economy market to foreign investment not only to promote emerging industries but also to find solutions to technical bottlenecks hindering expansion of the market. Third, China intends to solidify its role as a rule-maker by vitalizing international discussions on green finance on multilateral cooperation platforms. Since 2016, China has continued to expand green finance cooperation on both multilateral and bilateral cooperation platforms with the EU, UK, France, and Germany, among others. These actions convey an image to the global community that China is one of the leading nations in the global discussion on green finance. Also, it provides opportunities for China to expand its influence on the establishment of green finance global standards. 

Regarding China’s green finance strategy, our study assesses that Korea could leverage various opportunities to cooperate with China in the field of green finance by: 1) expanding Korea-China investment in the green industry, 2) actively participating in international green finance cooperative organizations, and 3) strengthening institutional cooperation between Korea and China in the green finance field. 

First, Korea and China could cooperate in green industry investment. As both countries have a manufacturing-based economic development structure, they share similar needs for green economy transformation, such as developing renewable energy and green vehicles. Korea could consider investing in cooperation with China in these industries, especially for those areas where China encourages foreign investments such as wind power, solar power, hydrogen energy, and renewable cars. By doing so, Korea could retain its share in related Chinese markets, and could also utilize Chinese market as a test bed to commercialize green technologies. 

Second, Korea needs to join multilateral cooperation platforms to actively participate in the global discussion on green finance. According to China’s strategy to utilize international cooperation platforms, we analyze that China is participating in these platforms not only to lead the global discussion on green finance and strengthen its global leadership, but also to secure its position as a rule-maker in this field. However, while Korea has joined some of these platforms, the current level of participation is insufficient to assume a leading position on global green finance discussion. Therefore, Korea would benefit from joining multilateral platforms such as the Global Green Finance Leadership Program (GFLP) and International Platforms on Sustainable Finance (IPSF) in order to expand its global leadership and assume a leading position in the establishment of green finance standards in the international community. 

Third, it is necessary for Korea to cooperate with other countries to establish an international green financial system, regarding which China could be the starting point. In 2021, China announced the Common Ground Taxonomy (CGT) with the EU, a joint classification system for green bond issuance which draws on the EU Taxonomy. This was a significant development because it signifies cooperation with a nation leading development of the green taxonomy in the international community, the EU, thus confirming China as a rule maker of green finance international standards. In this regard, Korea must make efforts to promote institutional advancements in the green finance market. Korea’s announcing its green classification system, the “K-Taxonomy,” in 2020, could be an opportunity to pursue institutional cooperation with China on the Green Bond Taxonomy with China, and further on with the EU. 

Finally, in order to realize the aforementioned green financial cooperation between Korea and China, it is necessary to establish a cooperative body that can coordinate this during the renegotiation process of the Korea-China FTA. The cooperative body could enable Korea to hold regular discussions on supplementary and improvement plans for green finance cooperation with China. 
As carbon neutrality and the development of green industries are significant missions for both Korea and China in this era of great green transition, we hope this study can add further momentum to cooperative relations between Korea-China in the field of green finance.

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