Greening China s Financial System: The Strategic Role of Development Banks Jiajun Xu Center for New Structural Economics Peking University 9 November 2015
Outline I. Green Credit Policies in China Drivers Milestones Implementation II. The Strategic Role of Development Banks The need for market incubation Development banks as public entrepreneurs III. China Development Bank (CDB) A Brief History of CDB Financial Highlights Public Entrepreneurship in Action IV. Governing the Renaissance of Development Banks 2
Greening China s Financial System 3
Green Credit Policies in China: Drivers Conventional Development Strategy: pollute first, clean up later State Council (2005): Decision on Implementing Scientific Outlook on Development and Strengthening Environmental Protection 11 th Five-Year Plan (2006-2010) 12 th Five-Year Plan (2011-2015) 13 th Five-Year Plan (2016-2020) 4
Green Credit Policies in China: Key Milestones First Green Credit Policy 2007 MEP, CBRC, and PBOC: Opinions on Implementing Environmental Protection Policies and Rules and Preventing Credit Risks A Major Step Forward 2012 CBRC: Green Credit Guidelines Strengthen Implementation 2014 CBRC: Key Evaluation Indicators about the Implementation of Green Credit Guidelines 5
Green Credit Policies in China: Implementation Banking Institution Loans to Energy Conservation & Environmental Protection Projects 12,000 4000 10,000 3500 3000 8,000 2500 6,000 2000 4,000 1500 1000 2,000 500 0 2007 2008 2009 2010 2011 2012 0 Number of projects Loan balance (RMB Billion) Source: Zadek and Zhang, 2014: 17 6
Green Credit Policies in China: Implementation Challenges in Implementation Self-evaluation => mock compliance Perverse incentives: Local governments Commercial banks No clear reward and punishment system In Search of Solutions Establish the Green Credit Reporting System Collaborate with the MOF and NDRC to provide incentives Improve the Green Credit Evaluation System integrate the evaluation results in regulatory rating of financial institutions and performance evaluation of senior executives 7
The Strategic Role of Development Banks 8
The Strategic Role of Development Banks: Market Incubation Tradeoffs Environment al Protection green growth = investment opportunities fear of the unknown => risk misperception => first-mover problem Economi c Growth Scalable sustainable development financing entails market incubation. 9
The Strategic Role of Development Banks: Public Entrepreneurship Public entrepreneurship is the capacity to organize, scale up and sustain long-term finance. (Xu and Carey, 2015) A comprehensive long-term vision Acting on a decisive scale in the presence of risk Foster learning-by-doing dynamics to enabling bottom-up initiatives to flourish and scale up Development banks are strategically positioned to take up the role of public entrepreneurship. The mandate of development banks is to achieve public mandates (as opposed to profit maximization in the case of commercial banks) Rely on sovereign creditworthiness to raise bonds on capital markets with greater risk appetite (in contrast with tax-funded ODA) Deploy market mechanisms (rather than adhering to administrative command to allocate resources in the case of traditional policy banks) 10
China Development Bank 11
A Brief History of CDB The First Stage: 1994-1998 A traditional policy bank The Second Stage: 1998-2013 Market-oriented reforms The Third Stage: 2013- A development financing institution rely on market mechanisms to serve the national development strategy 12
Financial Highlights of CDB 1,800.00 Total Assets, Gross Loan Portfolio, and NPL Ratio 20.00% 1,600.00 18.00% 1,400.00 1,200.00 16.00% 14.00% USD billio ons 1,000.00 800.00 600.00 400.00 12.00% 10.00% 8.00% 6.00% 4.00% 200.00 2.00% 0.00 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Total Assets Loans Outstanding,Gross Non-Performing Loan Ratio 0.00% Source: CDB, Annual Reports. 13
Financial Highlights of CDB 1,800,000 CDB VS Other Development Banks (USD millions) 1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 - WB ADB IADB AfDB EBRD KfW CDB Total Assets Total Gross Loans 14
Financial Highlights of CDB Net Loan Balance: Breakdown by Geography in 2014 Overseas outside Mainland China 12.70% Source: CDB, Annual Reports. 15
Public Entrepreneurship in Action: CDB as a forerunner of green finance In 2005 in response to the national strategy of promoting sustainable development, CDB promised to provide 50 billion RMB loans within five years to support environmental protection. Before the Green Credit Policies was formally launched in 2007, CDB has already integrated environmental impact assessment into its operations. CDB becomes a role model for other Chinese banks to follow. In 2014, CDB acted as a director member of the first Green Credit Committee of the China Banking Industry 16
Public Entrepreneurship in Action: Growth of Green Credits in CDB 1200 40.00 1000 35.00 30.00 800 25.00 600 20.00 400 15.00 10.00 200 5.00 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 total current-year new loans (RMB billions) 0.00 Loans to environmental protection, energy conservation and emissions reduction projects (RMB billions) green loans as a % of total new loans 17
Public Entrepreneurship in Action: Market Incubation Tops the Agenda Western economies built their developed markets using a long process We do not have time to reinvent the wheel; we do not have the luxury of indulging in the mistakes of adolescence as we evolve toward maturity Systems and markets can be built. China s market deficiencies can be overcome through cooperation between banks and government. s Chen Yuan, Aligning State and Market: China s Approach to Development Finance 18
Public Entrepreneurship in Action: Case 1: Renewable Energies CDB: renew energies = an strategic emerging industry Since 2003, CDB has played a leading role in financing renewable energies. From 2010 to 2015, outstanding loans in renewable energies have increased by five times: Wind Power: increase by 3 times (6 countries; 27 provinces); Solar Power: increase by 200 times (9 countries; 18 provinces). 19
Public Entrepreneurship in Action: Case 1: Renewable Energy Longyangxia Solar-hydro 320MW Photovoltaic Power Station This project is the largest photovoltaic power project in the world and the first solar-hydro hybrid photovoltaic power project in China. The project has a total installed capacity of 320MW and a total investment estimation of RMB 3.73 billion, and the Bank committed RMB 2.98 billion in loans. As of the end of 2014, RMB 1.8 billion had been disbursed. 20
Public Entrepreneurship in Action: Case 1: Solar Power Industry Solar Power Industry: a silent sunshine revolution Scale Matters: China s solarcell production rocketed from just 50 megawatts of generation capacity in 2004 to 23,000 megawatts in 2012, by which time it was supplying more than 70 per cent of the world market. Swanson s Law holds that every time the total cumulative production of solar panels doubles, their cost drops by 20 per cent. The steady decline in costs could lead to widespread adoption of solar power. Cases: Jinglong Group and CDB 2010, 30 billion RMB (5 billion USD) Agreement on Financial Partnership Jinko Solar 2012, 1 billion USD, 5 years 21
Public Entrepreneurship in Action: Case 2: Electronic Vehicles In response to China s new policies on environmental protection and new energy industry, CDB vigorously supported BYD Auto to develop itself into a world-leading enterprise in the new energy industry. After receiving continuous financial support from CDB for a few years, BYD Auto has transformed from a little-known private company into an industrial pioneer with an annual sales volume of 50 billion yuan and a total asset of almost 52.7 billion yuan, making a positive contribution to China s low-carbon economy. 22
Global Governance of the Renaissance of Public Entrepreneurship 23
Harnessing Public Entrepreneurship as a force for good The renaissance of development banks has embarked on a process of creative destruction in the established international rules. Creative: place competitive pressures on advanced economies to scale up large-scale and long-term finance in ways that redress the undue rigidities in the existing rules Destructive: undermine the effectiveness of existing rules, running the risk of further rounds of financial arms races and debt crises. Xu, Jiajun and R. Carey, Post-2015 Global Governance of Official Development Finance: Harnessing the Renaissance of Public Entrepreneurship, Journal of International Development, 27, 856-880. 24
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