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The People's Bank of China (PBOC) has started to provide
low-cost loans to fund decarbonization activities via a scheme that
financial experts say could play a key role in helping the country
reach its climate goals.
Under the carbon emissions reduction facility (CERF) launched 8
November, Chinese financial institutions licensed to operate
nationwide can apply for PBOC funds to support their loans to clean
energy, energy conservation, and environmental protection
projects.
Sun Guofeng, head of the Chinese central bank's monetary policy
department, said 30 December that the first batch of funds totaling
CNY 85.5 billion ($13.4 billion) were already distributed to
lenders to back decarbonization projects that can cut CO2 emissions
by 28.8 million metric tons.
"The PBOC will continue … to help China reach the goals of
reaching peak CO2 emissions by 2030 and carbon neutrality by 2060,"
Sun said during a press conference, citing the
country's national targets.
The central bank has not indicated an upper limit for the CERF
funds. Based on the amount of domestic green loans, CCB Futures, a
brokerage owned by state-controlled China Construction Bank,
estimates that the PBOC could distribute CNY 1.26 trillion per year
via the facility. Anhui-based Huaan Securities estimates the figure
at CNY 1.8 trillion.
In a research note published last
September, the International Energy Agency said China—the
world's largest GHG emitter—needs an annual investment of CNY 4
trillion in its energy sector alone to reach the 2030 climate
target.
While positioning the CERF as an important tool to promote
China's decarbonization, the PBOC will have other policy measures
to encourage green financing in the bond and equity markets,
according to observers.
"Bank lending is important, but it is only one part of a
company's capital structure," said Norman Waite, an analyst at the
Institute for Energy Economics and Financial Analysis.
Thinktank E3G's Senior Policy Advisor Byford Tsang envisaged a
potentially growing role for the central bank in China's green
finance sector, with the CERF's scope likely to expand. "The impact
could be modest at the start, as the scheme is confined to three
types of eligible projects. But it could increase over time as the
policy evolves," Tsang told Net-Zero Business Daily.
Conway Irwin, climate and cleantech research director at IHS
Markit, described the scheme as "a step in the right
direction."
"Many of the technologies with the potential to reduce
industrial emissions, like carbon capture and sequestration, are
highly capital intensive—any means of making capital at
reasonable rates available to project developers could potentially
help improve project economics," Irwin said.
Cheaper loans
According to the central bank, Chinese
financiers need to lend to decarbonization projects at interest
rates close to the prevalent loan prime rates (LPRs) before
applying for the CERF funds.
As the LPRs are generally applied to borrowers with the highest
credit ratings, Tsang expects many low-carbon project developers to
benefit from the policy design.
"Banks, based on their own risk assessment and appetite, might
offer the LPRs to project developers that would otherwise be
exposed to a higher cost of capital," he said.
The current annual LPR stands at 3.8% for one year and at 4.65%
for five years. Under the CERF, the central bank will provide
Chinese lenders with 60% of the loan principal at an interest rate
of 1.75% per annum for one to three years. This is at least 45
basis points lower than the inter-bank borrowing cost.
While the PBOC does not require Chinese banks to offer
discounted loans, analysts said banks have strong incentives to
lend more to emission reduction activities due to the rate spreads.
This, in turn, is expected to push down the financing costs for
green projects.
"If financial institutions are actively seeking out
decarbonization projects to take advantage of the interest rate
differential, that on its own has the potential to create
competition among those institutions to find and fund
decarbonization projects," Irwin said.
"If banks are competing to lend to projects, they're likely to
offer advantageous rates to the most promising ones, and the rush
to lend can also expand the pool of projects deemed investable and
the number of companies that stand to benefit," she added.
However, Chinese financiers need to provide collateral for the
funds they borrow from the CERF. The central bank said the
financiers will shoulder any potential lending risks by
themselves.
"The CERF program is clear that lending should be done at market
rates … This seems designed to safeguard against a wasteful lending
spree," Waite said. "It is also a statement on the economic
viability of the companies the PBOC wants funded."
Project requirements
According to the central bank, the CERF is designed to support
companies with decarbonization projects including solar power, wind
farms, biomass, hydrogen, geothermal energy, energy storage with
high efficiency, smart grid, carbon capture, storage, and
utilization technologies, among others.
"At the initial stage, the support may be small in scope yet
highly targeted, prioritizing industries that are in the early
stage of development but have great potential for reducing carbon
emissions if there is certain financial support," the PBOC
said.
The central bank has not set a specific decarbonization target
for each eligible project under the CERF. Financiers are only
required to release emissions data on the projects they fund every
quarter, though the figures need to be verified by third-party
institutions.
"On the domestic political front, the more Beijing signals that
decarbonization is a policy priority, the more pressure lenders and
project developers will be under to display progress in this area,
whether it's officially regulated or not," Irwin said.
With China expected to establish emission targets for various
industries in the coming years, Tsang suggested the central
bank could have more requirements for projects receiving CERF funds
in the future.
"It is possible further down the line that the government would
link the lending to sector goals or to introduce some minimum
threshold in terms of the emissions-saving potential of projects,"
he said. "But before that, the authorities should focus on making
sure the disclosures from the lenders and project developers are
robust, and on reviewing the scope of eligible projects where
appropriate."
"This will safeguard the integrity of the scheme and ensure it
contributes to China's climate goals meaningfully," he added.
To maintain their access to the central bank facility, Chinese
lenders need to ensure that the projects they fund can lead to
legitimate emissions reduction consistently. This requirement
suggests the PBOC is hoping to train Chinese bankers in evaluating
the decarbonization potential of their counterparties, according to
Waite.
"Banks need to gain increased sophistication in this
area—this is not a core competency of loan origination
personnel at the moment," Waite said. "While the PBOC CERF
incentivizes lending into certain sectors which foster
decarbonization, it also creates a broader credit assessment skill
set within the banks."
Posted 07 January 2022 by Max Tingyao Lin, Principal Journalist, Climate and Sustainability
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