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China Integrates Environmental Risk into Bank Lending

March 6, 2012

This week the markets took notice of China’s stated new annual growth target of 7.5% – below the 8% accepted growth benchmark deemed to offer social stability.  This comes hot on the heels of a major World Bank/China think-tank piece on economic growth, which urges major economic re-structuring away from fixed capital investment, and a major focus on environmental improvement.  Now, the national banking regulator is moving to make China’s bank lending greener.

This piece in the China Daily last week caught our eye:

Green-credit guideline for banks issued

By Wang Xiaotian (China Daily)

BEIJING – The Chinese government introduced a “green credit” guideline for commercial lenders on Friday to facilitate economic restructuring in a manner that’s environmentally friendly and saves energy.

The China Banking Regulatory Commission, the top banking regulator, ordered lenders to cut loans to industries with high-energy consumption and high levels of pollution or excessive capacity, and to strengthen financial support for green industries and projects.

The CBRC encouraged banks to evaluate, classify and rate the environmental and social risks inherent in their clients’ businesses and take the results as a key reference in their ratings and access to credit.

“Through credit controls, banks can have an influence on businesses’ awareness of energy savings, emissions-reductions and the benefits to the public,” said Yan Yanfei, deputy director-general of the statistics department at the CBRC.

He said that in the next step, the CBRC will set up some key indexes to make the guideline more specific and try to include adherence to the plan in the rating system.

Lenders also need to improve management of any overseas projects that they support, to ensure that the initiators of those projects comply with local environmental, land, healthcare and security legislation, according to the guideline.

Zhang Rong, the program manager of environment and social standards at the International Finance Corporation of the World Bank Group, said the guideline is welcome, especially given the increased involvement of Chinese enterprises in the global market, and the increasing number of calls urging the overseas projects to take more care of the local environment and to reduce energy use.

“Actually Chinese banks have already made very good attempts at green credit, and they can learn from the mature technology and management systems that their international counterparts have already been using for some time,” Zhang said.

China Development Bank Corp, which makes nearly half of the total loans supporting overseas projects of Chinese enterprises, has just provided credit to a Chinese company that operates an iron ore mine in Africa. The funds will help the company move surface soil to a place of safety to protect the seeds of local plants, according to Lu Hanwen, deputy director-general of CDB’s Project Appraisal Department II.

By the end of 2011, CDB had lent 658 billion yuan ($104 billion) to support environmental protection, energy-saving and emissions-reduction projects, accounting for 12.7 percent of the bank’s total outstanding loans.

Yang Bin, deputy general manager of Corporate & Investment Banking at Shanghai Pudong Development Bank Co Ltd, said banks have enough motivation to lend green credits because the demand from clients that they undertake green initiatives has been rising constantly.

Such loans have a lower non-performance ratio than other lending because enterprises can usually obtain strong incentives for green projects from the government to repay the loans, he said.

“And the rate of return against cost for green credits is much higher than other lending,” said Yang, adding that evaluating the environmental impact and energy-consumption of their clients will cost the banks little.

“But State-owned enterprises should also be ordered to implement green policies if the government wishes to achieve its energy-saving and emissions-reduction goals,” Yang said.

Obviously, while the current initiative is voluntary and toothless in nature, the source of the guidelines and the promise of more detail to come points to a pathway of progressive enforcement of lending practices.  This is perhaps bound into a broader revision of lending policy guidance given the sometimes inefficient nature and direction of bank loans in recent years.

China’s environmental quality is poor.  It ranks 116th out of a possible 132 in the annual Environmental Performance Index rankings – a global study put together at Yale.  It ranks particularly poorly on air quality and water quality impacts on human health and ecosystems.

If the banking regulator’s initiative moves to make China’s offshore investments more environmentally and socially sound, then it may do much to burnish China’s soft power by making investments more welcome in host countries.  If it can assist in adjusting the environmental and social impacts of domestic industry, then the policy will contribute to reducing the negative social stability impacts of a lower GDP growth rate.

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