• Fri. Mar 29th, 2024

China Green Finance Pioneer Sees Loan Slowdown as Economy Stalls

(Bloomberg) — Demand for green loans in China is poised to slow alongside the rest of the economy after growing three times faster than the overall market in the first quarter, according to the lender that helped pioneer green finance.

Industrial Bank Co., one of the first firms in China to start a green lending business in 2006, sees demand weakening as economic growth and confidence stall. That could put a dent in green loan issuance, which has outpaced overall lending in recent years and was especially strong at the start of 2022. 

“The situation domestically and internationally has become more uncertain, and economic development is facing multiple pressures,” said Li Li, the deputy general manager of the Fuzhou-based bank’s green finance department, in a written response. “The weak credit demand has impacted the promotion of our green finance business.”

China, the world’s largest polluter, has made an ambitious pledge to peak carbon emissions by 2030 and to be carbon neutral by 2060. Reaching those goals will mean leaning heavily on its banking system to back green projects and businesses that will contribute to the transition from carbon-intensive practices.

Green and ESG-related lending has benefited Chinese banks. In the first quarter, the amount of green loans grew 14% from the previous quarter, much faster than the 4.3% growth in overall loans, according to central bank data. Growth surged 39% year-on-year in the first three months.

As part of the green push, Chinese companies are issuing sustainable debt at a record pace — topping all other countries, and up 81% through May 25 compared with the same period last year, according to Bloomberg data. Chinese banks also top the Asia-Pacific leader board for green bond underwriting this year. 

Still, in the near term, it’s likely “the economic downturn has weakened corporate investment plans and reduced demand for green project financing,” said Effie Xin, a managing partner at EY Greater China Financial Services.

China has been promoting green lending for years, and often touts itself as the biggest green credit market in the world with 18.1 trillion yuan ($2.7 trillion) in green loans outstanding at the end of March. Some researchers have challenged that designation as comparable data on green loans isn’t always available in other countries. 

Green loans currently make up about a 10th of the loan portfolios at Industrial Bank and some of China’s largest state-owned banks. That may not be enough to make a meaningful impact to fight climate change considering the large role that bank financing plays in driving policy, according to Mathias Lund Larsen, a PhD fellow at Copenhagen Business School who focuses on governance of China’s green finance system. Ideally, green loans as a proportion of the total should be double that amount, he said.

Another challenge amid the slowdown is the tendency to increase lending to infrastructure projects like roads and bridges — which can boost the economy but aren’t environmentally friendly, Larsen said. Already this year, Chinese banks’ have helped finance coal companies at a faster pace than last year.

“Unfortunately, the research on the greenness of Chinese stimulus packages in the past has been that they have a very low green focus,” Larsen said. 

Industrial Bank meanwhile still aims to expand its green portfolio this year by 150 billion yuan, or about 33%, Li said. China’s eighth-biggest bank by assets signed off on about 65 billion yuan in new green loans in the first quarter, about 43% of its annual target, according to an earnings report. 

To hit the goal amid the sluggish outlook, Li said the bank will focus on adding new customers with the help of existing green clients and on lending to segments like solar, wind and hydropower. The bank will also target rural areas, as the government looks to bring more renewable energy to the countryside.

 

©2022 Bloomberg L.P.

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