China’s Green Financial System Report
The Chinese government considered the 2014 Green Finance Task Force convened by the China’s People’s Bank as one of the plans that could be used to develop a green financial system in addition to improving economic performance (Canuto, García-Kilroy & Caputo, 2012). The Task Force brought together 40 experts from government ministries, financial authorities, domestic banks and international experts to discuss specific recommendations that would help the Chinese government meet its financial obligations and economic progress. Some of the recommendations made by the Chinese 2014 Task Force included developing a specialized investment vehicle that would help support green investment initiatives. The investment vehicles here include green banks, micro-financial institutions, and funds among other contributing factors.
Similarly, the task force recommended working on a financial and fiscal report so that the government, through financial institutions, can promote growth in green bonds and green IPOs. With the green bonds, the government felt that it would be easier to manage problems resulting from adverse changes in business cycles (Huang & Lynch, 2013, p. 573). The report also revealed that it was necessary for the government to work through well-established financial infrastructure to cover the adverse effects of carbon markets, green credits, and stock indexes. Finally, the task force proposed that the government should establish a legal infrastructure such as information relating to the environmental liability of the lender, compulsory environmental responsibility policy, and environmental disclosure information to ensure environmental sustainability.
The Rationale for China’s Green Financial Strategy
Based on the 2014 task force report, the China Government decided to prepare all the founding documents that would help promote the new financial initiatives before the final approval by the Green Fund Management Authority (Canuto, García-Kilroy & Caputo, 2012). In this report, the government was required to submit its investment strategy as one of the principal components of the founding document. The Green Fund Management Authority gives the priority to the investment strategy because it spells out the general principles and mechanisms that will be applied by the implementing body to pursue the country’s Green Fund’s objectives (Canuto, García-Kilroy & Caputo, 2012). The investment strategy also highlights the various stages of project development and implementation. The principal goals of the Green Financial Strategy according to the Chinese Investment plan include:
- Establishing a platform to promote innovation
- Ensuring positive impact on the country’s green programs and projects
- Working towards reinforcing climate policy goals following environmental interventions
- Providing reasons behind the expansion of the country’s green economy, and
- Attracting extra resources from domestic and foreign investors to support the country’s green economy interventions.
How the Chinese Government Plans to Adapt Different Green Financial Product
The only way the Chinese government can realize sustainable growth is by planning and adopting appropriate strategies that will promote the adoption of the green financial product (Zhang & Chen, 2014, p. 122). The idea behind the green finance product adoption is to ensure that the available financial institutions are charged with the responsibility of allocating funds and other financial assets while taking into account environmental and social factors that may affect credit allocation. Through the plans to adapt the various green financial products, the government is certain of transforming its economy from the currently polluted to a green state. In other words, the future economic success of China depends on the ability of policy makers and the current government to establish a policy that enhances the development of green industries alongside transforming or reducing the adverse environmental impacts of traditional industries (Huang & Lynch, 2013, p. 577). The key plans according to the government policy statement 2015 include focusing on cleaning energy, prioritizing in industrial energy conservation, working towards improving energy efficiencies and finally ensuring that there is a reduction in the level of discharge from industries. With the priorities stated, the China Government focuses on a budget allocation of close to 460 billion US dollars across all the existing green sectors. The government is confident that despite the fiscal limitations and other government priorities, the domestic and international markets will generate a greater percentage of the total funds required to execute this budget (Millat, Chowdhury & Singha, 2012).
The Chinese government is also focusing towards the rapid development of the financial systems (Millat, Chowdhury & Singha, 2012). The strategic plans in this context include internalizing domestic economic practices, increase economic participation based on sophistication and depth, improving industrial production efficiency, contributing through the release of productive financial assets and ensuring that the available resources enhance the country’s level of output in a global context. Most economist and policy makers believe that the only way to ensure the green financial outcome is by aligning a country’s green economy and economic priorities with the financial market policies (Zhang & Chen, 2014, p. 123). To this end, the Chinese government plans to adapt the green economic product by improving the flow of green financial assets in ways that will not only accelerate the transition towards a sustainable growth in GDP but will also act towards improving performance efficiency, overall productivity, and resilience of the country’s financial system. This means that the plan to green the country’s financial system must not be considered an additional economic requirement, but rather a concern that requires efficiency and effectiveness of the different government agencies (Millat, Chowdhury & Singha, 2012). Ideally, every system must be modified to ensure proper capital allocation, appropriate pricing of risks, stronger long-term economic growth and preventing stress that may lead to market instability or economic underperformance.
In line with the proposed plans, the government must develop appropriate strategies that will promote green credit, securities and green insurance (Rahman, 2012). These strategies should also focus on eliminating the major constraints that may derail policy development and implementation. The proposed methods that can be followed by the government to eradicate greening impediments include (Canuto, García-Kilroy & Caputo, 2012):
- Preserving price signals that may result from inexistence or the use of inappropriate policies
- Motivating reluctant investors to provide short-term and long-term funds for green development projects and
- Providing precise definition and frameworks that may result in enabling policies or financial principles.
While working on these plans, the government should understand that green financial initiatives may be affected by divergent interests and approaches used to implement appropriate policies (Robinson, et al. 2013). Therefore, the government must first respond by linking the ideas and interests of the central and local government as well as ensuring that there is a common goal between the government and existing market institutions. In general, the adaption plan for the different green financial products will include the following (Zhang & Huang, 2011, p. 189):
- Providing appropriate market information- such information should be embedded in sustainability issues and approaches to risk assessment and investment decision. The information provided by the government should also focus on transparency and accountability of components such as economic metrics, indexes, and banking initiatives.
- Ensuring system competencies and cultural, financial compliance- in this respect, the government is advised to ensure that the existing financial institutions consider making policies that focus on both environmental and social responsibilities (Millat, Chowdhury & Singha, 2012). For informed decision-making, the governments must increase the action of financial institutions, central banks, and financial regulators to consider establish environmental risk management plans through pension funds and insurance.
- Monitoring the assets at the risk of becoming obsolete- this plan focuses on proper management of the costs associated with environmental issues. By taking sustainable precautionary measures, the government will have the opportunity to control the activities of potential financial institutions and other micro-finance institutions.
- Green existing debt markets- the government will be required to engage in product innovation including investing in green bonds, establishing robust and acceptable standards, and acting through tax initiatives to ensure long-term flows of green investments.
- The government establishing appropriate monetary policies- the government should understand that monetary policy has fundamental impacts on the financial performance of a country. The greater influence created on the economy and societies will ensure proper balance in cash flows from financial institutions and members of the public (Millat, Chowdhury & Singha, 2012). Every member of the public must take into account the impact of environment on sustainable economic performances.
- Establishing and strengthening legal frameworks- the government through environmental laws and other enforcements will ensure that every firm, industry or individual contribute to the actual demand of a green financial system.
- Improving coordination between financial institutions-the government must ensure that the information on the green financial system and the recommended policies are available for access by stakeholders.
- Fostering the development of information infrastructure-, such information should make a comparison between environmental costs and credit ratings for a green financial system. The comparison is meant to allow individuals, producing industries and financial institutions to understand the benefits of green financial initiatives to a country.
The Effectiveness of the Adaption and the Lessons Learnt
The effectiveness of the Green Financial adaption plan is measured based on the ability of the government to promote international and domestic economic significance (Canuto, García-Kilroy & Caputo, 2012). This means that through the adaptions, the Chinese government is able to plan and fulfil specific requirements such as scope of policy implementation and economic significance. In other words, the adaption plan is effective because it promotes the government’s efforts towards implementing the regional and global sustainable financial development policies (Ullah, 2013, p. 76). Similarly, the government now has the opportunity to work on its green economic policies with much focus on the impacts of financial institutions on the country’s economic performance. The sole idea behind the strategic planning is to measure the country’s ability to transform its own economic programs and incorporate international sustainable standards for financial development. In the same global framework, the government will be able to effectively plan for the extreme changes in global economic conditions.
Similarly, the effectiveness of the greening plan will be measured based on the country’s ability to bring about ecological civilization (Xu, 2013, p. 33). Under the concepts of eco-civilization, the government will find it easier to establish a stable and more prosperous economy despite the limits commonly imposed by natural resources, ecosystems, and other environmental boundaries. In other words, the steps towards financial greening will allow the country to make an economic transition, facilitate economic progress and engage other developing countries in maintaining a healthy and productive environment. With the aim of maintaining a stable environment for manufacturing and other business activities, the efforts towards green financial transition will require actions from all stakeholders.
A case study of the Chinese financial system indicated that environmental challenge is one of the factors that pose a greater risk to the country’s quality of life and at the same time degrades the government efforts towards ensuring global economic competitiveness, resilience or long-term growth (Robinson, et al. 2013). The reports released in mid-2015 indicated that the government incurs higher costs to offset the damages of pollution on the country’s GDP. Other similar reports have also shown that despite the fact that China is now the second largest growing economy in the world, the country leads in emission of conventional pollutants and carbon dioxide. These are some of the reasons why the government has concentrated much of its finances towards sustainability issues. Currently, the Chinese government is pursuing industrial restructuring as one of its sustainable development plans (Millat, Chowdhury & Singha, 2012). Through this plan, the government is restricting and eliminating dirty and inefficient industries while encouraging high-tech and value-added industries. The greening policy has allowed the government to cut down the economic costs of pollution and use the saved funds in other sectors
Comparing the Adaption of Green Finance Initiatives in China with How Green Financial Systems Function in Other Countries
How Green Financial System Functions in China
The Chinese green financial system is dominated by major financial institutions that provide about three-fifth of the total credit to the domestic market (Liao, Mukherjee & Wang, 2012). Through the banking system, the Chinese government provides close to a half of the total loan to producing firms and individuals with the aims of improving business functions. This means that there is a substantial government involvement in the country’s economic operations. The government, through the Chinese Central Bank, sets maximum interest rates for loans and deposits and also setting target levels of loan volumes. In addition to the central bank, the Chinese government holds the majority shares in the five largest banks in the country. The position of the government as one of the shareholders in most of these banks is an opportunity shared by investors (Sun, 2014). The government lending is predominantly enjoyed by large, state-owned enterprises. The government is also working towards rebalancing its financial system so that smaller private firms can equally have access to the capitals.
How Green Financial System Functions in France
Unlike in China where the green financial system is managed by the central bank through the support of the government, the green financial system in France is under the management of the Treasury Department. One of the responsibilities of the department is to promote economic prosperity alongside ensuring security to the country’s financial system (Filardo & Yetman, 2012). Under the new economic policy, the French Treasury Department is charged with a wide range of responsibilities such as advising the government on economic and financial issues, promoting sustainable economic development, and facilitating improved management of the financial resource.
While the Chinese green financial system focuses purely on loan management for green economy, the French green financial system includes a variety of functions such as:
- Ensuring effective management of government finances and loans
- Facilitating tax collection processes and other finances paid to and due to the government.
- Paying the government bills and ensuring proper management of the government accounts or public debts.
- Effectively supervising and controlling bank operations and other financial institutions.
- Advising the government on domestic monetary and issues of international finance, trade, and tariffs.
- Developing and implementing tax and finance policies to improve the economic performance of the country.
On similar accounts, the French government, through its green financial system, works towards mobilizing world’s capital for effective transition of sustainable and low carbon economy (Liao, Mukherjee & Wang, 2012). Even though the country’s green financial policy is practiced by majority of market participants, the financial incentives and the rule governing financial markets are criticized on the basis that the principles can disadvantage the country’s long-term sustainable economic operations. This is because potential investors are now relocating to other neighboring countries where the financial laws and policies allow for free market operations. In other words, investors hold the view that the new financial policies are only meant to favor the government, but not to improve the economic performance of the private sector.
How Green Financial System Functions in Bangladesh
The green financial system in Bangladesh considers eco-friendly business activities and those industries that are energy efficient for financing. Similarly, the government through the green financial system invests extensively in environmental infrastructure like energy efficient projects, supply of clean water, treatment of wastewater plant, and proper disposal of solid wastes (Millat, Chowdhury & Singha, 2012). Like the Chines government, the government of Bangladesh uses its banks and micro-financial institutions to finance green economic activities. Such finances also include consumer loan programs that the government provides to qualified members of the public with the aims of promoting clean environmental practices like purchase of energy efficient equipment and fuels.
Like the Chinese government, the government of Bangladesh promotes its green financial policy by creating a climate risk fund (Rahman, et al. 2013). Through this strategy, the government ensures that banks and leading financial institutions can finance the economic activities of areas prone to natural calamities like floods, cyclones, and droughts. This means that the government must assess an area for environmental risks and allocate a climate change risk fund to help finance the economic activities of the affected people (Cochrane, 2013). Once the government has identified an area to be prone to a natural calamity, the banks are directed to ensure regular supply of finances in terms of non-refundable emergency loans.
Apart from the green emergency loans, the government has also introduced green marketing, which includes production and sales of environmentally safe products. The policy of green marketing takes into account a wide range of activities such as product modification, specific changes in industrial production process, changes in product branding and packaging, and modified advertisements (Canuto, García-Kilroy & Caputo, 2012). The government also encourages banks to use the same strategy when advertising their services and also create awareness among the common people. The policy of green marketing is only practiced in Bangladesh and has helped the country to achieve its sustainability measures (Mohajan, 2011).
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