CHINA'S CLEAN REVOLUTION IV

English Language Summary November 2011

FINANCING CHINAS LOW CARBON GROWTH

1 FINANCING CHINAS LOW CARBON GROWTH

FINANCING CHINAS CLIMATE PLANS

This briefing note is based on Financing Chinas Low Carbon Growth ,our fourth annual Chinas Clean Revolution report that will be previewed at the Hong Kong Business Summit on Climate Leadership on November 7, 2011 and released in full (in mandarin) in late November.

Financing Chinas Low Carbon Growth is the first comprehensive review of Chinas strategy on financing its low carbon economy. The report explores:
The fiscal and financial policies and instruments in place to meet Chinas goals; The evolving role of Chinese financial institutions in supporting climate and energy goals; Opinions on the level of investment and the investment needed; and Current challenges and barriers to progress. Our research is based on review of existing literature and our own interviews of 20 experts1 closely involved in Chinese policy development and tracking, including representatives from the Ministry of Finance, National Development and Reform Commission (NDRC), Tsinghua University, Chinese Academy of Sciences and Chinese Academy of Social Sciences. The main report also reviews a number of sectoral and regional case studies, including the role of Hong Kong as a financial and knowledge centre.
CHINAS POLICY FRAMEWORK FOR LOW CARBON FINANCE The main elements of Chinas low carbon financing are summarised in Figure 1. Amongst the experts interviewed, all of these elements were held to be equally important. While government finance has been instrumental in advancing renewable energy and energy efficiency (Figure 1), it has also been well leveraged by non-government entities. According to some estimates, the central governments US$31 billion2 (RMB 200 billion) investment into energy conservation and emissions reduction during Chinas 11th five-year planning period (2006-2010) was leveraged to generate a total investment of US$315 billion (RMB 2 trillion)3.

FIGURE 1. PRIMARY FINANCIAL MECHANISMS DRIVING LOW CARBON GROWTH IN CHINA

PUBLIC & INTERNATIONAL MARKETS
Foreign-Direct Investment Stock Market Carbon Markets

GOVERNMENT FINANCE
1 Interviews were conducted on an anonymous basis with twenty experts on financing low carbon growth in China. Interviewees were drawn from venture capital and private equity investors (7), government (5), banks (4), academia (3) and independents (1). 2 All currency conversions were calculated on November 1, 2011 conversion rates. 3 State Council Information Office. November 2011. The State Council Information Office held a press conference regarding China's policy and action to address climate change at the United Nations climate change conference in Cancun. www.china.com.cn/zhibo/2010-11/23/content_21379072. htm?show=t

R&D Direct Subsidies Demonstration Projects Taxation

COMMERCIAL BANK & INTER- BANK FINANCE

Debt Finance

LOW CARBON GROWTH

Corporate Bonds

PRIVATE FINANCE
Venture Capital Private Equity Corporate Finance

FINANCING CHINAS LOW CARBON GROWTH 2

Financing already appears to be coming from a diverse set of sources and is arguably becoming more sophisticated. Key indications of progress include the following: Central Government investment in the energy efficiency, renewable energy and environmental protection sectors has grown steadily from US$3.7 billion (RMB 24 billion) in 2007 to a projected US$16.8 billion (RMB 107 billion) in 2011 (Figure 2). In 2010, the venture capital (VC) sector completed 84 clean technology transactions totaling US$508 million (RMB 3.2 billion), more than doubling on the previous year and increasing annual investment by over 40%. Clean technology ranked second VC finance amongst twenty-three industrial sectors4,5. Similarly for private equity, 2010 saw the clean technology industry ranked second in China by number of transactions (31 in total) and 10th by total investment at US$330 million (RMB 2.1 billion)6. As of December 2010, the National Association of Financial Market Institutional Investors reported a release of funds exceeding US$157 billion (RMB 1 trillion) for 179 enterprises from Chinas seven Strategic Emerging Industries7 including US$100 billion (RMB 640 billion) for new energy industry companies8. Funds included the registered issuance of debt financing tools such as short-term financing bonds, medium-term notes and small and medium-size enterprise (SME) collective bills. As of August 2011, NDRC had certified three rounds of 1,734 energy service companies, an important third-party financing industry for energy efficiency projects9.
FIGURE 2. REPORTED CENTRAL GOVERNMENT INVESTMENT IN ENERGY EFFICIENCY, RENEWABLE ENERGY AND ENVIRONMENTAL PROTECTION 2007-2011 (N.B. THE 2011 FIGURE IS PROJECTED BASED ON THE GOVERNMENT BUDGET)

120 96 Energy Efficiency and Renewable Energy Investment (billion RMB) 90 64 60 42 30 0 24

107
4 The 23 industries including the Internet, cleantech, bio/ healthcare, electronic and opto-electronics equipment, machinery manufacturing, IT, telecommunications and valueadded services, chemical raw materials and processing, food and drinks, agriculture/forestry/animal husbandry/fishing, energy and mineral, entertainment and media, construction/ engineering, chain retail, automobiles, semiconductor, finance, textiles and clothing, education and training, radio, television and digital television, logistics, real estate, and others.

2007

2008

2009

2010

2011

5 Zero2IPO. March 2011. China Venture Capital Annual Report 2010. www.zero2ipogroup.com/en/research/reportdetails. aspx?r=b68ff1e5-a03a-4aa2-8f9e-93ff5769436d 6 Zero2IPO. March 2011. China Private Equity Annual Report 2010. www.zero2ipogroup.com/en/research/reportdetails. aspx?r=057317c5-9cb0-44b0-a9cb-e9da0bcb98fb 7 The majority of the Strategic Emerging industries prioritised for development on Chinas 12th Five year Plan are associated with low carbon technology and environmental protection. For a summary of these industries please refer to our report Delivering Low Carbon Growth available at http://www. theclimategroup.org/publications/2011/3/7/delivering-lowcarbon-growth-a-guide-to-chinas-12th-five-year-plan 8 National Association of Financial Market Institutional Investors. March 2011. Supporting debt financing of SEIs, promote industrial structure refining. www.nafmii.org.cn/ Info/485347 9 The list of energy service companies could be found at: www.sdpc.gov.cn/zcfb/zcfbgg/2010gg/t20100907_369860.htm, www.sdpc.gov.cn/zcfb/zcfbgg/2011gg/t20110314_399354.htm, www.sdpc.gov.cn/zcfb/zcfbgg/2011gg/t20110811_428015.htm 10 Measure on encouraging and instructing private enterprises to develop strategic emerging industries ( )NDRC (2011) 11 China Banking Association. July 2011. 2010 annual CSR report for Chinese banks. www. china-cba.net/bencandy. php?fid=65&id=7611

In July 2011, NDRC issued a measure seeking to ensure equal treatment of private enterprise in accessing public resources, and to encourage new business models. The measure also promotes the establishment of venture investment firms and industrial investment funds to direct private capital to the seven Strategic Emerging Industries. This step is especially important for SMEs in the low carbon industry value chain, which typically find it hard to access debt finance from commercial banks. THE ROLE OF CHINESE FINANCIAL INSTITUTIONS Many Chinese banks are in the early stages of creating climate change policies and integrating these into their lending practices. The banking sector has for example been progressing green credit for energy efficiency, renewable energy and the low carbon sub-sectors of the Strategic Emerging Industries (Figure 3). Loans outstanding to energy-saving and environmental protection projects in 2010 increased 18% on the previous year, the total value of loans made to the projects increased by 1.7% and the number of customers being provided loans rose by 11%11. The development of green credit at Chinas commercial banks is in its infancy, having so far been driven by energy policy requirements and social responsibility considerations, and many initiatives are not yet profitable.

10

3 FINANCING CHINAS LOW CARBON GROWTH

FIGURE 3. GROWTH IN LENDING FROM CHINESE BANKS TO ENERGY EFFICIENCY AND ENVIRONMENTAL PROTECTION PROJECTS (2004 - 2010)12,13
1,011 856

1,000 BANK LOAN FOR ENERGY EFFICIENCY AND ENVIRONMENTAL PROTECTION PROJECTS (BILLION RMB) 800 600 400 200 0 2004 2005 2006 2007 2008 89 132 203 341 371

2009

2010

INVESTMENT REQUIRED TO MEET CHINAS CLIMATE AND ENERGY GOALS No clear consensus emerged amongst our group of experts on the total investment needed, or on whether the current commitment is sufficient to meet targets. Asked about Chinas annual investment needs, half of our respondents estimated a requirement of US$80-240 billion (RMB 500 billion-1.5 trillion) during the 12th fiveyear planning period (2011-2015). Forty per cent put the annual demand at greater than US$315billion (RMB 2 trillion) during the 13th five-year period (2016-2020, Figure 4). For comparison, Bloomberg New Energy Finance estimates that US$54.5 billion (RMB 346 billion) was invested into clean energy in China in 201014. Against the backdrop of Chinas commitment to develop its Strategic Emerging Industries, most of our expert group however believes the short-term investment demand will be met for low carbon technologies, compared to a likely investment shortfall in energy efficiency and emissions reduction in traditional industries (Figure 5).

FIGURE 4. SURVEY RESULTS: ESTIMATED ANNUAL INVESTMENT NEEDS TO MEET CLIMATE AND ENERGY TARGETS IN 2015 & 2020
How much additional investment is needed for China to achieve its climate and energy policy targets in 2015 and 2020? (Trillion BMB) Based on recent investment trends,will China meet the investment level needed to achieve its climate and energy policy targets in 2015 and 2020?

100% 2 PERCENT OF RESPONDENTS PERCENT OF RESPONDENTS 80% 60% 40% 20% 0%

12 China Banking Association. May 2010. 2009 annual CSR report for Chinese banks. www.china-cba.net/bencandy. php?fid=65&id=5299 13 China Banking Association. July 2011. 2010 annual CSR report for Chinese banks. www.china-cba.net/bencandy. php?fid=65&id=7611 14 Michael Liebreich et al. Green Investing 2011: Reducing the Cost of Financing. The World Economic Forum in conjunction with Bloomberg New Energy Finance. April 2011.

100% 1.5 - 2 1 - 1.5 0.5 - 1

DIFFICULT TO TELL

2 1.5 - 2 1 - 1.5 0.5 - 1

DIFFICULT TO TELL

80% 60% 40%

Yes

Yes

No No

20% 0%
DIFFICULT TO TELL DIFFICULT TO TELL

2011 2015

2016 2020

2011 2015

2016 2020

FINANCING CHINAS LOW CARBON GROWTH 4

FIGURE 5. SURVEY RESULTS: RESPONDENT OPINIONS ON MEETING INVESTMENT DEMANDS OF LOW CARBON INDUSTRIES 15
Based on current investment trends,will the level of investment needed to achieve each industrys development target for 2015 be met?
100% PERCENT OF RESPONDENTS 80% 60% 40% 20% 0% Industry Building Transport Residential Energy Consumption ES&EP New Energy Electric Vehicles No Yes Difficult to tell

ENERGY EFFICIENCY AND EMISSION REDUCTION IN TRADITIONAL SECTORS

LOW CARBON INDUSTRIES

CHALLENGES & RECOMMENDATIONS Based on our research and interviews, we believe China faces a number of broad challenges to successful financing of its energy and climate targets, as described in this section. The current national investment strategy focuses on funding the manufacture of clean technologies and deploying them at scale, but has yet to prioritise financing of technological innovation, capacity building or low carbon services that will be increasingly necessary to meet climate and energy goals. Recommendation: Improve the national investment strategy to prioritise these areas. It is unclear how effective Chinas investments into energy efficiency and renewable energy have been, including the extent to which these investments also meet wider economic goals and carbon targets. Recommendation: Improve the assessment of investments and their impact on wider policy objectives. China has not yet established clear and enforceable polices and standards for provision of green credit by banks, or the associated regulatory system to ensure green credit policies achieve the desired effect. Recommendation: The China Bank Regulation Commission should accelerate the establishment of polices, standards and systems to address this gap. Whilst China is slowly adjusting its tax regime to encourage low carbon industries and energy efficiency, its energy prices are often too low to encourage efficiency measures. Recommendation: The government should continue to adjust the scope and level of taxation in these areas. The government is yet to fully co-ordinate its wider financial strategy with its low carbon policies, or to coordinate its approach across Ministries, the State Councils policy targets and provincial and municipal government plans. Recommendation: Further prioritise and direct government funding, concentrating support on areas with the largest public benefit and a long-term cost savings (e.g. energy efficiency retrofits and basic technology R&D). Establish coordinated financial planning on carbon objectives across the government. Chinas banking sector participation in financing the low carbon economy is still emerging. Recommendation: Increase bank participation in building the low carbon economy. Mechanisms could include establishment of loss-sharing partnerships between banks and local governments to provide energy efficiency loans to industry, and efforts to integrate green credit with other financial products.
15 ES&EP: Energy Saving and Environmental Protection

5 FINANCING CHINAS LOW CARBON GROWTH

THE ROLE OF HONG KONG As Chinas most financially open city, Hong Kong can play a significant role in advancing Chinas green growth. The city has already played a prominent role in fostering clean technology in China, through channelling capital, enhancing exchange between the Chinese and international markets, and providing support services and expertise for business development. To stay competitive, Hong Kong will need to identify new strategic roles in accelerating Chinas clean industrial revolution. In particular, as the city aspires to remain a global hub for finance and the knowledge economy, it could focus on guiding investment towards low carbon business and clean technology innovation.

Financing Chinas Low Carbon Growth our fourth annual Chinas Clean Revolution report will , be available at www.theclimategroup.org in late November. The report will be followed by a series of updates (in English and Mandarin) throughout 2012. These will analyse and assess the developing financial infrastructure (including tax policy; venture capital and equity markets; bond markets; carbon trading; R&D investment) and policy design (for key technologies, sectors and levels of government) that will enable China to achieve its climate and energy targets for 2015 and 2020.

CONTACT US
The Climate Group Second FloorRiverside BuildingCounty HallBelvedere Road London SE1 7PBUnited Kingdom F: 44 (0)20 7960 2970 T: 44 (0)20 7960 2971 WWW.THECLIMATEGROUP.ORG WWW.THECLIMATEGROUP.ORG.CN [email protected]

ACKNOWLEDGEMENTS
The Climate Group is grateful for the organizations who supported the report, China's Clean Revolution IV: Financing China's Low Carbon Growth :