Changes in Chinese capital development will influence green finance

Although the uptake has been slow from an international perspective, it appears that China’s effort to change the way that it deals with capital concerning green bonds and loans is set to cause a global ripple effect on green finance in general.

A relatively radical economic agenda floated toward the end of this year by Ma Jun, a member of the Chinese central bank’s monetary policy committee, sought to reduce the amount of capital set for green loans on bank balance sheets by half. While it has taken some time for other nations to measure the effects of this proposal, it now appears that the world markets are contemplating a knock-on of sorts.

This is a tipping point, as China has some of the biggest banks in the world, and the green bond market in the Asia Pacific nation is the second-largest of its kind worldwide. China has serious influence on changes made elsewhere, and it now has more scope to get capital reductions on green loans. In theory, this could make the loans cheaper and more accessible for a number of state and private lenders.

Australia has long been an example of how capital flow leads banks rather than the other way around, especially in light of how the housing market works in the country. The way that capital rules for mortgages are set globally gives Australian banks more incentive to prioritize lending in the housing market than moving any other type of capital.

Thanks to these concessional rules, which the Switzerland-based Bank of International Settlements mandates, banks in Australia actually have to hold less capital against each arbitrary amount that they finance. In broad terms, for every $100, the banks have to hold $10.50 in capital as a precautionary measure when they give out loans in a commercial capacity. Under concessional rates, this drops to just $3.68 per $100.

This means that the banks can put roughly a third less per $100 as capital on the balance sheets, similarly to how China is now able to put more effort into making green finance one of the most attractive lending opportunities. As Australian banks generate a threefold higher return on equity, Chinese lenders could see their equity returns double on green finance loans.

The concept is not altogether new. Mark Burrows, an Australian investment banker who previously served as a senior adviser to the UN Environment Program (UNEP), initially promoted it around six years ago. He has since moved on to the Macquarie Group, an investment company that made waves when it acquired the Green Investment Group, which the UK formerly owned.

This means that one of the first people to receive credit for making the most concessional opportunities now helps advise the largest green investment company in the world. It is now thought that other countries are likely to follow suit in the near term as more lenders become attuned to the possible benefits. At a time when many are feeling pressed to invest in financial vehicles with green credentials, developments such as these will be welcome.