China’s trial green zones show power of asset-backed financing

Echo Xie
·5-min read

One of China’s poorest provinces has become a vanguard for green energy, with a pilot project delivering significant savings to residents through the use of solar power.

The trial, in a suburb of Guiyang, the provincial capital of Guizhou in the southwest, has seen rooftop solar panels installed on residential and commercial buildings, along with underground pumps to deliver water from a nearby river at a constant 20 degrees Celsius (68 Fahrenheit) in winter and summer.

The system uses solar power to cool the water to 7 degrees in summer and heat it to 75 degrees in winter, letting it circulate in pipes inside the buildings. It also compresses air to save energy and release it when the solar power is insufficient.

Do you have questions about the biggest topics and trends from around the world? Get the answers with SCMP Knowledge, our new platform of curated content with explainers, FAQs, analyses and infographics brought to you by our award-winning team.

Temperatures in Guizhou can fall as low as 0 degrees and, like other provinces in southern China, central heating systems are rare or non-existent. The trial has been running since late 2017 in Guiyang, where the cost of heating a household over the three winter months was about 3,600 yuan (US$550). In contrast, the annual cost of the new system is about 4,000 yuan, according to the local newspaper.

Construction costs for the system were 45 per cent lower compared to a building with central air conditioning.

Local governments in Guiyang plan to build 10 such projects to supply energy for the region’s 220,000 residents, at a total investment of 2 billion yuan (US$305 million).

How technology is helping make electricity distribution greener and more resilient to climate events, pandemics

Lan Hong, a professor of environmental economics at Renmin University, was in charge of the project as deputy director of the green finance port management committee of Guian New District from 2017 until last year. She said the project highlighted how green finance could combine with renewable schemes and make them profitable.

“We want to use green asset-backed securities (ABS) to raise funds,” said Lan, adding that it was hard to apply for green credit without funds or collateral. Instead, the next 15 years’ proceeds from the project will be used as collateral to issue bonds.

“The interest rate of green ABS is also lower than direct loans,” she said, while cautioning the approach should only be used on projects with stable revenues in the long term.

The initial project raised one billion yuan and a second one is under way. The local government is promoting the model to the rest of the province and beyond, to the country as whole.

As of last year, total green loans in the Guizhou pilot zone amounted to more than 182 billion yuan, while green bonds reached 3.2 billion yuan. In the pilot zone, 16 financial institutions have established 35 branches.

Chinese utilities’ ambitious renewable energy targets raise questions about costs, delivery

Guizhou was one of six provinces selected for the green finance pilot zones, along with Zhejiang, Jiangxi, Guangdong, Xinjiang and Gansu, to help fund the country’s environmental protection goals.

Similar results have been achieved in Huzhou, in the eastern province of Zhejiang, where in 2005 President Xi Jinping introduced the concept that “green mountains and clean water are equal to mountains of gold and silver”. Since becoming a green pilot zone in 2017, the city has helped 5,719 enterprises obtain 48 billion yuan in credit and introduced the country’s first green finance evaluation standards and system applicable for green companies, banks, projects and services in 2018.

Huzhou’s green loan balance reached 140 billion yuan in the first half of last year, representing a more than 50 per cent year-on-year increase and accounting for a quarter of total loans. It is also the first and, so far, only pilot zone to coordinate the development of green finance and green buildings.

“China’s green finance pilot zones have in many ways provided important lessons for the whole country, for example how to accelerate different types of financing in different markets – from credits to bonds, from funds to insurance,” said Christoph Nedopil Wang, a senior research fellow at the International Institute of Green Finance of the Central University of Finance and Economics in Beijing.

“The pilot zones have also provided relevant innovations into the green financial markets, which ideally can be replicated in new areas and sectors,” he said.

According to Lan, better connections are needed between China’s financial institutions and its green projects. “We need to establish management offices to match the projects and funds,” she said. “The green finance management office in Guiyang accepts leadership from both the central bank and the local government and that’s how we combine money and projects together.”

China doubles new renewable capacity in 2020 and raises thermal plants base to five-year high

This approach required the authorities in the pilot zones to introduce a green finance certification scheme to identify, collate and manage projects and match them with green finance, she said.

According to a study from Tsinghua University last October, China needs to invest about 138 trillion yuan to achieve its carbon neutrality goal by 2060. Green loans make up more than 80 per cent of green financing in China, but their proportion of total loans has grown from 8.8 per cent in 2013 to just 10.8 per cent by 2020, according to the People’s Bank of China.

Lan said China should build a diversified green finance system with funds from both loans and long-term funds such as life insurance funds and pension funds. “These funds are stable, in large amounts and have a long investment period. They expect a low rate of return, so it’s an ideal source for green financing,” she wrote in a 2018 article.

More from South China Morning Post:

This article China’s trial green zones show power of asset-backed financing first appeared on South China Morning Post

For the latest news from the South China Morning Post download our mobile app. Copyright 2021.