PBOC’s Carbon-Reduction Lending Program Has Modest Start, but Great Potential, Analysts Say

The Chinese central bank’s new monetary policy tool to support carbon emission cuts could release 400 billion yuan ($63 billion) to 1.9 trillion yuan in funding for financial institutions over the next year under different scenarios, with the potential to unleash far more over the long term, analysts said.

On Monday, the People’s Bank of China (PBOC) announced the launch of its carbon-reduction support tool, designed to provide cheap funding to financial institutions that operate nationwide to channel low-cost loans to businesses in the clean energy, environmental protection, energy conservation, and carbon-reduction technology industries.

The tool is a measure for targeted credit easing and an incentive for financial institutions to fund carbon-reduction projects, some analysts said.

The initiative is part of the broader fiscal and monetary support laid out in China’s roadmap for achieving net-zero carbon emissions by 2060. It came as the world is debating strategies to deal with climate change at the COP26 Glasgow conference and watching whether major carbon emitters such as the U.S. and China will take firm actions.

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Financial institutions such as commercial banks interested in participating in the initiative will need to first issue a loan to a qualified carbon-reduction project and then apply to the PBOC for a support that can cover 60% of the principal at an interest rate of 1.75%.

The policy is equivalent to an interest rate cut of 72 basis points to the cost of qualified green loans, as the annual interest rate on the PBOC’s medium-term lending facility loans is 2.95%, analysts at brokerage China International Capital Corp. Ltd. estimated in a Tuesday note.

This kind of liquidity injection will be more efficient and precise in achieving the PBOC’s goal than another approach in which the central bank injects cash into the financial system first and banks create credit later, analysts at Hongta Securities Co. Ltd. wrote in a note.

But analysts generally think the credit unleashed by the initiative will be moderate in the short term given the limitations that the PBOC has set and the strict standards expected of banks for choosing the right projects.

Also, some analysts said the policy is not a sign that a comprehensive monetary easing is on the way because it is aimed at cutting carbon emissions instead of relaxing monetary policy. Overall, China’s monetary policy remains restricted by rising inflationary pressure, analysts at Huatai Futures Co. Ltd. wrote in a note.

Some analysts believe that the initiative will have a more significant impact in the future. That’s because the central bank will likely expand it to cover more financial institutions and more green industries as China’s transition to net-zero carbon emissions is estimated to require hundreds of trillions of yuan in new investment, they said.

Contact reporter Guo Yingzhe (yingzheguo@caixin.com) and editor Michael Bellart (michaelbellart@caixin.com)

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