PBOC to provide low-cost funding to banks for carbon-reduction loans

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China’s central bank launched a new monetary policy tool to support carbon emission reduction projects through low-cost lending to financial institutions, according to an announcement on Monday.

The new tool aims to leverage more social capital to promote the low-carbon transition of key industries and support the development of clean energy, energy saving, environmental protection and carbon emission reduction technologies, according to an announcement released by the People’s Bank of China (PBOC) on Monday evening.

Financial institutions will provide carbon emission reduction loans to related companies, at interest rates close to the level of the country’s benchmark lending rate – the loan prime rate (LPR). Then the central bank will provide 60 per cent of the loans to these commercial banks for one year at an interest rate of 1.75 per cent, said the PBOC.

The lenders can choose projects by themselves and can roll over the loans twice at most, and are required to provide qualified pledges to the PBOC.

The PBOC requires financial institutions disclose relevant information, such as the number of projects, the amount of loans, the weighted average interest rates and carbon emission reduction data supported by the new tool. Their information disclosure will be verified by a third-party professional institution and subject to public supervision.

The financing will support companies in clean energy, energy-saving and environment-friendly sectors, as well as those with carbon emission reduction technology. That includes wind and solar power, high efficiency power storage and clean energy transmission, and is especially meant to back earlier-stage firms where there is high potential to cut emissions with the right funding.

The creation and launch of such a structural monetary policy tool will support the development of key fields, such as clean energy, energy conservation and environmental protection, in a “steady, orderly, targeted and direct manner,” said an official from the PBOC.

More social funds could also be mobilized to promote carbon-emission cuts, said the official.

The Chinese central bank has been looking to contribute to President Xi Jinping’s pledge to make China carbon neutral by 2060 after reaching peak emissions in 2030. The tool also comes amid a drive to fine-tune policies in the face of slowing economic growth, while the recent power crunch has underlined the large role fossil fuels still play in China’s economy. 

“The new move will greatly benefit related companies in the private sector, which previously had to borrow from banks at interest rates of 4.6%- 5.4%, compared to interest rates of 3.8% – 4% for state-owned companies. Under the new PBOC plan, interest rates for related companies in the private sector will be 3.5% – 3.8% for one-year loan and about 4.5% for five-year or longer-term loans,” analysts at CIC Financial said in a research note on Tuesday.