Recently, Governor Yi Gang of the People’s Bank of China (PBOC) was interviewed by China Global Television Network (CGTN) on issues related to mobilizing the financial system to support green transition, climate information disclosure, international cooperation in green finance and monetary policy. The transcript of the interview can be found below.
CGTN: Green transition requires massive capital, and the financial system can play an important role in this process. In recent years, what measures has the PBOC taken to encourage financial institutions to support green transition?
Yi Gang: Central banks can play a very important and positive role in green transition. The international community has reached a consensus about this.
As far as monetary policy is concerned, the first and the most important mandate for central banks is to maintain price stability. Having said that, some central banks still have room to pay attention to structural issues to facilitate green transition, where structural monetary policy could play a role.
To facilitate green transition, the People's Bank of China has done a lot. The People's Bank of China included high-quality green bonds and loans as qualified collateral to the Medium-term Lending Facility in 2018. Last year, we launched two new monetary policy instruments, namely carbon emission reduction facility and special central bank lending facility for green and efficient use of coal, both of which provide funds to qualified commercial banks at a low interest rate of 1.75%.
As of the end of May, the People's Bank of China has provided over 210 billion yuan through the two facilities to financial institutions, which reduced emission by over 60 million metric tonnes of carbon dioxide equivalents, accounting for about 0.6% of China's annual carbon emission.
Moreover, the People's Bank of China issued Green Finance Evaluation Guidance in May 2021, incorporating green loans and green bonds into financial institutions' performance rating, providing the right incentives.
These incentives have helped accelerate green financing. As of March 2022, outstanding green loans in China exceeded 18 trillion yuan, posting a rapid increase. Outstanding green bonds reached about 1.3 trillion yuan, one of the largest in the world.
In conclusion, central banks can do something to help in green transition. It is important to make the whole society aware of the benefits of green transition.
CGTN: What has the PBOC done to improve climate information disclosure and prevent fake reporting? What are some achievements?
Yi Gang: This is very important. The disclosure is important and key issue in green transition. For fair and efficient implementation of green monetary policy tools, we should guard against different kinds of moral hazards, such as green-washing, low-cost fund arbitrage, and green project fraud. Therefore, information disclosure and strict supervision are needed when we design and implement green monetary policy tools. For example, the carbon emission reduction facility requires banks to disclose information on their websites on a quarterly basis about loan amount, interest rate, number of supported projects, and especially, quantity of carbon reduction. The People's Bank of China will verify the information together with other ministries and independent third-party institutions. It is also important for the general public to know this and help to watch.
To promote better management of climate risk, the People's Bank of China conducted the first climate risk stress testing last year, where the biggest challenge was insufficient information disclosure.
To promote climate information disclosure, the PBOC released the Guideline on Environmental Information Disclosure for Financial Institutions last year, defining requirements on the form, frequency, qualitative and quantitative information of the disclosure, and has guided over 200 financial institutions to prepare environmental information disclosure reports, including procedures to identify and assess, manage and control environmental risks, issuance of green loans and reduced emissions, as verified by third-party agencies. Going forward, we plan to expand the pilot program nationwide.
CGTN: The PBOC has been actively advancing international cooperation in green finance through multilateral and bilateral platforms. What role has the PBOC played in developing global green finance?
Yi Gang: At the global level, the People's Bank of China has worked with all parties to mobilize social capital to address climate change.
First, China co-chaired the G20 Sustainable Finance Working Group. Last year, the G20 resumed the Sustainable Finance Working Group, co-chaired by the People's Bank of China and the US Treasury. The working group has completed the G20 Sustainable Finance Roadmap as an important global guidance for mobilizing social capital to address climate change. This year, our priority is to develop the framework for transition finance, to guide social capital to support low-carbon transition of high-emission sectors.
Second, we have made progress in harmonizing taxonomies with our European counterparts. The People's Bank of China and the European Commission have been comparing green finance taxonomies since 2020. In November last year, we published the Common Ground Taxonomy, proposing 55 mutually recognized economic activities that could mitigate climate change. We have just upgraded the Common Ground Taxonomy on June 3rd this year, adding another 17 economic activities. The groundbreaking work could facilitate cross border green capital flows. To date, the China Construction Bank and the Industrial Bank have issued green bonds under Common Ground Taxonomy. Some emerging market economies also refer to this taxonomy.
Third, we have leveraged green finance to build a green “Belt and Road”. In 2019, the People's Bank of China offered guidance in launching the Green Investment Principles (GIP) for the Belt and Road, outlining seven principles for green investment. As of May 2022, the GIP membership have expanded to 41 signatories and 14 supporters.
The People's Bank of China is also working with the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), the FSB and the BCBS on various fronts, including regulatory standards for green finance.
Going forward, the PBOC will continue to strengthen international cooperation on green finance through multilateral and bilateral platforms to create an enabling environment for China to achieve the target of carbon peaking and neutrality.
CGTN: The Chinese economy has been facing some downward pressures, and the RMB exchange rate has depreciated recently. What is the current stance of China’s monetary policy and how would it support economic recovery?
Yi Gang: China’s monetary policy is accommodative in supporting the real economy. Growth of broad money M2 and total social finance is in line with the nominal GDP growth rate, and provide ample liquidity and support to small- and medium-sized enterprises with the purpose of maximizing employment.
The market interest rate has been stable and trending downward in the past 10 years. The natural interest rate is mainly determined by the marginal productivity of capital and long-term demographic trend.
In China, interest rates are determined by market supply and demand, and the central bank guides market interest rates with monetary policy instruments. Currently, the time deposit rate is 1-2%, and bank loan rate is about 4-5%, and the bond market and the equity market function well. After taking into account of inflation, you can see the real interest rate is pretty low. The financial market makes an efficient allocation of resources.
We have a flexible and market-determined exchange rate system using a basket of currencies as reference. Compared to 20 years ago, RMB has appreciated against the USD by 25%, and appreciated against a basket of currencies by about 30% in nominal terms. The appreciation in real terms is even more.
Inflation outlook is stable in China. Right now, consumer price index is 2.1% and producer price index is about 6.4% on the year-on-year basis. Maintaining price stability and maximizing employment are our high priorities.
This year, we face some downward pressures of growth due to COVID-19 and external shocks, and the monetary policy will continue to be accommodative to support economic recovery in aggregate sense. At the same time, we also emphasize structural policies such as supporting small- and medium-sized enterprises and green transition.
