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China megatrends: Belt and Road Initiative brings green opportunities – and challenges

Investment strategy


Domestic efforts have been more effective

It is one thing to announce big sustainability ambitions for a major international project such as the Belt and Road Initiative (BRI). Achieving those ambitions is proving a little trickier for China. At home, though, there is better progress.

As China’s economic influence on the world stage grows through its Belt and Road Initiative, it is also seeking to showcase its sustainability leadership. The incentives to do so should be strong: as the world’s largest greenhouse gas-emitting nation, China’s current growth model is unsustainable and has negative implications for the world economy.


BRI to embrace sustainable development, but…

In its BRI infrastructure projects, China is attempting to embrace five of the 17 United Nations’ Sustainable Development Goals (SDGs), which were adopted in 2015:

  • SDG #6: Clean water and sanitation – ensure access to water and sanitation for all people
  • SDG #7: Affordable and clean energy – ensure access to affordable, reliable, sustainable and modern energy for all people
  • SDG #11: Sustainable cities and communities – make cities and human settlements safe, inclusive, resilient and sustainable
  • SDG #13: Climate action – combat climate change and its impact urgently
  • SDG #17: Partnership for the goals – strengthen the means of implementation and revitalise the global partnership for sustainable development.

However, one of China’s largest investment areas in emerging markets is coal-fired power plants. The Global Environment Institute found that between 2001 and 2016, China developed 240 coal-fired power projects in 68 countries, most of them associated with the BRI since its inception in 2013. These projects provide a total of 251 GW of generating capacity, equivalent to about 25% of China’s domestic coal-fired capacity. This is far from being in line with China’s pledge for a green BRI outcome.

Beijing has yet to establish the principles needed to guide environmentally sound investment abroad. Its export of dirty-energy technology undercuts the credits it gets for going green in its domestic energy initiatives. It will have to embrace responsible investment rules to fend off international criticism of its lack of sustainable growth and investment strategies.


…domestic efforts have been more effective

However, China has made progress towards some of the SDGs at home. Environmental policy and enforcement have become more systematic since President Xi came to power in 2013 when the State Council approved a comprehensive action plan to reduce air pollution. This was followed by plans to reduce water and soil pollution in 2015 and 2016, respectively, involving local and national targets and timelines for pollution reduction, aiming at the high-pollution sectors. If fully implemented, the plans would amount to the world’s largest ever environmental clean-up effort.

China has also stepped up the pace of environmental innovation, with initiatives in carbon pricing, clean-energy finance and electric vehicles. In June 2017, it rolled out a pilot programme for green finance in five provinces to promote a USD 440 billion spending scheme on environmental protection projects. In November 2017, it launched the long-awaited carbon emissions trading scheme, which could become the world’s largest carbon market.

China is now the world’s biggest investor in renewable energy technologies. In 2016, it accounted for almost 50% of the world’s installation of new wind-power capacity. By 2020, China is expected to account for more than a third of the world’s total wind-power capacity. It has also vowed to achieve the Paris Agreement goal of limiting the global average temperature increase to less than 2oC.


Carrots and sticks for going green

The macroeconomic incentive for going green is consistent with Beijing’s economic rebalancing objective of less investment, fewer industries and more consumption, more services. China has been the biggest contributor to the world’s greenhouse gas emissions because of its rapid industrialisation using coal-fired power plants.

To deliver President Xi’s sustainability pledge, China must change its economic development model. Xi’s ‘new normal’ policy, which focuses on slower GDP growth, but higher efficiency via structural reforms and the development of low energy-intensity technology sectors will be instrumental in facilitating the energy and economic transition. The shift to renewables, for example, is motivated by the creation of an expected 13 million jobs in the renewable energy and environmental technology sectors by 2020.

Under the previous growth model, high-carbon investments were seen as lower-risk and higher-reward than low-carbon investments as the economy was dominated by the secondary sector. This started to change in 2013 when China’s tertiary sector (a proxy for the new, greener economy) became larger than the secondary sector (exhibit 1). As low-carbon technologies mature, the risk-reward profiles of high-carbon versus low-carbon investments will invert.

Exhibit 1: China’s economic re-balancing

exhibit 1 chinas econ rebalancing

Source: CEIC, BNP Paribas Asset Management (Asia), as of July 2018

Many financial institutions are starting to turn from high-carbon activities to low-carbon ones, with some fund managers trying to ‘decarbonise’ their portfolios. Government regulations are reducing the returns on high-carbon activities by increasing the cost of greenhouse gas emissions. Furthermore, changes in consumption patterns towards greener goods and services such as solar energy, wind power, electric vehicles and personal services are also forcing a shift in production behaviour towards sustainable growth.


Green finance

Chinese banks have started to issue BRI-related green bonds, the standard fixed-income instruments from which the proceeds are designated for sustainable projects. The Industrial and Commercial Bank of China issued its first One-Belt-One–Road Climate Bonds in Luxemburg in September 2017, raising more than USD 2 billion for financing and re-financing projects in low-carbon and low-emission transport, renewable energy, energy efficiency and water resources management. At the same time, China hosted an international Green Finance Forum in Beijing to discuss green finance tools and products, environmental risk analysis and how to enhance the social and environmental preferences of those investing in the BRI countries.

China’s green bond market is among the largest in the world, with its share in global green bond issuance rising from only 2.4% of the world total in 2015 to more than 23% in 2017, according to some estimates (exhibit 2). Other green financing tools and investment instruments are being developed, including green loans, green securities, green insurance, green banks and green funds. They share the common characteristics of:

  1. Providing lower financing costs to green projects than to conventional investments
  2. Ensuring all proceeds go to finance green projects only.

Exhibit 2: Green bond issuance

exhibit 2 green bonds issuance

Source: HSBC, BNP Paribas Asset Management (Asia), as of July 2018


The ultimate question

The billion-dollar question is what will ensure China puts its green ambitions into practice, including in its BRI investments? There is no guarantee, of course, but President Xi’s track record of making changes in the areas he has prioritised may give some level of confidence that China will act on its sustainable development promises.

As I argued recently, what is revolutionary about Xi’s approach is he has forced through changes in the political and economic incentives that had governed the country for over three decades. Thanks to that, instead of a system that single-mindedly maximises GDP growth, which was a high-pollution model, China now has multiple policy goals, including sustaining GDP growth, alleviating poverty, reducing financial risk and protecting the environment.

By replacing the old ‘one-track mind’ approach, which was easy to follow, there is now a more complex set of priorities, which makes optimising all the policy goals simultaneously impossible. Mr. Xi has thus created a political environment more likely to ensure compliance by local officials who, since they do not know Beijing’s target weights for the multiple goals, are more likely to simply do what they are told rather than be defiant as was often the case before.


The ultimate challenge

The biggest challenge remains implementation, which concerns governance, transparency and disclosure. China will have to develop its regulatory framework to ensure environmental integrity is upheld.

With President Xi re-centralising many controls, his administration should be able to mobilise considerable investment in new and environmentally friendly technologies. But there is also a question about his willingness to assume the burden of global leadership that going green would entail. In climate negotiations, China has repeatedly argued that developed nations should bear the brunt of responsibility for climate change, citing those countries’ historical emissions and emerging markets’ right to catch up economically.

In a nutshell, the incentive for China to go green, including in its BRI investments, should be strong, but so are the challenges to delivering its aims, especially on governance. Given Beijing’s green initiatives so far, the Chinese market offers considerable potential in terms of future sustainable finance and investment.

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