Cheap Capital Bankrolls China’s Green Revolution

Chinese employees work at the Yingli Group's photovoltaic manufacturing plant, in China's Hebei Province.

Earlier this month, , Chief Editor of the blog, testified before the . His testimony provides a crystal clear overview of  the different factors that are supporting China’s push to lead the global green economy, (at the expense of the U.S.). Over the next couple of weeks we plan to republish different  portions of Wong’s comprehensive testimony. We start today with his assessment of  China’s capital markets and their role in executing  Beijing’s green policies. Unlike the U.S. and Europe, where banks have tightened lending, Chinese banks are well stocked and therefore able to lend to renewable energy and cleantech companies at very competitive prices.

A distinct advantage of the Chinese system is its ability to both mobilize large volumes of low-cost capital through various channels, including state-owned investment vehicles and financial institutions, and economic stimulus programs. Planners also use smart, targeted, and sometimes novel financial and tax policy instruments to stimulate investments in clean energy projects.

First and foremost are the “Big Four” state-owned commercial banks, which really seem to play the role of development banks and whose lending activities are often times driven by central government policy. As a “priority sector,” clean energy and its related infrastructure projects have received preferential access to bank loans, and at borrowing rates below what is available in other countries for similar projects. The role of credit has been particularly significant in the wake of China’s economic stimulus plans, which unleashed a floodgate of bank lending—an unprecedented $1.5 trillion in 2009, and $680 billion in the first half of 2010 despite efforts by China’s de facto central bank to tighten up bank lending due to concerns about inflation.

National programs provide public funding to clean energy R&D, something discussed in more detail below. There are also a variety of technology-specific fiscal allocations by central and provincial governments in the clean energy sector. In 2009, the central government announced
two major incentive programs for solar electricity—one for distributed rooftop solar programs, and another for utility-scale solar plants.7 This year, the central government just last month allocated 2 billion yuan for energy conservation projects. Alternative energy vehicles are also a beneficiary of financial incentives provided to public and private purchasers in a number of pilot cities.

In the wind and other renewable energy sectors in particular, China has employed a comprehensive suite of financial policies to promote industry growth, including preferential feedin tariffs for renewable electricity producers, carbon financing for clean energy project developers through the clean development mechanism under the Kyoto Protocol, subsidies to grid operators to build out transmission lines to clean energy projects in remote areas, the mandated market share as described earlier, and tax reduction incentives. On top of these national-level incentives additional carrots are dangled by provincial and local governments in the form of additional tariffs per kilowatt hour for renewable electricity, tax breaks, and favorable land pricing, among others.

State-owned enterprises are another critical driver of clean-energy deployment. China’s “Big Five” power companies, all government owned, are major investors in renewable energy projects. Together, they accounted for 55 percent of all domestic installed wind capacity as of the end of 2008. China Investment Corporation, a recently formed state wealth fund with $300 billion of managed assets, is now making major investments in Chinese clean energy companies. The China Energy Conservation and Environmental Protection Group, a state holding company with more than 90 subsidiaries and 20,000 employees, invests widely across a broad range of energy conservation, pollution control, and renewable energy businesses.

Finally, Chinese planners are experimenting with novel policies that may not directly finance clean energy projects, but clearly demonstrate a preference for them by imposing restrictions on carbon-intensive projects. These include a possible carbon tax by 2014, denial of stock exchange listing of energy-intensive and pollution-intensive companies, and the denial of bank credit to such companies.

Photo: PicApp-Stephen Shaver/UPI Photo

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