PBOC Gives Banks Cheaper Funding for Loans to Green Firms

(Bloomberg) -- China’s central bank will offer cheap funding to banks which lend to firms that are working toward the nation’s goal of reducing carbon emissions.

The People’s Bank of China will lend financial institutions money to help them provide loans to firms working on China’s energy transition, according to a statement Monday evening. The central bank will lend 60% of the required funds at an interest rate of 1.75%, and banks can then use the money to provide loans at a higher rate around the level of the loan prime rate.

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.

Though the funds can be offered at banks’ own discretion, the central bank will require public disclosure of the use of the loans and quantification of the emissions reduced with the funding. 

China’s sustainable financing is also expected to get a boost from a green taxonomy the PBOC jointly released last week with the European Commission, part of an effort to bring global standardization.

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. 

Targeted Easing

The PBOC didn’t provide an estimate of the amount of expected lending. Goldman Sachs Group Inc. forecast the tool will provide 1.2 trillion yuan ($188 billion) of liquidity support over the coming year, while Everbright Securities Co. Ltd. projects 600 billion yuan to 900 billion yuan of liquidity over two years.

The funds’ interest rate is among the lowest for PBOC’s policy tools, below the level of relending program for agricultural and small businesses at 1.95% to 2.25%, and the same as the relending rate related to financial stability.

The new tool will have some of the effect of a targeted rate cut and reduction of the reserve requirement ratio, Everbright analysts led by Wang Yifeng said in a report Tuesday. “The probability for a rate or RRR cut by the end of this year has further declined,” they said.

The PBOC has refrained from reducing the RRR since a cut in July, and instead chose to inject liquidity through daily open-market operations and rolling over longer-term policy loans. 

Over time, the program provides a channel for the PBOC to make longer-term loans, and therefore would reduce the need for it to cut the RRR in order to replenish lenders’ longer-term capital, GF Securities Co. Ltd. analyst Zhong Linnan said in a report Monday.

(Adds taxonomy background in the fifth paragraph.)

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