China and the art of unlocking capital for climate action

The problem with markets in most advanced and developing economies is that they favour short-term investment, not long-term socio-economic projects
This is why the US struggles to finance and improve transport and other infrastructure at the national level, but China doesn’t.

Anthony Rowley

Published: 5:30am, 8 Oct 2023

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China, the IMF observed in a recent report, is one of few emerging economies with the available resources to finance what is going to be a very costly battle against climate change. The truth is, however, that China may be one of very few economies at any level able to muster such funds.

Since climate change does not respect national boundaries, governments and financial institutions in advanced nations, as well as the developing world, will have to bear their share of the multi-trillion-dollar burden.

However, while most advanced economies have sufficient savings, these are managed mainly by private-sector entities and are not generally at the disposal of governments, unlike in China.

Climate change is going to see the world confront this stark reality. When it comes to financing expenditure on climate change mitigation and physical infrastructure, the private sector is not always willing to risk capital up front on a sufficient scale.

In its latest Global Financial Stability Report, the International Monetary Fund observed that many emerging economies lack sufficiently developed financial markets to deliver large sums of private finance. While this is true, the way in which capital markets have developed in many advanced nations creates a similar problem there, too.

Equity market development tends to favour short-term investment in consumer goods and service production, rather than long-term capital projects of a socio-economic nature. Hence the widespread problems that are emerging now with regard to climate financing.

The emerging-markets movement that began in the 1970s – largely with the impetus of US and European investment bankers – saw equity markets proliferate across Asia and other developing regions. This has given these markets a bias toward short-term financing, too.

Thus, as the IMF suggested, there is going to be a need for new thinking on how public and private sectors can work together in financing climate change alleviation. The IMF does not advocate a Chinese model as such, but it does single out China for its capability to deliver financing on the scale needed.

This is a timely observation as disillusionment is growing with the ability of private capital to make a meaningful impact on climate change, especially through so-called ESG, or environmental, social and governance, investing.

ESG funds have attracted trillions of dollars in investment, including from smaller shareholders through exchange traded funds. Yet the bulk of this investment is directed towards rather vague social and governance goals, instead of the specific goal of fighting climate change.

Investment in climate change prevention and alleviation, the IMF suggested, should focus on carbon-intensive sectors such as steel, cement, chemicals and heavy transport. But these are far from being the darlings of Western stock markets and investors, who are much more focused on tech and consumer stocks.

The IMF report also comes when claims such as the one made by the Glasgow Financial Alliance for Net Zero in 2021, under the leadership of former Bank of England governor Mark Carney – that private financial institutions can deliver US$100 trillion in climate finance – are looking hollow.

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The significance of the reference to China lies in the fact that planned economies, unlike market economies, can focus on social priorities such as infrastructure and channel savings directly into these areas.

While the United States, in particular, has long struggled to finance adequate transport and other infrastructure at both the national and state levels, and some European countries have had similar problems, China has been able to command the needed resources centrally.

A notable exception has been the Chinese property sector, which has been developed chiefly at the local level and financed through land sales. But this does not invalidate the success achieved by China in financing other areas of socio-economic importance.

Climate change spending promises or threatens to cap all such expenditure and yet the scale of the needed spending – and much less the question of how to direct funds from savings to investment – has been badly neglected, beyond unfounded assumptions about the role to be played by ESG investing and other mechanisms.

As biggest lender to poor states, China can do more for climate finance

The IMF projected that the private sector will need to supply about 80 per cent of the required investment in battling climate change in emerging markets and developing economies, and this share rises to 90 per cent when China is excluded.

Innovative financing solutions such as blended finance and securitisation instruments should be employed to pursue a managed phase-out of coal power. Yet, only the Asian Development Bank is so far experimenting seriously with such solutions, as I have mentioned previously.

The IMF suggested that multilateral development banks and donors can play an important role in supporting blended finance – including through a more extensive use of guarantees. “Beyond these challenges, climate policies and commitments at most major banks are still not aligned with net-zero climate targets, even when they do have policies intended to reduce emissions,” it noted.

The hard fact is that, in terms of financial provision, planning, making a concerted effort and having a conceptual grasp of the size of the challenge, the world is falling dangerously short of what is required on the climate change front. Perhaps it could do worse than take a few leaves out of China’s book, at least on climate finance.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs