Interview with the People's Bank of China Governor Yi Gang on green finance, monetary policy

Central banks can play a very important and positive role in green transition. The core mandate of a central bank is to maintain price stability. Having said that, some central bankers still have room to pay attention to structural results to facilitate the green transition, where structural monetary policy could play a role to facilitate green transition. People's Bank of China may have 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, they launched two facilities to qualify commercial banks at a low interest rate of 1.75 percent. 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 emissions by over 60 million metric tons of carbon dioxide equivalents, accounting for about 0.6 percent of China's annual carbon emissions. Moreover, the People's Bank of China issued green finance guidelines 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. An 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 greenwashing, low-cost funding arbitrage, and green project fraud. Therefore, information disclosure and strict supervision are needed when they design and implement green monetary policy tools. For example, the carbon emission reduction facility requires banks to... 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 People's Bank of China has issued guidelines 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.

First, China co-chaired the G20 Sustainable Finance Working Group. Last year, the G20 resumed the Sustainable Finance Study Group, co-chaired by People's Bank of China and the U.S. Treasury. The working group has completed the G20 Sustainable Finance Roadmap as an important global guidance for guiding social capital to support a 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, they published the Common Ground Taxonomy, proposing 55 mutually recognized economic activities that could facilitate cross-border green capital flows. To date, the China Construction Bank and the Industrial Bank have issued green bonds under the Common Ground Taxonomy. Some emerging market economies are also referring 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. The GIP membership has 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, and 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 and carbon neutrality.

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 provides ample liquidity and support to small and medium-sized enterprises. Interest rates are determined by the marginal productivity of capital and long-term demography 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 one to two percent, and the bank loan rate is about four to five percent, and the bond market and equity market function well. After taking into account of inflation, China by and large has a market-determined exchange rate system using a basket of currencies as reference. Compared to 20 years ago, the RMB has appreciated against the U.S. dollar by 25 percent and appreciated against a basket of currencies by about 30 percent 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. This year, they face some downward pressures on growth due to COVID-19 and external shocks, and the monetary policy will continue to be accommodative to support economic recovery in an aggregate sense. At the same time, they also emphasize structural policies, such as supporting small and medium enterprises and the green transition.