AXA IM Talk on Asia & China Market: China’s Green Transition: The economic impact and the finance plan

AXA IM’s Senior Emerging Asia Economist, Aidan Yao, shares his latest macro views on China and Asian Market every month.

This month he is joined by Shirley Shen, Emerging Asia Economist, the two of them discusses the economic impact of China’s ambitious green transition and how Beijing plans to finance it.

Please find the full script below:

Aidan: Hello, welcome to our monthly video series, my name is Aidan Yao, I’m the senior economist here in AXA Investment Managers.

In March we discussed China’s ambitious plan to become carbon neutral by 2060. In this video, we will focus on economic impact of this massive decarbonization drive, as well as how China is going to finance this vast green transformation. On this topic I have invited my colleague Shirley Shen to share her insights on the latter subject.

How will the decarbonization campaign impact China’s economy?

Aidan: Let’s first focus on the economic impact. We think that, for China to accomplish its 2060 commitments, it needs to achieve two things:

  1. China needs to rebalance its economy, moving away from industrial-driven growth to services-driven growth, in order to lower the energy intensity of the economy. Our analysis suggests that such an economic rebalancing will help China to achieve over 60% of its decarbonization objective.
  2. China needs to revamp its current energy system, by significantly raising the share of renewable power in its energy mix. Our estimate suggests that the share of non-fossil fuels needs to increase to over 80% of the energy system for China to achieve carbon neutrality.

On the micro level, such an energy revolution will obviously create winners and losers. At one end of the spectrum, renewable power and electric vehicle industries will continue to attract significant capital inflows to the tunes of trillions to power their further secular growth going forward.

At the other end of the spectrum, traditional industries linked to fossil fuels will face a bleak future ahead. Rising defaults, non-Performing Loans and unemployment will create a painful adjustment for some sectors and regions. The onus will be on the government to mitigate these shocks through fiscal transfers, re-employment training, debt write-offs and reallocation of gains from new emerging industries. All considered, we think the benefits of the green transformation will outweigh the costs, creating a net gain for Chinese economy and society over the long run.

How will China finance its vast green transformation?

Shirley: Finally, it is essential to consider how Beijing will finance this green transition.

While there are plenty of instruments invented in recent years, green bond stands out as a preferred vehicle to mobilize public and private resources to support the country’s green ambition.

Started in late 2015, it took less than a year for the Chinese green bond market to become the top issuer of green bonds in the world, with its annual issuance among the top 5 ever since.

Apart from its size, the market is also diverse in green projects and high-quality issuers. Yields and valuations of Chinese green bonds are also more attractive than their foreign counterparts.

While there are still some discrepancies between the Chinese and international green bond standards, our study has found that the gap has continued to narrow over time. While there are risks factor specific to Chinese green bond market for global investors to consider, overall, we think the potential benefits still outweigh the hurdles.