China is facing some major changes as it moves on to the next stage in its story of social and economic reform.
Many aspects of this are well known and widely discussed.
For example, the country needs to develop a less export-oriented, more consumption-based growth model.
It needs to allow market forces and competition greater roles in the economy.
It has to become more urbanized and adjust to changing demographics and an aging population.
Perhaps the greatest challenge, however, is to address sustainability and the environment.
China’s economic reform and development of the last 30 years have transformed living standards for hundreds of millions of people.
But this achievement has imposed a cost in terms of polluted air, water and soil.
China is not alone in this, but as is often the case, its problems are on a big scale.
The country’s leadership is well aware of the importance of tackling these problems.
Already, the economy is starting to be affected by the costs of pollution-related health issues.
Left unchecked, environmental damage has the potential to become a drag on the economy and even threaten social stability and food security.
Moving away from a “brown” to a “green” economy is now a matter of policy.
This transformation is underway.
Levels of wind and solar power output have doubled or trebled in the last five years or so.
The government’s environmental protection agency has launched a strategy to tackle soil contamination.
The 13th five-year plan lays out a whole series of environmental targets.
The government will directly provide some of the investment needed.
But the overwhelming majority of it will need to come from private capital.
The key will be to construct market-based mechanisms to channel private capital investment into what officials call “protection of the eco-environment”.
In other words, the government wants to create a green financial system.
A People’s Bank of China report from April lays out in detail how this can be done.
It identifies mechanisms to create incentives for green finance — covering green credit, green insurance and green securities.
These involve increased return on investment for green projects – alongside lower returns on polluting projects.
These measures will be supported by improved data transparency and reporting.
These initiatives will open up some interesting opportunities for Hong Kong.
For example, there will be fiscal and financial policy support for the expansion of green lending, green bonds and green initial public offerings, all of which could involve our financial services sector.
Hong Kong’s skills could also be useful in helping achieve such official aims as better emissions trading markets, a green rating system, a green stock index, a public environmental cost-analysis system and database, and a green investor network.
Hong Kong’s Financial Services Development Council has formed a working group to explore these and other areas.
The group is expected to produce a white paper in the first quarter of next year.
Many observers, such as the International Institute for Sustainable Development, point out that there is a huge amount of work to be done in China and in the rest of the world in developing green finance.
Green projects tend to have higher initial costs and lower investment returns when measured by traditional “brown’ standards.
But the IISD and others believe that China is in many ways ahead of other countries in preparing to embrace new approaches to make green finance a reality.
As a leading international financial centre, it is important for Hong Kong to be part of this.
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