Lessons from using state organs to finance the green transition in China

This policy brief describes the key state-led policies China has enacted to steer capital towards a green transition and draws out lessons for other countries, particularly emerging markets and developing economies (EMDEs).

The brief is one of a series of three; read the Vietnam brief here and the India brief here.

Main messages

• The state-led nature of China’s political economy model enables the government to steer capital towards a green transition.
• Through a top-down approach, a wide range of central and local government bodies issue mutually supporting policies across different aspects of the financial system, coordinated through overarching policy ‘guidelines’.
• China has utilised several innovative green financing policies, such as greening collateral within central banking, macroprudential assessments and targeted longer-term re-lending operations.
• These policies have been central to lowering the cost of capital for renewable energy projects.
• State-owned enterprises play a core role in ensuring demand for clean technologies in China, while state-capitalised private equity funds have been pivotal in ensuring adequate risk-willing capital for new technologies.
• These tools have led China to dominate the global manufacturing and deployment of green technologies, especially wind power, solar power, batteries and electric vehicles.
• Although the policies adopted by China have commonly been considered inefficient in Western countries, countries globally can learn important policy lessons from China, by using similar state-led approaches and tools.
• Many countries similarly use central banking, state-owned enterprises and state-capitalised private equity funds. The key lesson from China is that these tools should be used at a far more ambitious level to play a more central role in providing the capital needed for a green transition.