Out of the window? Green monetary policy in China: window guidance and the promotion of sustainable lending and investment
A more recent version of this paper has been published in Climate Policy
Chinese monetary and financial authorities have been among the pioneers promoting green finance. This paper investigates the use of one specific monetary policy tool, ‘window guidance’, also known as ‘moral suasion’ and ‘jawboning’, by China’s central bank, the People’s Bank of China (PBC), and the China Banking Regulatory Commission (CBRC). The instrument is designed to encourage financial institutions operating in China to expand credit to sustainable activities and curb lending to heavy-polluting industries.
The authors find that ‘green window guidance’ was used by the CBRC from at least 2006 and by the PBC from 2007 to discourage lending to carbon-intensive and polluting industries and/or to increase support to sustainable activities. Both authorities stopped discouraging lending to carbon-intensive/polluting industries in 2014 and sustainable objectives were also removed from the PBC’s list of priority sectors at the start of 2019, ending the practice of green window guidance in China: the window guidance targets were replaced and formalised through new ‘Guidelines for Establishing the Green Financial System’, reflecting efforts to move away from controls-based towards market-based policy instruments.
The Chinese experience suggests that directed lending through window guidance can be a useful instrument to help align the financial system with climate and other sustainability goals, but that such policies need to be fitted to the specific context in which they are used. When window guidance is used, the authors suggest, it should be linked to clear success criteria, with monitoring of achievement, and green window guidance should be embedded in a broader framework of green finance policies, as well as climate and environmental policies.
Key points for decision-makers
- China’s leadership has made clear that it expects the financial sector to play a central role in financing and supporting the shift of investment away from carbon- and resource-intensive and highly polluting industries towards more sustainable, greener industries.
- Chinese monetary and financial regulatory agencies have informally guided credit towards more sustainable investment, and this informal process is known as window guidance, which became a central policy instrument for the People’s Bank of China from the late 1990s.
- Based on a detailed analysis of the PBC’s quarterly monetary policy reports and the CBRC’s annual reports, the authors examine window guidance targets for the period 2001–2020.
- The principle finding is that both institutions, the PBC and the CBRC, utilised qualitative window guidance, with diverse targets, to encourage banks to lend to specific priority sectors and refrain from extending credit to others.
- The efficacy of window guidance and other directed lending policies diminishes as financial markets mature and direct monetary policy instruments become less powerful.
- While today’s focus of sustainable finance policy in China lies primarily on the development of market-based instruments, the Chinese experience offers valuable lessons for other emerging market and developing economies.
- To the best of the authors’ knowledge, this paper is the first that examines the role of window guidance in greening bank lending in China.