Ma Jun - China should lead the reduction of risk weight for green assets

China should lead the reduction of risk weight for green assets, says Ma Jun

By Hu Yuting, Xinhua Caijing; translated by Chen Yunhan -- October 1, 2018

BEIJING – With explicit green credit standards and a lower green loan default rate since 2013, China should be the first country to consider lowering the risk weight for green assets, in order to accelerate the transition of the real economy towards a green and low-carbon one, according to Ma Jun, a member of the Monetary Policy Committee of China’s central bank, and Chairman of China’s Green Finance Committee.

Ma Jun, who is also the Director of the Center for Finance and Development at Tsinghua University, presented in the Annual Conference held by the International Institute of Green Finance (IIGF) at China’s Central University of Finance and Economics (CUFE) in Beijing on Sep 29th, with a theme of “lowering the risk weight for green assets”.

At the end of 2017, eight central banks with the strong will to foster green finance, including the Central Bank of France, the People’s Bank of China, the Central Bank of Netherlands, and Deutsche Bundesbank, jointly initiated the Central Banks and Supervisors Network on Greening the Financial System (NGFS). So far, this network has expanded to 18 national central banks and financial regulatory bodies with three workstreams. Ma chairs the supervision workstream of the NGFS. Members of the NGFS are currently discussing the desirability and feasibility of introducing “green supporting factors” such as reduction of risk weights for green assets.

According to Ma, lowering the risk weight of green assets can be beneficial in the Chinese context: it can significantly reduce the financial costs for green loans, provide an important incentive for banks to scale up green lending, and thereby accelerating the transition of the real economy to a green and low-carbon one.

As intriguing as it is, there is not yet any conclusion about the merits and demerits of this policy option in most countries, mainly due to the lack of explicit definitions as well as statistics on green loans and their default rates. The inability to determine whether green loans are less likely to default has thwarted countries from implementation.

Then why should China? Ma pointed out that China is the most qualified to take the lead. In 2013, the China Banking Regulatory Commission issued the Green Credit Guidelines, and China has kept a record on the green credit balances and default rates over the five years. It shows that in 2017, the non-performing loan (NPL) ratio for green loans was only 0.4%, far lower than the NPL ratio of 1.7% for the entire banking industry. Under such circumstances, lowering the risk weight for green assets will be in line with the macro-prudential principle to ensure banking system stability, with the additional benefits of meeting the government objectives of optimizing the economic structure, strengthening the ability of the financial system to serve the real economy and fostering greener economic development.

Ma also suggested that raising the risk weight for “brown assets” of higher environmental risks is another option for consideration by policy makers.