Our takeaways from the PBoC’s new green facility

The market has been waiting for two key policy actions from China. The first is monetary policy support for a rapidly weakening economy. The second relates to the PBoC’s role in China’s grand plan for energy transition. The PBoC’s announcement of the “carbon-reduction supporting tool” on 8th November has been widely seen as “killing two birds with one stone”, but this might be an over-interpretation.

The new monetary policy tool is certainly attractive in some respects. For green firms, the lending rate under the new scheme will be as low as the prime rate (3.85% for 1-year). And for banks, it is offered with a funding cost at as low as 1.75% (comparing to the 1-year MLF’s 2.95%) for 60% of the total amount of the loans. Moreover, there is no specific announcement on the quota for such loans at the moment, so in theory the potential to support carbon reduction could be substantial.

However, it seems difficult to expect a massive use of this facility because only a small proportion of the banks’ collateral are eligible for the green facility. So far, green loans only constitute 7.8% of total outstanding loans in China (Chart 1). If we zoom into renewable energy, which the facility is targeting, the share is even smaller, at just 2% of the total loans (26% of green loans). Also, although the funding for the tool is cheap, the spread may not be wide enough to motivate banks to use it frequently unless there is a real need. Our calculation indicated that the interest rate spread for banks will be slightly lower (about 162 bps) than 225 bps for general loans. In short, the tool is unlikely to make a huge difference in liquidity conditions in the near term.

This tool, however, is clearly relevant as a starting point for the PBoC’s contribution to China’s energy transition. In fact, the creation of a new green monetary tool is a good sign for a faster growth in green assets (Chart 2) because it will create additional incentives for banks to prioritize renewables, energy-saving, and carbon reduction in lending. China’s energy crunch has made this transition even more urgent because the underinvestment in brown energy, as well as the slow transition to renewables, are key reasons behind the power crunch.

All in all, our reading of the PBoC’s carbon reduction facility is that it should be interpreted more as a green tool than a monetary stimulus tool. For the latter, open market operations have been used so far as a key measure to inject net liquidity to the financial system, but it seems clear that, if the economic situation really needs more monetary expansion, the PBoC will still adopt measures from its traditional toolbox, i.e., an RRR cut or macroprudential regulatory adjustment, to keep China’s growth hovering above 5% next year.

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