Climate Change Will Threaten Financial Stability: PBOC

Climate change could impact monetary policy, credit risk, market risk and liquidity risk, and undermine the stability of the entire financial system, PBOC governor Yi Gang said.

PBOC (People’s Bank of China) Governor Yi Gang has expressed concern regarding the challenges to financial stability and monetary policy that climate change will present, speaking at the China Development Forum in Beijing on Saturday (20 March).

While noting that outstanding green loans in China were about CNY 12 trillion (USD 1.84 trillion) by end-2020, ranking the first in the world; and outstanding green bonds registered about CNY 800 billion, ranking second in the world; Yi said more was needed.

The green investment needed to achieve China’s goal of reaching peak emissions in 2030 and carbon neutrality in 2060 (“the 30/60 goal”) will amount to “hundreds of trillions of RMB”.

“Public finance, however, could cover only a tiny fraction,” Yi said. “It is therefore imperative to put in place sound public policy incentives to encourage market forces to fill in the gap.”

In addition, Yi highlighted a need to evaluate and address the potential impacts of climate change on financial stability and monetary policy, given the risk of extreme weather events, as well as the potential for the value of carbon-intensive assets to fall and “sour the balance sheets” of firms and financial institutions.

“This will heighten credit risk, market risk and liquidity risk, and further undermine the stability of the entire financial system,” Yi said. “It may also affect the scope and transmission of monetary policy, and be a drag on key variants such as growth and productivity.”

“These are new challenges to financial stability, as they make the evaluation of monetary policy more difficult.”

Yi reiterated China’s planned measures to promote green finance in the country – including work on taxonomy, disclosure, stress testing, and international cooperation, among other areas – and pledged the PBOC to continue contributing towards the 30/60 goal.

The full speech is available here (English).

During a roundtable discussion, Yi said the PBOC will incorporate climate change into its monetary policy framework. This could involve the adoption of preferential interest rates for credit extended for controlling carbon emissions and a special re-lending facility for green finance.

Yi said the PBOC will limit investment in carbon-intensive assets and incorporate climate risk factors into the risk management framework of its foreign exchange reserves.

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