Green quandary for central banks + Huawei wants more foreigners + A man sees red

Dear reader,

It is the same old problem: Both ECB chief Christine Lagarde and her Chinese counterpart Yi Gang of the People’s Bank of China are well aware of the central banks’ responsibility in the fight against climate change. Nico Beckert takes a closer look at the roadmaps of the ECB and the PBoC to help shape a green economic transition. China’s central bank is able to work more closely with the state on climate protection than Western central banks. But the PBoC also serves Beijing’s economic goals, pouring billions into the coal industry. The ECB, on the other hand, faces a different predicament: It lacks democratic legitimacy and is hardly allowed to act independently on climate policy.

Huawei’s founder Ren Zhengfei wants to recruit more foreign talent to set tomorrow’s standards in new business areas such as household appliances, wearables, and industrial machinery. Frank Sieren analyzed an internal memo from Huawei to find out more about what the CEO is planning for a campus near Shanghai to make foreign top executives feel right at home.

The whole country is currently trimmed to red during the Golden Week holidays. Flags on every street corner, red flower decorations everywhere. On the occasion of the national holiday, state and party leader Xi Jinping gave a speech to his Politburo. And it is just as red-tinged: from red culture, red successors, red resources, red monuments, red ideals, red genes to the red nation. In his column, Johnny Erling explains why Xi did not title his first anthology the “Red Xi Bible”, but “Learn from Xi’s Golden Sentences” instead.

Have a great golden Autumn weekend!

Your
Ning Wang

Central banks in a bind over the climate crisis

By

Nico Beckert

The next world climate conference in Glasgow at the beginning of November is drawing ever closer. In a recent study, the United Nations stressed that “the world is on a catastrophic path” to “2.7 degrees of warming,” and finance plays a pivotal role.

The world’s largest banks have continued to invest billions in fossil fuels or supported investment in the sector through underwriting, even after the Paris climate agreement was passed. And these investments are a threat to the stability of the financial system. That’s why the climate crisis is also an issue for central banks. European Central Bank (ECB) chief Christine Lagarde called climate change “the biggest challenge that is addressed to us.” Climate change affects the ECB’s “primary objective of price stability“, the Frenchwoman said.

Her Chinese counterpart Yi Gang of the People’s Bank of China (PBoC) urges that “we must evaluate the potential impact of climate change on financial stability.” The timeframe for the People’s Republic to achieve carbon neutrality is shorter than that of the EU or the US, Yi said. “The time is shorter and the curve is much steeper for China. It means our financial institutions are faced with grave risks and should begin their green transition right away,” the PBoC chief warned. This is because the longer Chinese banks lend to fossil fuel industries, the greater the risk that companies will be unable to repay these loans when climate policies make their fossil fuel business model unsustainable in the future.

Greater attention needs to be paid to the risks of the green transition, especially in the context of fossil fuels, Yi stressed. “China’s financial institutions have invested heavily in carbon-intensive assets, and the risk of asset price adjustment caused by the green transition must be closely monitored.” In plain language, this means that if banks don’t stop lending money to fossil fuel companies soon, their credit risk will keep rising. That’s because fossil fuel companies will lose their business. For example, if China pushes to phase out coal, operators of coal-fired power plants will be forced to write off their assets – with serious consequences for banks, which will be stuck with their loans. Yi, therefore, warns of credit risks that undermine the entire financial system.

Both the PBoC and the ECB are aware of this problem – but the central banks also find themselves in an area of conflict. The ECB lacks democratic legitimacy to make major climate policy decisions on its own. The Chinese central bank, on the other hand, serves as a tool for the state to make economic policy decisions as well. And this includes the promotion of climate-damaging sectors such as the coal industry.

China’s central bank – green funding, but also capital for coal

China’s central bank works more closely with the government than Western central banks do and thus has the ability to support the government more effectively in implementing climate goals.

The Central Bank of China:

recently introduced instruments to financially support Chinese banks in granting green loans. Companies are to receive prioritized loans if they want to invest in emission-reducing measures. Only second to Japan, China’s central bank is the world’s largest financial institution to introduce such an instrument.
pays banks slightly higher interest on their central bank reserves if the central bank rates financial institutions as “green”. Since summer 2021, the central bank has also been recording the share of green bonds among the total assets of China’s 24 largest banks. The annual change in the total value of green bonds held by banks is also recorded. These measures are intended to incentivize banks to increase lending for sustainable investment.
plans new regulations on the disclosure of climate-related information (China.Table reported) and climate stress tests for banks.

At the same time, back in August, the PBoC proposed a “strict control over the volume of lending to projects with high power consumption and emissions” in the future. However, the central bank did not provide details on the extent of the restriction on lending to fossil fuel companies.

Moreover, there have already been similar proposals in the past. As early as 2012, the government announced that it would “severely restrict” lending to energy-intensive industries and sectors with high emissions.

But little has happened so far. After all, China’s central bank not only promotes Beijing’s climate goals. It also supports the government in implementing its economic policy. In response to the pandemic, the central bank increased funding and launched concessionary credit programs. Most recently, China’s government-directed state-owned banks to provide new loans to operators of coal-fired power plants and mines to help overcome China’s energy crisis (China.Table reported).

ECB – many plans and caution on green monetary policy

In July, the ECB presented an “Action Plan to address climate change in its monetary policy strategy“. Among other things, it announced the following measures that are “consistent with the price stability objective”:

The European Central Bank:

wants to take climate considerations into account when acquiring corporate bonds. Companies whose bonds the ECB obtains, for example, should commit to Paris climate targets.
plans to review the valuation of assets that banks deposit as collateral with the central bank. When reviewing this assessment framework, climate risks are to be taken into account.
plans to impose new transparency obligations on banks regarding the climate risks of their assets, such as loans and bonds. These transparency obligations are to serve as a basis for deciding whether bank assets qualify as collateral at the ECB, or to what extent certain assets with more climate risks will be treated differently when assessed as central bank collateral. The ECB plans to present a detailed plan on this in 2022. As banks have a vested interest in holding assets that serve as valuable collateral, such an approach could reduce lending to fossil fuel companies.
wants to close knowledge gaps and collect data – for example, on the carbon footprint of financial institutions and the extent to which banks’ assets are exposed to climate risks.
Plans to conduct climate stress tests for national central banks of the Euro system by 2022.
wants to ensure that rating agencies adequately consider climate change risks in their ratings.

Careful praise for ECB – rebuke for PBoC

Mauricio Vargas, a financial expert at Greenpeace, welcomes “the ECB’s clear commitment to take the fight against the climate crisis seriously”. However, the resolutions remain very vague. Vargas demands that the ECB excludes fossil energy companies “that invest in the development of new fossil energy projects” from its bond-buying programs.

Ernest Urtasun, a Spanish member of the Greens/EFA group in the European Parliament, sees the climate strategy as a “good first step”. However, the plans lack “ambition and a sense of urgency” about the climate crisis. The ECB is taking no action “against lending to the carbon economy, which is accelerating the climate crisis”, Urtasun criticizes.

Paul Schreiber, Campaigner at Reclaim Finance, criticizes that the measures by the ECB are too focused on assessing climate risks. Especially concerning the collateral deposited by financial institutions with the central bank, it is rather problematic that the ECB does not propose any additional measures to decarbonize collateral.

Reclaim Finance also denounces the reforms in the acquisition of corporate bonds. A mere commitment of companies to the Paris climate targets is not enough. There is no control over whether companies implement climate targets in their day-to-day operations. Moreover, the adjustments to the purchase of corporate bonds are not planned until 2023 and come far too late, the NGO criticizes.

The supposedly green reforms of China’s central bank, on the other hand, are criticized because it continues to pump massive amounts of money into the country’s coal industry. After the Covid pandemic, it issued cheap loans to boost the economy. In the process, large investments were made in new coal-fired power plants, criticizes the NGO Oil Change International. The organization has compared the measures of the central banks in a report and considers the PBoC’s interventions in climate protection to be lacking. A lack of transparency was also criticized: China’s foreign exchange reserves – the largest in the world – are “likely geared towards fossil fuels”, the organization writes. However, only limited information was available (China.Table reported).

Central banks in a bind

Central banks have instruments at their disposal to make lending to fossil industries more costly. But so far, they have rarely made use of them. In China, the central bank is much more active in supporting the government’s economic policy. But while the country is still very dependent on fossil fuel energy, the central government and the central bank need to be careful when transforming the economy if they do not want to jeopardize growth.

The ECB, in turn, is an independent central bank. Its mandate is to maintain price stability and support the EU’s economic policy. There is a dispute among the Governing Council of the ECB, to what extent climate policy is one of the central bank’s duties.

Huawei wants foreign talent

By

Frank Sieren

Chinese companies will not be able to avoid the global battle for talent. Those who either want to reach the top or plan to stay there need highly qualified employees – innovative, creative, dynamic. The Shenzhen-based network supplier Huawei in southern China is no exception. True, the company is a smartphone giant, taking the lead in sales for the first time last year, ahead of Samsung and all the other top dogs in the industry such as Apple or Xiaomi. But it is no guarantee that Huawei’s success will continue indefinitely.

For company founder Ren Zhengfei, this makes the hunt for first-class employees one of his company’s greatest challenges. At a recent internal meeting with in-house researchers and developers, Ren addressed the problem in detail. “Our compensation packages need to align with international talent markets and go beyond local levels. This is essential to attract the best employees in the world,” Ren said, according to meeting minutes obtained by China.Table.

“Our company is at a critical juncture in terms of strategic survival and development,” Ren said. Its future will be determined by competition for the best engineers, software experts, strategists, and analysts. To provide a comfortable environment for such sought-after employees, Huawei plans to establish a new campus in the Yangtze River Delta, with Shanghai as its center. The company is banking on the high leisure and recreational value of the surrounding area. “The region has beautiful scenery. It is a great place for non-Chinese to live and work,” Ren said.

A campus “as international as possible”

According to the minutes, the 77-year-old described in detail to his employees how he imagines the profile of the new campus. The graduate civil engineer wants it to be as international as possible. “If 700 or 800 non-Chinese scientists work there, they won’t feel like they’re in a foreign country,” he said. Whether Ren is serving the preference of his central government with this seems unlikely. Beijing wants to minimize the People’s Republic’s dependence on foreign resources. That includes workers.

However, not only research facilities themselves are important, but above all the free time activities provided by the company. Young people of today are different compared to back in his prime, the Huawei CEO said. “They have enough to eat and clothes, so they put their interests or hobbies above everything else. They can no longer be motivated by promotions, personal salary increases, or more bonuses alone.”

It is a global trend. When it comes to job offers, potential candidates are no longer just interested in money and career opportunities, but also external features of a workplace. Those who work a lot also want to feel comfortable while doing so. That’s why the Shanghai campus is set to have numerous cafés, all of which will be designed and furnished by the company. Huawei is thus taking up principles of the New Work concept, in which the workplace offers numerous options for a restful and relaxing break. This is why the campus is also supposed to have its own lake.

Research does not have to pay off immediately

Another important point raised at the meeting is basic research. China pays a lot of attention to experimental science, but hardly any to theoretical research, Ren criticized. The company should not be short-sighted and pursue only practicality, he said. Instead, it would need more breakthroughs in theoretical science, especially in areas such as semiconductors and materials science. “If we hadn’t paid so much attention to basic research in the past decade, we wouldn’t have gained the huge amount of theoretical and technical knowledge to overcome the difficulties created by the restrictions and blockades by the U.S.,” Ren said, referring to the U.S. government’s sanctions against Huawei. Quite satisfied, the company founder noted that they had parried these challenges well.

When asked by a young scientist how long-term research can result in short-term value creation, Ren replied that this can only be achieved through a division of labor: “I don’t think people who conduct long-term research need to be directly responsible for the business harvest.” Instead, they should focus only on researching basic theories. In doing so, Ren compared the basic research of Huawei’s semiconductor division to climbing a mountain: “We will continue to allow HiSilicon to climb the Himalayas, but most of our employees will grow potatoes and graze sheep and cattle at the base of the mountain to provide a steady flow of food for those who climb it.”

Huawei wants to establish new standards

One example where its basic research could soon pay off is research into 6G network technology. 6G could show even more application scenarios and new networking capabilities by integrating communications and sensors. “We must not be limited by standards, but dare to go our own path and establish de facto new standards,” Ren urges.

To set new standards, Huawei plans to push deeper into new business sectors. According to Ren, these could be automobiles, electric household appliances, wearables, and industrial machines, for example.

Migrant workers to be made equal to city populace

A senior adviser to China’s central bank People’s Bank of China (PBoC) has called for migrant workers in Chinese cities to be given full access to local government services. Cai Fang, a member of the PBoC’s monetary policy committee, said in a speech published online that giving migrant workers access to the hukou system in cities would boost consumption by up to 30 percent. According to a study, this would also help double the number of middle-income population, Bloomberg reported Thursday.

The Chinese household registration system hukou is currently standing in the way of the People’s Republic’s growth. Up until now, only those who have the status of urban residents by birth have had access to public services such as schools, hospital visits, or pension payments. Reforms have been underway for several years by the National Development and Reform Commission. However, they do not seem to be taking effect fast enough. The increase in the urbanization rate pushed by Beijing also carries risks of a “middle-income trap.”

President Xi Jinping called as recently as August for China’s middle-income population to grow as part of efforts to achieve “common prosperity“. According to calculations by Chinese economists, this will require doubling the number of the middle-income population, which is currently at around 400 million.

Xi had already declared the revision of the Hukou system a central political goal in his doctoral thesis. By the end of 2019, the State Council had pledged to ease the system in cities with a population of three to five million, and for megacities such as Beijing and Shanghai, to simplify registration for newcomers. China’s urbanization rate has risen since the 1960s, from about 20 percent to nearly 60 percent by the end of 2018. niw

CIA establishes China Mission Center

The US Central Intelligence Agency has announced the founding of a new China Center. The China Mission Center “will further strengthen our collective work on the most important geopolitical threat we face in the 21st century, an increasingly adversarial Chinese government,” CIA Director William Burns said in a statement, Reuters reported.

These operations centers are stand-alone units that draw resources from across the CIA. Such CIA units already exist for counterintelligence, counterterrorism, and the Middle East. Burns said the mission center will help unify the intelligence community’s existing work on China.

Burns had already identified China as one of his priorities during confirmation hearings in the US Senate back in February. The veteran diplomat called China’s “hostile, predatory leadership” the greatest threat to the US and declared Beijing’s goal was to “replace the United States as the most powerful and influential nation in the world.” ari

Huawei opens innovation center in Helsinki

Chinese telecommunications equipment supplier Huawei has opened an innovation center in Finland. At the Digital Finance and Security Innovation Lab (Fin²Sec) in Helsinki, innovations are to be developed in cooperation with local partners, according to media reports. The focus is on the digitalization of banking, finance, and payment services in Europe, as reported by tech blog Gizmo China. According to the report, Huawei is collaborating with Aalto University, the University of Helsinki, and other partners such as banks and fintech from all over Europe. The lab will not only develop new concepts but also share experiences and challenges, said Adam Rybusiewicz of Huawei, according to the report.

For Huawei, the establishment of the center is a rare success in the Baltics. Countries there tend to be skeptical of the Chinese group. The Finnish parliament had passed a law in December that would allow authorities to ban the use of telecom network equipment if they have “serious reasons to suspect that its use of the equipment will compromise national security or national defense.”
Unlike its neighbor Sweden, Finland has yet to ban any supplier based on its country of origin and did not mention Huawei or ZTE by name. Finland is, however, home to Nokia, one of Huawei’s main competitors. ari

Rising demand for lithium

Due to the increasing demand for EV batteries, the price of raw materials has risen worldwide. The price of lithium, for example, which is a fundamental component of batteries for EVs and smartphones, has recently risen sharply. According to the benchmark Mineral Intelligence Index for lithium carbonate and hydroxide, prices have more than doubled in the past year, Bloomberg reported. Demand for materials used in electric cars and renewable energy storage has soared.

Mining companies are trying to increase supply. But that is not enough to meet demand, the report added. “The cost of cells is a key pricing factor for batteries. And raw materials such as lithium, cobalt and nickel still account for 50 percent of the cost,” Christophe Pillot, head of French energy consultancy Avicenne, said at an industry conference in late September.

While prices for lithium were still at lows just over a year ago, they have now risen to a record high since the end of September. On spot markets in China, where short-term supply contracts are signed, a new record price of ¥182 (about €24) per kilogram of lithium carbonate was reached.

Due to the rise in commodity prices, Bloomberg predicts that battery prices will not drop in 2021 for the first time in a long time. Prices for Lithium-ion batteries could increase due to strong demand, driving up EV prices, experts say. According to Bloomberg NEF, global lithium demand will increase fivefold by the end of the decade. niw

Facebook whistleblower: surveillance of Uyghurs

Facebook whistleblower Frances Haugen suggested during her testimony that China was using Facebook to monitor Uighurs abroad. The former product manager referred to spying by the People’s Republic during the hearing to the US Senate Subcommittee on Consumer Protection, CNN reported. When asked by a senator whether Facebook was being used by “authoritarian or terrorist-based leaders” around the world, Haugen said that was “definitely” the case and that Facebook was “very aware” of it, the report said. Her team had been directly involved in tracking Chinese participation on the network and “surveilling, say, Uyghur populations, in places around the world,” Haugen said.

Back in March, according to the report, Facebook security officials disclosed that Chinese hackers had targeted Uighur activists and journalists living outside the country with fake Facebook accounts and malware. Whistleblower Haugen blamed “Facebook’s consistent understaffing of the counterespionage information operations” and announced that she would also testify to other parts of US Congress about it.

Haugen had worked at Google, Pinterest, Yelp, and lately at Facebook for about two years, most recently in the counterintelligence department. Frustrated that Facebook put its own profit over the common good in every decision, she had collected extensive records that were accessible to all Facebook employees and then handed them over to the Wall Street Journal. ari

Xi – A man sees red

By Johnny Erling

The People’s Republic of China, like other socialist states, has become accustomed to the symbolic color red (红色), but party leader Xi Jinping now wants to apply the revolutionary paint for his party and society with an even thicker coat and newfound vigor. Only if the youth grows up with “red genes” would China “never change its color.” Shortly before the CC plenum meeting in Beijing at the end of November, the last major party conference to set the course for the upcoming election party congress next autumn, Xi is bringing the party, the nation, and its people into ideological line. At the same time, he is making China back-pedal in terms of the market economy. The party leader is doing everything he can to extend his ten-year rule over China in 2022. The entire country must become even redder: “We’ll start with the babies.”

Actually, the word “red” falls under the group of adjectives that are non-gradable. But in China, things are different. Last week, the party’s theory magazine “Quishi”, published by the Central Committee, printed an unpublished speech by Xi to his Politburo on the occasion of the National Day: In it, he repeats the word “red” a total of 22 times, linking it to more than half a dozen terms. From red culture, red successors, red resources, red monuments, red ideals, red genes to red country. (红色文化红色血脉红色资源红色旧址红色理想红色基因红色江山).

Xi delivered his internal address on June 25, a week before Beijing’s pompously staged 100th-anniversary celebrations of the founding of CP China. The first thing he did was to lecture the country’s top officials with a truism: “Red is the freshest shining, the fundamental color of the Communist Party of China and the People’s Republic. There are red resources scattered everywhere in our vast nation.” By this, he means museums, monuments, or squares meant to commemorate the Party’s decades-long revolution leading up to its victory and founding of the People’s Republic. “These resources must become places of pilgrimage for the ideological and patriotic education of the youth so that the red genes are propagated from generation to generation. This would guarantee that our red country never changes its color.”(把红色基因传承好，确保红色江山永不变色.)

To this end, he urges his closest comrades-in-arms: “I have told you time and again that revolutionary ideals reach higher than the sky,” and demands them to think just ideologically as he does: “Having red arteries is the concentrated expression of the political essence of the CP of China and the source of our spiritual strength.”

Since taking office in 2012, Xi has repeatedly inspected historical memorials of the revolution during his travels throughout the country. He felt “shaken to his soul” by the commemoration. Last June, Qiushi magazine selected 32 of Xi’s quotes from these visits. Among them, he talks about his “project to pass on the red genes from one generation to another,” (红色基因代代传”工程). The Party could not start early enough with the patriotic education of its youth, he said. “Revolutionary traditional education must start with babies so that the red genes enter the blood.”(革命传统教育要从娃娃抓起, 使红色基因渗进血液).

On November 25, 1968, a stamp was introduced that was too red even for Mao’s Cultural Revolutionary China. “The whole country is red” was written on the stamp, which, however, did not show the island of Taiwan as a white spot and the islands in the South China Sea claimed by Beijing at all. The stamp was immediately confiscated. It is now a rarity. At a Hong Kong auction, the pair seen above was sold for HK$1.725 million.

Only during Mao’s reign, Beijing’s use of the symbolic color red was even more inflationary. The Great Chairman had himself be praised as the “Red Sun”, let his people sing the song “The East is Red” and unleashed the Red Guard. On November 25, 1968, a special stamp issued in honor of Mao’s Cultural Revolution with the inscription: “The whole country is red” became a grotesque display of red madness. The stamp was withdrawn hours after it was issued because the island of Taiwan was marked in white and the islands in the South China Sea claimed by Beijing were not marked at all. Sinologist, journalist, and expert on Mao memorabilia, Helmut Opletal, estimates that only a few hundred copies entered circulation. As the most valuable rarity in Chinese philately, these stamps fetch unbelievable prices today.

On the stamp, the Cultural Revolutionaries wave Mao’s little red book with the “Words of the Chairman”, also known as the Red Mao Bible. That is why Xi Jinping had to find a different color for his book of words. In 2017, his first anthology was published under the title: “Learn from Xi’s Golden Sentences”. Since then, more “Golden Sentences Books” have been published.

Xi’s flooding China with red propaganda is not a mere thickly applied whitewash to legitimize the party’s autocracy. It is also a move to maintain the ideological superstructure with which he can steer China’s economy back on a socialist track. His recent plea for a policy of equally distributed wealth, Beijing’s promotion of state-owned enterprises, and spectacular campaigns against economic monopolies, power, and influence in private hands all point in the same direction. The latest issue of the Economist called it “China’s New Reality,” or “Xi’s Taming of Capitalism.”

Inspired by the famous Red Mao Bible (Words of Chairman Mao), Xi Jinping also had selected quotes from his works published, but he had them named differently: “Learn from Xi’s Golden Sentences” is the title of Volume 1, which was published by the Party Publishing House in 2017.

The party leader has never hidden the fact that he is not a pragmatic economic reformer, but a nationalist and a man of conviction who intends to transform economy, society, and ideology – in Chinese fashion, to be sure – but in a socialist manner, to turn his nation into a global empire. But many in the West didn’t want to believe that. After he was elected party leader, he said in his inaugural speech to the new Central Committee on January 5, 2013, “In these years, people at home and abroad keep questioning whether what we are doing is still socialist. Some call our system socialism shaped by capital, state capitalism, or neo-bureaucratic capitalism. (资本社会主义, 国家资本主义, 新官僚资本主义) They are wrong about that.“

In his most recent speech printed on October 1st, Xi said, “We bear the name ‘Communist Party,’ recognizing the ideals of communism as our own (…) Our Party has been in power for more than 70 years and will be for a long time to come.” Xi has remained true to himself. He is a man who sees red.

The holidays of the Golden Week offer time for a wide variety of activities: While a bride and groom pose for photos in Beijing, the group of tourists next to them is busy with their own holiday snapshots on their smartphones. Today, however, the “Golden Week” comes to an end – now it’s back to work.

CHINA.TABLE EDITORIAL OFFICE

Amelie
Richter

Marcel
Grzanna

Fabian
Peltsch

Julia
Fiedler

Angela
Köckritz

Jörn
Petring

Dear reader,

It is the same old problem: Both ECB chief Christine Lagarde and her Chinese counterpart Yi Gang of the People’s Bank of China are well aware of the central banks’ responsibility in the fight against climate change. Nico Beckert takes a closer look at the roadmaps of the ECB and the PBoC to help shape a green economic transition. China’s central bank is able to work more closely with the state on climate protection than Western central banks. But the PBoC also serves Beijing’s economic goals, pouring billions into the coal industry. The ECB, on the other hand, faces a different predicament: It lacks democratic legitimacy and is hardly allowed to act independently on climate policy.

Huawei’s founder Ren Zhengfei wants to recruit more foreign talent to set tomorrow’s standards in new business areas such as household appliances, wearables, and industrial machinery. Frank Sieren analyzed an internal memo from Huawei to find out more about what the CEO is planning for a campus near Shanghai to make foreign top executives feel right at home.

The whole country is currently trimmed to red during the Golden Week holidays. Flags on every street corner, red flower decorations everywhere. On the occasion of the national holiday, state and party leader Xi Jinping gave a speech to his Politburo. And it is just as red-tinged: from red culture, red successors, red resources, red monuments, red ideals, red genes to the red nation. In his column, Johnny Erling explains why Xi did not title his first anthology the “Red Xi Bible”, but “Learn from Xi’s Golden Sentences” instead.

Have a great golden Autumn weekend!

Your
Ning Wang

Central banks in a bind over the climate crisis

By

Nico Beckert

The next world climate conference in Glasgow at the beginning of November is drawing ever closer. In a recent study, the United Nations stressed that “the world is on a catastrophic path” to “2.7 degrees of warming,” and finance plays a pivotal role.

The world’s largest banks have continued to invest billions in fossil fuels or supported investment in the sector through underwriting, even after the Paris climate agreement was passed. And these investments are a threat to the stability of the financial system. That’s why the climate crisis is also an issue for central banks. European Central Bank (ECB) chief Christine Lagarde called climate change “the biggest challenge that is addressed to us.” Climate change affects the ECB’s “primary objective of price stability“, the Frenchwoman said.

Her Chinese counterpart Yi Gang of the People’s Bank of China (PBoC) urges that “we must evaluate the potential impact of climate change on financial stability.” The timeframe for the People’s Republic to achieve carbon neutrality is shorter than that of the EU or the US, Yi said. “The time is shorter and the curve is much steeper for China. It means our financial institutions are faced with grave risks and should begin their green transition right away,” the PBoC chief warned. This is because the longer Chinese banks lend to fossil fuel industries, the greater the risk that companies will be unable to repay these loans when climate policies make their fossil fuel business model unsustainable in the future.

Greater attention needs to be paid to the risks of the green transition, especially in the context of fossil fuels, Yi stressed. “China’s financial institutions have invested heavily in carbon-intensive assets, and the risk of asset price adjustment caused by the green transition must be closely monitored.” In plain language, this means that if banks don’t stop lending money to fossil fuel companies soon, their credit risk will keep rising. That’s because fossil fuel companies will lose their business. For example, if China pushes to phase out coal, operators of coal-fired power plants will be forced to write off their assets – with serious consequences for banks, which will be stuck with their loans. Yi, therefore, warns of credit risks that undermine the entire financial system.

Both the PBoC and the ECB are aware of this problem – but the central banks also find themselves in an area of conflict. The ECB lacks democratic legitimacy to make major climate policy decisions on its own. The Chinese central bank, on the other hand, serves as a tool for the state to make economic policy decisions as well. And this includes the promotion of climate-damaging sectors such as the coal industry.

China’s central bank – green funding, but also capital for coal

China’s central bank works more closely with the government than Western central banks do and thus has the ability to support the government more effectively in implementing climate goals.

The Central Bank of China:

recently introduced instruments to financially support Chinese banks in granting green loans. Companies are to receive prioritized loans if they want to invest in emission-reducing measures. Only second to Japan, China’s central bank is the world’s largest financial institution to introduce such an instrument.
pays banks slightly higher interest on their central bank reserves if the central bank rates financial institutions as “green”. Since summer 2021, the central bank has also been recording the share of green bonds among the total assets of China’s 24 largest banks. The annual change in the total value of green bonds held by banks is also recorded. These measures are intended to incentivize banks to increase lending for sustainable investment.
plans new regulations on the disclosure of climate-related information (China.Table reported) and climate stress tests for banks.

At the same time, back in August, the PBoC proposed a “strict control over the volume of lending to projects with high power consumption and emissions” in the future. However, the central bank did not provide details on the extent of the restriction on lending to fossil fuel companies.

Moreover, there have already been similar proposals in the past. As early as 2012, the government announced that it would “severely restrict” lending to energy-intensive industries and sectors with high emissions.

But little has happened so far. After all, China’s central bank not only promotes Beijing’s climate goals. It also supports the government in implementing its economic policy. In response to the pandemic, the central bank increased funding and launched concessionary credit programs. Most recently, China’s government-directed state-owned banks to provide new loans to operators of coal-fired power plants and mines to help overcome China’s energy crisis (China.Table reported).

ECB – many plans and caution on green monetary policy

In July, the ECB presented an “Action Plan to address climate change in its monetary policy strategy“. Among other things, it announced the following measures that are “consistent with the price stability objective”:

The European Central Bank:

wants to take climate considerations into account when acquiring corporate bonds. Companies whose bonds the ECB obtains, for example, should commit to Paris climate targets.
plans to review the valuation of assets that banks deposit as collateral with the central bank. When reviewing this assessment framework, climate risks are to be taken into account.
plans to impose new transparency obligations on banks regarding the climate risks of their assets, such as loans and bonds. These transparency obligations are to serve as a basis for deciding whether bank assets qualify as collateral at the ECB, or to what extent certain assets with more climate risks will be treated differently when assessed as central bank collateral. The ECB plans to present a detailed plan on this in 2022. As banks have a vested interest in holding assets that serve as valuable collateral, such an approach could reduce lending to fossil fuel companies.
wants to close knowledge gaps and collect data – for example, on the carbon footprint of financial institutions and the extent to which banks’ assets are exposed to climate risks.
Plans to conduct climate stress tests for national central banks of the Euro system by 2022.
wants to ensure that rating agencies adequately consider climate change risks in their ratings.