China Report: Environmental and Industrial Policy Environment

This paper outlines the frameworks of Chinese law and policy concerning environmental protection, public investment, financial policy and industrial policy and the challenges they face.

• Policy and Legal Frameworks: Over the past 20 years, China has built up a comprehensive system of laws,regulations, rules, standards and guidance on environmental protection. However, challenges remain an inadequate institutional and legal system,  tensions between the national environmental
  protection system and local implementation, fragmentation of regulation and management across watersheds and ecological regions and weak standards encouraged by ambiguous rules.
• Public Investment: China has also developed a system for direct public financing of environmental works,made up of on-budget fiscal expenditure, ecological compensation systems and special funds. Key challenges here are fragmentation of funding channels, reactive funding lacking a long-term strategy
  and weak supervision and performance management.
• Financial Policies: In recent years, attention has turned to the role of financial institutions and markets in supporting environmental protection and industrial transformation. Starting in the 1990s, China has developed policies to establish systems for carbon markets as well as green credit, green securities and
  green insurance. However challenges and limitations remain in unattractive risk: return rates for green investments, lack of environmental competency
  within commercial banks, green finance being overly dependent on the government,  green finance being overly dependent on bank finance.
• Industrial Policies: Industrial policy is a key feature of China’s economic development model, with the aim of upgrading industries developing strategic emerging industries. However, in practice, resource-intensive industries have continued to grow. This leaves the economy vulnerable to the volatility of international resource prices and places it at the lower end of the
  industrial value chain with low added value.

The paper goes on to make recommendations in each area.

[NB: This report is one chapter in the book Greening China’s Financial System]