Is Green Finance Policy Effective In Restraining Excess Investment In Overcapacity Industry?

The theory of green finance can be traced back to the idea of sustainable development. As more people come to realize that the financial service sector is environmentally significant for its indirect environmental impacts through capital funding and investment decision-making, many believe that sustainable development will not be achieved without the active participation of business enterprises throughout the world. Internationally, the United Nation Environmental Program Financial Initiative and the Equator Principles are two of the most widely accepted guidelines for green finance implementation, and their efforts have brought this issue greater attention at the international level.The Chinese central government introduced the green finance policy in 2007, urging coordination among the country’s financial sector, the environmental protection bureau and the banking regulation commission to enforce environmental protection policy implementation along with credit risk management. The government’s concern was the potential financial risk that might arise from overcapacity in certain industries (i.e., coal, steel, cement etc.).Previous studies on China’s green finance policy have tended to focus on theoretical aspects of how those green loan policies would constrain the development of the high pollution industry, and whether’green industry’would prosper with additional investment. However, the implementation effects of China’s green finance policies on high pollution and overcapacity industries has rarely been addressed over the past 10 years. This paper aims to address this question by analyzing whether the green finance policies have systematically changed accessibility to external financing in one such high pollution and high-energy consumption industry, the coal mining industry.Results show that the Chinese coal mining industry imposes serious impacts on the environment, yet China’s banking sector has not incorporated such externalities into the capital pricing system. Potential reasons for this include a lack of accessible corporate environment impact data, and environment impact assessment methods and procedures.With regards to the cause of overcapacity within the coal mining industry, evidence suggests that the private owned coal companies and the local government intervention are the two major drivers in overcapacity building in the coal mining industry nationwide.This analysis of the impact of green loan policies on the coal mining industry is first carried at the macro-level. Results show that from 2000 and 2012, the total fixed asset investment in the coal mining industry experienced continued growth. Despite the fact that the absolute amount of fixed asset investment was growing continuously over the past decade, evidence suggests the official governmental document published in 2006 warning of credit risks in the overcapacity industry and the official start-up of the green loan policy in 2007 likely played a role in suppressing the investment impulse. The annual growth rate of fixed asset investment and the level of the fixed asset investment elasticity both display a sharp decrease in 2006 and 2007. In addition, the structural change of capital funding for fixed asset investment indicate that Chinese coal companies were shifting away from the credit support from the banking sector and governmental financial support and moving toward self-financing for capital funding.At the micro-level, the case studies of thirteen listed coal mining companies in three provinces (i.e., Henan, Shanxi and Hebei) show that provinces with stricter green financing approaches had a corresponding impact on fixed asset investment.This paper suggests that while China’s green finance policy might not have been able to downsize the absolute level of commercial lending for coal mining companies during the past decade, it was effective in pulling down the high growth rate of fixed asset investment, especially after the its introduction in 2007. The case studies of three provinces indicated that local governments play a key role in establishing policy and regulatory frameworks to constrain the overcapacity industries’accessibility to banking capital.