Speech at China Green Finance and Investment Summit: Xining: thoughts on green finance and Belt & Road

Party Secretary  Mr Wang Xiao, Mayor Zhang Xiaorong

Distinguished guests

Ladies and gentlemen

Good morning

 

It really is a great pleasure to be here in Xining today with you all.  I would like particularly to thank Euromoney and the Xining Municpal People’s Governement for the kind invitation to speak today.

 

I am sure, like me, that you are all looking forward to today’s summit and hearing the perspectives of so many experts in their fields. 

 

The topics that we will explore are really important ones: from the revival of the Silk Road and the special place Qinghai and Xining has in that, to the role green finance will play in growing China’s green economy and the prospects of inward and outward investment under China’s ‘new normal’.   They are closely related too. 

We are meeting at a time of some significant economic and political uncertainties around the world.  That, of course, leads to a degree of caution on behalf of investors. But it does not mean that good opportunities and bright spots don’t exist on the landscape. Indeed far from it.  And the topics we will be exploring today present some of the most exciting opportunities in my opinion.

 

In the next few minutes I would like to share some thoughts on two broad themes:

 

Firstly the growing importance of green finance;

and

Secondly the significance of the Belt and Road Inititaive.

 

Turning to Green Finance

I remember as a young banker back in the late 80s reading avidly about climate change and environmental challenges and the role the banking system could play in helping address looming problems.  That is now a long time ago.

 

The past 3 decades has seen a lot of discussion, , but at long last real momentum has been built up, not least following on from the UN Climate Change Conference COP21 in Paris towards the end of last year.

 

In an historic step forward, the whole world committed to concrete and practical steps to deliver a low carbon and green economy.

 

Of course this will cost money.  A lot of money.  Indeed the International Energy Agency estimates that 53 trillion US dollars of new investment will be required to meet the 2 degrees target agreed at COP21.

 

Realising investment of this scale and magnitude will need a degree of collaboration and commitment from governments and the business community that has never been seen before to make and fund the necessary investment in infrastructure and technology.  That is a challenge; but a fantastic opportunity too.

So of course this is where green finance comes in, whether it is green loans for sustainable investment; green insurance or fund raising from the capital markets or even through new and innovative solutions many of you may be working on now.

 

My view is that the capital markets have a particularly significant role to play.  They can channel large scale investment – and let’s not forget how large scale it is -  into sustainable projects:

• water treatment
• waste management
• renewables
• clean transportation
• and so the list goes on.

 

So this is where green bonds come in.  They offer a degree of innovation without undue complexity.  They offer the same recourse to issuers as traditional debt does, but without complex structuring needed for cashflow based financing.  But they fill a very real need – to fund green investment.

It is of course fair to say that green bonds are still emerging from relative obscurity to become an asset class in their own right.  But the market is growing swiftly. 

 

It tripled from 2012 to 2013.  Then tripled again the year after.  And 2015 saw the highest value yet issued – some 42 billion US dollars.  And in the first quarter of 2016 alone, 22 billion US dollars worth have been issued and we are looking at an estimated US$ 100 billion by the end of this year.  A drop in the ocean perhaps towards 53 trillion, but a move in the right direction.

 

Of course for the market to really flourish it will need robust frameworks and equally crucially good governance by issuers. 

 

The frameworks are rapidly emerging, including the International Capital Market Association’s green bonds principles and the Climate Bond Initiative’s green bonds accreditation.  And stock markets are paying attention too: for instance the London Stock Exchange has established a designated green bond market.

 

It is also very encouraging to see the proactive and leading role that China is taking in this field.  Green finance is an integral part of the solution to tackling environmental problems here in China and helping to mobilise investment into the infrastructure that is most needed.

 

What is more, China’s green finance task force is developing standards and definitions to put in place a robust framework.

And what is very encouraging is that Chinese organisations accounted for 38% of all green bond issuance in the first quarter of this year - and this proportion is expected to grow and grow.

Looking further afield, India which faces its own environment challenges, has made ambitious pledges to grow its green finance market. 

 

And I am sure we are all looking forward to hearing the outcomes of the Green Finance Study Group set up under China’s Presidency of the G20, which culminates in just about a month’s time.

You will probably have realised from my job and my accent that I am British; so forgive me if I give the UK’s financial services industry a bit of a plug at this point as a vital and professional partner in this field.  From our banks to our insurers; from our capital markets to our active involvement in multilateral development institutions, including the Asian Infrastructure Investment Bank, what the UK offers is deep global expertise.

 

And that leads me on to the second broad theme I wanted to talk about the Belt and Road Initiative

 

I am sure everyone here is familiar with the Belt and Road Initiative, but I think we are still in the minority within the business community.  As I speak to companies in the UK, across Europe and here in Asia I don’t think many people have got a real grasp of what it means for them commercially. 

 

Yes it is a huge and ambitious initiative.  And that must mean opportunity.  But how can a company get beyond the over-arching political vision?  What does it really mean in practice?  And most of all, how can a business get involved?

 

These are questions we have been grappling with at the China Britain Business Council and where we have been working hard to begin to offer answers to these questions.  In essence to bring the Belt and Road Initiative to life.  Let me share our key findings.

So what is it? 

Let’s start by covering some of the big facts.

1. The routes traverse over 60 countries across several continents, with a spaghetti-like web of political and economic interests.

 

1. These countries account for over 60% of the world’s population.

 

1. BUT these countries only account for 33% of the world’s GDP – and therein lies the economic development potential and dividend.

 

1. This really isn’t just about new build projects; the legacy is fundamental. The infrastructure plans which will link Asia to Europe have a very real potential, over time, to reshape global trade and investment.  Take just one small example.  Shipping goods from Western China to Europe takes roughly 40 days by sea.  By rail it takes 14 days.  Just think what that means for supply chains.  Just think about what that means for working capital requirements.

 

But this is all still big picture stuff.

 

So at CBBC we have drilled deeper and produced two major reports on the Belt and Road looking at the nature of the opportunity secondly at examples of existing cooperation around the world.

 

Our first report was published towards the end of last year and its theme was ‘New Opportunities in China and Beyond’.

 

In addition to an overview of the Belt and Road initiative, the policy environment and potential new funding sources, we looked into three key areas for business:

1. What are the opportunities by sector?

 

1. Where will the opportunities be found – both in China and outside China ; and

 

1. What risks and challenges might be faced.

 

Sectors

Our findings on opportunities by sector indicate a very broad range

• Infrastructure
• Financial and professional services
• Agriculture and the environment
• Advanced manufacturing and transport
• Energy and resources
• E-commerce and logistics
• Healthcare and Life Sciences
• Tourism; and
• Creative and Culture

 

So the opportunity is much, much more than the infrastructure play that is the most obvious area.

 

We also then looked at where these sectoral opportunities might emerge, both within China and beyond.  That of course included considering each of the 13 core provinces in China

 

Here in Xining today, it would be remiss of me not to say something about the role of Qinghai and Xining, something I am sure we will hear more about during the day.

 

Qinghai is of course one of the 13 core provinces and already a major channel for trade between Central China, Tibet and South Asia.  It is therefore very well placed to flourish further.

There are important plans to strengthen transportation infrastructure, improve ecological and environmental protection, develop the light industry base and expand energy production and capabilities. 

 

And there are also tremendous opportunities in the further development of the cultural and tourism sectors, building upon the rich cultural heritage and spectacular natural environment here.  These span sightseeing, expedition and adventure tourism in resort areas such as Guide, Huzhu and Minghe. 

 

But looking at Belt and Road overall it will of course not be without Risks and Challenges.

 

Belt and Road is not purely an economic initiative, it is also a major geopolitical one.  And the legal, political, social and business environments in countries along the routes vary widely. Investors will need to do thorough due diligence, consider carefully the most appropriate business model, secure optimal financing and work with partners who have deep experience of success in a wide range of jurisdictions.

 

We pleased that the Chinese government praised this report as the first practical guide by any country outside China to grasp the real potential of the Belt and Road from a business perspective - and delighted that our chairman presented President Xi Jinping with a copy when he made his state visit to the UK last year.

This spurred us on to run a whole series of activities across China, the UK and Europe to encourage both UK and Chinese firms to become partners in projects along the Belt and Road routes.

Our second report is one that really brings the Belt and Road Initiative to life.

 

Working in collaboration with Tsinghua University, just a few weeks ago I had the pleasure of launching our second report at the Great Hall of the People in Beijing.

 

Through the use of real examples of UK-China cooperation we have shown that Belt and Road collaboration is already a reality in 2016, not just an aspiration for the future.

 

The report identified more than 20 projects worth a total of 27 billion US dollars which are already underway by British and Chinese companies along Belt and Road routes in countries spanning Europe, the Middle East, Asia and Africa. 

 

And the report also demonstrates clearly the synergies between Chinese and UK firms, with British organisations as diverse as HSBC, the London Metal Exchange, BP, KPMG, Linklaters, Atkins and Mott Macdonalds already sharing and contributing their world class services and innovative solutions to projects along Belt and Road Corridors across Asia, Africa and Europe.

 

Extending this to include all companies worldwide, recent estimates suggest that there are US$250 billion’s worth of projects already underway, being financed by around 40 financial institutions.

 

That is an opportunity that is too hard to ignore!  And as I said earlier, the major infrastructure projects are just one part of the Belt and Road story.

 

But with all this investment planned and underway, it should go without saying that it needs to be built in a low carbon and sustainable way.  And that brings me back to my first theme, green finance.  The promotion of green development must lie at the very heart of Belt and Road.  It needs to be a part of the DNA with financial institutions acting responsibly to favour green projects – and green finance – from the outset.

 

 

Conclusion

Maybe in conclusion I can draw a few thoughts together:

• The world is undoubtedly facing a range of economic and political challenges; but as ever it is for business to respond and adapt to a changing environment. I am confident that it will.

 

• The need for infrastructure investment is manifest and it is equally clear that this must be delivered in a low carbon and environmentally sound way.

 

• Green finance has an exciting future – and the participants carry great responsibility to ensure good governance and compliance. This has to be for real – not just rhetoric.

 

 

• The Belt and Road Initiative will drive infrastructure development on a scale that is hard to picture. And as this is put in place, new markets will open up and over time global trade and investment patterns will be re-shaped in ways that are hard to conceive of right now.

 

• So opportunity aplenty lies ahead of us. Of course, it won’t be without challenges.  Success will require effective collaboration.  It will mean working with the very best of partners using the very best practices and technologies from around the world.

 

• And I naturally think that companies from my country have an important role to play. We have the global business-know-how and expertise.  We lead in global financial innovation. And our companies have the appetite and drive to play a part in turning tomorrow’s opportunity into a reality that leads to greater prosperity for all.

 

Thank you for your attention.