Greening monetary policy: evidence from the People’s Bank of China

Abstract

ABSTRACT In June 2018, the People’s Bank of China (PBoC) decided to include green financial bonds into the pool of assets eligible as collateral for its Medium Term Lending Facility (MLF). The PBoC also gave green financial bonds a ‘first-among-equals’ status. We measure the impact of the policy on the yield spread between green and non-green bonds. Using a difference-in-differences approach, we show that the policy increased the spread by 46 basis points. Our approach differs from the literature in that we match bonds under review with non-green bonds with similar characteristics and issued by the same firm, which allows for highly relevant firm fixed effects. We also specifically investigate the impact on green bonds. The granularity of the data (daily) also allows us to conduct a dynamic analysis by dividing the sample into weekly, monthly and quarterly observations. Our results also show that the impact of the reform starts to materialize after three weeks, has a maximum effect after three months, and has a persistent effect over six months. Key policy insights The PBoC was one of the first central banks to have a policy specifically targeting green bonds in 2018. Including green financial bonds as collateral for monetary policy increased the spread by 46 basis points compared to before the policy reform. These findings show that a central bank can actively influence market rates for green projects compared with non-green projects by accepting green bonds into the pool of eligible collateral and that giving them preferential status. It is especially relevant for countries with shallow bond markets to help develop nascent green bond markets, as was the case in China before the reform studied here.