Out of the window? Green monetary policy in China: window guidance and the promotion of sustainable lending and investment

Abstract

ABSTRACT Chinese monetary and financial authorities have been among the pioneers in promoting green finance. This article investigates the use of one specific monetary policy tool, namely window guidance, by the Peoples’ Bank of China (PBC) and the China Banking Regulatory Commission (CBRC) to encourage financial institutions to expand credit to sustainable activities and curb lending to heavy-polluting industries. ‘Window guidance’ is a relatively informal policy instrument that uses benevolent compulsion to ‘guide’ financial institutions to extend credit and allocate lending in line with official (government) targets. We investigate window guidance targets for the period 2001–2020 and find that ‘green’ targets were included by the CBRC from at least 2006 and by the PBC from 2007 to discourage lending to carbon-intensive and polluting industries and/or to increase support to sustainable activities. In 2014, both authorities stopped discouraging lending to carbon-intensive/polluting industries through window guidance. Sustainable objectives were subsequently also removed from the PBC's list of window guidance priority sectors at the start of 2019, ending the practice of green window guidance in China. Sustainability-enhancing window guidance targets were replaced and formalized through new ‘Guidelines for Establishing the Green Financial System’, reflecting efforts to move away from controls-based towards market-based policy instruments. Based on this analysis, the article draws four lessons for the design of green finance policies for other countries that seek to enhance sustainable finance and mitigate climate change and related risks. Key policy insights The Chinese experience of using window guidance to direct bank lending to support national sustainability targets and goals shows how the instrument can be successfully used in financial markets that are at an early stage of financial market development. The efficacy of window guidance and other directed bank-lending policies is likely to diminish as financial markets mature and direct monetary policy instruments become less powerful. When window guidance is used, it should be linked to clear criteria of success, the achievement of which should be monitored. Green window guidance should be embedded in a broader framework of green finance policies, as well as climate and environmental policies. While today's framing and language on sustainable finance policy in China focuses increasingly on market-based instruments, the Chinese experience of using window guidance offers valuable lessons for other emerging economies in Asia and beyond with financial systems dominated by banks.