The Obstacles to Green Credit: Evidence from China's Green Credit Guidelines

Abstract

We find a strong credit penalty effect on heavily polluting firms, of the 2012 'Green Credit Guidelines' (GCG) of China. Heavily polluting firms' access to both short-term and long-term bank credit reduces dramatically. Nonetheless, this penalty effect disappears in municipalities under pressure to grow their local economies, for firms having deep political connections or bank relations, and for firms in provinces where the banking sector is under profit pressure. We also find some evidence of a credit rewarding effect in that firms with strong environmental governance have better access to bank credit after the GCG. In collection, our evidence show that special interests linked to local economic growth, political connections, and banking business preference generate non-trivial obstacles to the banking system's role in propelling the transition to a greener economy.