When green credit policies backfire: banking competition, low-end lock-in and capital misallocation in China

Our study explores the relationship between Green Credit Policy (GCP), bank competition, and corporate green transformation. Previous research mainly focused on the impact of GCP on corporate green practices from a single dimension, with limited attention to bank competition and the overall process of corporate green transformation. Using machine learning methods and Baidu Maps API, we innovatively construct indicators for the green transformation of Chinese A‐share‐listed companies and bank competition from 2007 to 2020. We treat China's Green Credit Guidelines as a quasi‐experiment and find that GCP has a positive impact on corporate green transformation, with bank competition strengthening this effect. Notably, the influence of state‐owned banks and foreign banks is more pronounced. Mechanism analysis indicates that alleviating financing constraints and promoting green behavior are critical mechanisms through which GCP affects green transformation. Furthermore, this effect is more pronounced in state‐owned enterprises, companies with high environmental transparency, regulated industries, and regions with stronger environmental regulations.

Green credit policies direct financial resources to sustainable firms while restricting polluting ones, promoting environmental goals, and mitigating climate change. Despite extensive research on how China's punitive green credit policy (GCP) affects polluting firms, far less attention has been paid to how local governments respond to the policy and shape its overall impact. This study explores how the punitive GCP affects local government responses, particularly through subsidies. Using a staggered difference-in-differences approach based on variation in firm-level exposure to the GCP, we analyze data on Chinese A-share listed firms from 2010 to 2018. Our findings indicate that the GCP led to approximately a 30% increase in non-tax subsidies from local governments to polluting firms as short-term economic relief. This suggests that such subsidies may partly offset the financial constraints imposed by the central policy. We further categorize these subsidies into ‘green’ and ‘non-green’ and observe regional divergences: while all regions increased non-green subsidies post-GCP, only developed eastern regions saw a marginally significant rise in green subsidies. This highlights differing local strategies in supporting firms’ green transformation. Our results contribute to the ongoing debate on the GCP's effectiveness, emphasizing the importance of aligning local incentives. Policymakers should avoid a one-size-fits-all approach and refine the GCP to better support green projects in polluting firms. Poorly designed local subsidies may undermine the intended impact of the central government's GCP, while well-structured local subsidies can enhance it. Clearer guidance is needed to align local subsidies with national green goals and support firms’ green transformations.

The green credit policy (GCP) is an institutional framework aimed at guiding enterprises towards green transformation and promoting high-quality development, which serves as a crucial tool for supporting the establishment of a green technology innovation system. In this study, utilizing the green credit guidelines as a quasi-natural experiment and constructed a continuous difference-in-difference (DID) model, examines the impact of GCP impact on enterprise green innovation and its internal mechanisms by analyzing data from Chinese A-share listed companies between 2006 and 2021. Our findings indicate that the GCP had a significant impact on enterprise green innovation, inhibiting companies from in-dependently developing green innovation while promoting joint green innovation with other institutions; These results were robust and consistent, even after conducting several sensitiv-ity analyses; This mechanism indicate that the commercial credit plays an important regulatory role in the process of GCP affecting green innovation of enterprises and the financing constraints act as an intermediary factor in the process of GCP affecting green innovation. Based on our research, we offer policy recommendations aimed at improving the GCP and fostering a market-oriented green technology innovation system.

The impact of green credit policy on enterprises' financing behavior: Evidence from Chinese heavily-polluting listed companies

Can the green credit policy reduce carbon emission intensity of “high-polluting and high-energy-consuming” enterprises? Insight from a quasi-natural experiment in China

Taking the green credit policy in 2012 as a quasi-natural experiment, this paper applies the methods of propensity score matching and Difference-in-Difference (PSM-DID) to investigate the relationship between green credit policy and enterprises' green technology innovation performance based on Chinese industrial enterprises database and green patent database. The results show that the implementation of "green credit guidelines" policy has significantly improved the green innovation performance of high-polluting and high-energy consuming enterprises, which indicates that the incentive effect of green credit policy on enterprises exceeds the constraint effect and leads to "Porter effect." Moreover, the green credit policy has significantly increased the number of non-invention patents rather than invention patents. In addition, the green credit policy has a more significant effect on the green innovation performance of high-polluting and energy-intensive enterprises that are state-owned and have weak market power. Mechanism test shows that green credit policy can change the credit financing constraints and R&D investment allocation to affect the green innovation performance of high-polluting and energy-intensive enterprises.

This paper investigates whether green credit policy can mitigate firms’ financialization. Using data from Chinese non-financial public listed firms during 2008 to 2019, we take the green credit policy promulgated in 2012 as a quasi-natural experiment and find that: (1) the green credit policy can reduce firms’ entrusted loans, especially affiliated entrusted loans. Moreover, the governance effect exerted by banks’ green credit policy reduces free cash flow and excess cash in heavily polluting firms, as shown in mechanism analysis. (2) The profit-seeking incentive dominates shadow banking activities in heavily polluting enterprises. (3) The 2012 green credit guidelines reduce entrusted loans maturity but increase the interest rate. The findings of this paper provide market-oriented insights into the regulation of shadow banking activities. This research also contributes to the literature on the effects of green credit policy by exploring their impact on firm shadow banking activities, and takes one step further to investigate the effect of green credit policy on firms’ entrusted loans. This paper also sheds light on how green credit policy can alleviate the imperfections and distortions of financial markets in the emerging market.

Taking the green credit policy in 2012 as a quasi-natural experiment, this paper uses the difference-in-differences method to explore the impact of green credit policy on enterprises' financial asset allocation and the moderating effect of government subsidy. We find that green credit policy significantly promotes the financial asset allocation of heavy-polluting enterprises, which is mainly reflected in short-term liquid financial investment, thus supporting the precautionary motivation of holding financial assets. The mechanism analysis shows that green credit policy promotes the financial asset allocation of heavy-polluting enterprises by reducing the scale of debt financing and increasing the financing cost. Government subsidy can significantly weaken the promoting effect of green credit policy on enterprises' financial asset allocation, and there is heterogeneity due to the regional environmental regulation intensity and financial development level. Further analysis shows that the negative moderating effect of government subsidy on green credit policy and enterprises' financial asset allocation significantly promotes the "shifting form virtual to real" of heavy polluting enterprises by reducing financial asset allocation. This paper discusses the impact of green credit policy on financial asset allocation of heavy-polluting enterprises in China and further clarifies the significant role of government subsidy in the process, so as to provide suggestions for government to control the "shifting from real to virtual" of enterprises. The results also provide an important reference for countries, especially developing countries, to implement green credit policy and government subsidy to achieve sustainable economic development.

How to help enterprises reduce pollution and transform into environmentally friendly enterprises through financial channels is an important issue that needs to be urgently addressed. This study constructs a quasi-natural experiment based on the implementation of the 2012 Green Credit Guidelines and evaluates the impact of green credit policy on green transformation in high-pollution enterprises from the aspect of green innovation. The research results found the following: (1) After the implementation of green credit policy, the quantity and quality of green innovation in high-pollution enterprises have significantly improved. (2) To avoid the inaccuracy of research conclusions caused by differences in sample characteristics, this study used the PSM-DID model to verify the promoting effect of green credit policy on the green transformation of high-pollution enterprises. (3) Furthermore, this study analyzed the impact of differences in the ownership nature of enterprises and regional financial development levels on the green transformation of high-pollution enterprises under green credit policy. The results show that green credit policy has a stronger impact on the green innovation of state-owned high-pollution enterprises and high-pollution enterprises in underdeveloped financial areas. The findings of this study provide an important reference for the reform of green finance of government departments.

Based on the data of China's open-end stock funds and partial stock funds from 2009 to 2020, we take the implementation of green credit guidelines (GCG) as a quasi-natural experiment and investigate the impact of green credit policies on the net value crash risks of fund holding heavily polluting enterprise stocks. The results show that green credit policies will significantly increase the net value crash risks of fund holding heavily polluting enterprise stocks. Green credit policies increase the net value crash risks of fund holding heavily polluting enterprise stocks by increasing investor redemptions. Further tests show that better fund performance and higher portfolio concentration weaken the positive impact of green credit policies on the net value crash risks of fund holding heavily polluting enterprise stocks, and higher proportion of institutional investors strengthens the positive impact of green credit policies on the net value crash risks of fund holding heavily polluting enterprise stocks. This study supplements the literature on green credit policies and funds, and provides policy guidance for regulators.

The innovative use of green credit policy for financial regulation in environmental governance is a significant effort to balance environmental preservation and economic growth. The objective of this paper is to study the effect of green credit on the polluting firms’ eclectic business strategy, which is financialization, and the related mechanisms. Based on the sample of Chinese public firms from 2008 to 2019, we employ the DID model constructed by the Green Credit Guidelines promulgated in 2012 to investigate the causality between green credit policy and firms’ financialization. The results of theoretical and empirical studies show that the green credit policy helps to mitigate the financialization of heavy polluters compared to non-heavily polluting firms, thereby realizing the optimal allocation of financial resources. The mechanism test indicates that green credit policy has a suppressive effect on the financialization level of heavily polluting firms, mainly through promoting green innovation while reducing excess cash and banks’ credit willingness. The heterogeneity test further indicates that green credit policy is more pronounced in SOEs, strong environmental regulation enforcement regions and higher market competition industries. Our study confirms the effectiveness of green credit policies from the perspective of firms’ business strategy, which not only provides empirical evidence for the evaluation of green credit policy effects, but also sheds lights on the green transformation and sustainable development of heavily polluting firms.

Fostering green development with green finance: An empirical study on the environmental effect of green credit policy in China

We use the 2012 Green Credit Guidelines as a quasi-natural experiment and data from A-share listed companies from 2008–2020 to examine the effect of green credit policy on firm productivity and its mechanism of action. The results show that the green credit policy significantly inhibits improvements in firm productivity. The inhibitory effect still holds after a series of robustness tests, such as the difference-in-differences propensity score matching method, placebo test, and change in the timing of policy shocks. The mechanism of action test reveals that credit resource allocation, financing constraints and business credit are important channels through which green credit policy can reduce firm productivity. The heterogeneity test reveals that the inhibitory effect of green credit policy on firms’ productivity improvements in restrictive industries is more significant for private firms, smaller firms, and inland regions. The policy implication of the findings of this paper is mainly to improve the green credit policy guarantee mechanism and policy implementation using the market as the main body, with the goal of realizing the synergistic development of policy implementation and environmental protection and of promoting rational resource allocation.

Green credit is an important manifestation of commercial banks’ environmental responsibility, but few studies have examined the impact of green credit policies on the financial performance of commercial banks. Based on the panel data of 62 commercial banks in China from 2013 to 2020, this paper investigates the changes in financial performance due to the implementation of green credit policies in 2016 using the difference-in-differences (DID) method and explores the mediating mechanism of green credit affecting commercial banks’ profit. The sample was divided into a treatment and a control group. The treatment group disclosed total green credit data during the sample period, while the control group did not. The findings of this paper are as follows: (1) the implementation of the green credit policy increases the profits of commercial banks. (2) The green credit policy improves the profits of commercial banks by increasing their noninterest income and reducing their nonperforming loan ratios. (3) The green credit policy does not improve commercial banks’ profit by reducing their cost-to-income ratios. (4) The implementation of the green credit policy significantly improves the profits of banks with low (vs. high) nonperforming loan ratios. (5) Compared to large national banks, regional urban and agricultural commercial banks’ profits improve more significantly after executing the green credit policy. The research contribution of this paper provides a quantitative basis for Chinese commercial banks to improve their financial performance through the implementation of green credit in recent years and for the government to further improve green credit policies to motivate banks to implement green credit and achieve sustainable development. Then, we further discuss the implications for the prominent theoretical and managerial policies, study’s limitations, and future research directions.

Green credit policy is an important practice to guide green development through the rational allocation of credit funds. Using the promulgation of the "Green Credit Guidelines" policy in China as a quasi-natural experiment, this paper examines the impact of green credit policy on heavily polluting enterprises' substantive and strategic green innovations within a difference-in-differences framework. We find that green credit policy improves the overall and strategic green innovations but has no significant effect on substantive green innovation of heavily polluting enterprises. Moreover, this effect is more prominent for state-owned enterprises and enterprises in regions with lower levels of financial development. Further analysis demonstrates that the green innovation induced by green credit policy increases heavily polluting enterprises' loan availability but does not improve heavily polluting enterprises' value. This paper sheds new light on the relationship between green credit policy and corporate green innovation in China as a transition economy.