China's Regulatory Pathway to Green Finance

Abstract

China's green credit balance and green bond stocks have surged to become the world's largest within five years. China's regulatory pathway to this and other achievements in green finance remains an underexplored question. We explain the distinct green finance regulatory model that China has developed, including its use of a richer set of regulatory styles than might be expected from a system ostensibly based only on central planning. The Chinese green finance regulatory model encompasses two parts, the pressure driving mechanism and experimental governance. The pressure driving mechanism swiftly injects green finance targets into all levels of bureaucracy. Experimental governance through green finance pilot zones aggregates real-world information about probabilities attaching to the failure or success of a given regulatory approach, and so overcomes Hayekian suspicion that centralised planning may not calculate accurately. The pressure driving mechanism further adjusts targets and tasks based on information from multi-level reporting loops. Coordinating the transformation of financial systems into green or sustainable finance is a global challenge. The Chinese regulatory practices that we identify shed light on how to overcome these challenges, something that other jurisdictions may learn from, in particular other developing economies.