Green Credit Products Silently Spring up

Case study

The Bank of China (BOC) has granted carbon trade financing to the amount of USD 2.98 million to CDM (Clean Development Mechanism) projects of Zhejiang Yingpeng Chemical Co., Ltd, and has signed a swap agreement of no less than USD 2.98 million. It has avoided the forward rate risk of US dollars while meeting the financing demand of the enterprise. This is the first swap business relating to financing on the basis of CDM projects. The successful operation of this business is a successful case in which commercial banks have strengthened innovation of financial products and supported the development of the low-carbon economy.

After the Copenhagen Climate Conference, advocating low carbon has become the most fashionable, healthy and environmentally friendly life style.

According to a report by “Puyi Wealth” on financing products, in 2010, more and more banks have started transforming their mode of operation. Paperless offices, addition of ATMs and promotion of online banking show that the banks are inclining towards “low carbon”. In addition to increasing their investment in “low carbon” in their daily operations, commercial banks are also launching a variety of products to establish channels where customers can participate in low-carbon and environmental protection activities. This year, the Industrial Bank, China Everbright Bank, Agricultural Bank of China and Bank of China have all launched “low-carbon” credit cards. In addition to being made of degradable environmental friendly materials, they also provide functions like environmental friendly bills and carbon purchasing offer plans.

From increased efforts in energy conservation and emissions reduction to the continual launch of “low-carbon” products, the banks are starting to line-up their green credit products.

Product innovation facilitates enterprises

Energy conservation and emissions reduction is triggering new changes in economy and trade, and green credit products are gradually emerging.

Zhejiang Yingpeng Chemical Co., Ltd is located in Yong Kang, Zhejiang, the hardware capital of China. Its output of F22 refrigerant is among the top three in China. The greenhouse warming potential (GWP) of by-product F23 produced during the production of F22 is 11,700 times that of carbon dioxide. With its special processes, Yingpeng Chemical decomposes F23 into carbon dioxide, hydrogen fluoride and hydrochloric acid, greatly reducing the emission of greenhouse gases. The F23 decomposition project of Yingpeng Chemical was approved by the National Development and Reform Commission in May 2007 and passed the examination of the UN CDM Executive Board and registered as CDM project in April 2009. Following this, Yingpeng Chemical cooperated with two major companies from Italy and Ireland in CDM projects. Yingpeng Chemical transferred the reduced greenhouse gas emissions of the project to the two partners. Through such a transfer, Yingpeng Chemical can earn millions of US dollars every year.

Since the collection of foreign exchange gained through CER (Certified Emission Reduction) trade under the CDM project is a long process, Yingpeng Chemical hoped that the Bank of China could provide financial services for the project to ease its fund pressure and avoid the risk of USD exchange rate. In view of its good operation status and its project obtaining CER, BOC innovatively conducted swap business relating to such financing.

In addition to Yingpeng Chemical, Zhejiang Wenling Zhengfeng Power Co., Ltd also broke through the trade barriers to export its engines in virtue of BOC’s low-carbon financial products. In October 2009, the US EPA announced that it would charge emission deposits for all general engine products exported to the American market from January 1, 2010. The lowest charge standard is USD 25 per unit and every business should pay at least USD 500,000. The holding time of deposits is at least five years. Deposits are used to pay the expenses for recalling and compensation after the product emission exceeds the standard.

Provided that the sales volume of the company is 200,000 sets every year, Zhejiang Wenling Zhengfeng Power Co., Ltd would need to pay a deposit of USD 5 million each year and USD 25 million over five years, which is a heavy burden for the company. The company had no choice but to seek help from BOC. With more than two months hard work and coordination with multiple parties, Wenling Branch of the BOC formally opened the first counter guarantee bond in China against EPA’s emission deposit bond in November 27, 2009, giving Zhengfeng Power a pass into American market.

From the experiences of these two enterprises, we can see that in recent years banking and financial institutions have fulfilled national macroscopic regulatory policies, increased support to energy-saving and emission-reducing projects and strictly controlled credit extension to “high-consumption and high-pollution” industries. The energy-saving and emission-reducing credit business has grown fast, and the continual launch of new products and services has extended the scope of green credit products.

By the end of the first quarter of 2010, the balance of BOC’s energy-saving and emission-reducing credit extension exceeded RMB 180 billion, with an annual double-digit growth rate. The percentage of such loans in the bank’s total RMB credit has been increasing. By February 2010, the balance of green credit in Beijing was RMB 48.499 billion, representing an average annual growth rate nearly 85% compared to 2001.

Green credit business grows fast

With the emergence of the low-carbon economy and the increasing inclination towards energy saving, emissions reduction and economic structure adjusting, speeding up the growth of green credit has become a major issue for banks.

As the first bank in China to cooperate with IFC in energy efficiency loans, the Industrial Bank has continuously extended its modes of energy efficiency loans to include loans to enterprise energy-saving technological reconstruction projects, financing to energy-saving service providers or energy contract management companies, capacity increase of energy-saving and emission-reducing equipment suppliers, energy efficiency of equipment suppliers and utilities service providers etc.

Meanwhile, the China Everbright Bank has become the first carbon neutral bank in China. The “Carbon neutral” mode adopted by the China Everbright Bank is to purchase carbon credit from the Beijing Environment Exchange, which will be invested into eligible energy-saving and emissions-reducing projects to neutralize carbon dioxide produced by the China Everbright Bank in its production and operations. According to China Everbright Bank, it will continue to promote carbon financing services through a variety of methods like establishing a green credit mechanism, promoting modeled financing, creating new carbon financing products, and making contributions to the establishment of a resource-saving and environmental friendly society.

The Guide on Supporting Energy-saving and Emission-reducing Credits (the Guide) newly issued and implemented by the Bank of China has taken its green credit to a new level. According to BOC’s officials, the launch of the Guide is an effort to implement the new spirit and new requirement in the national energy-saving and emission-reducing policies, further regulate and optimize credit structure, actively support the development of clean energy and energy-saving and environmental protection industry, promote “green credit”, limit credit to “high-pollution and high-consumption” industries and end projects with outdated capacity as soon as possible. (Source: Economic Daily News)