As China insists on using carbon credits as collateral for credit, banks are seeking more clarity on creditors’ rights.



China’s National Carbon Exchange in Shanghai will allow banks to use carbon credits as collateral, but bankers have said they need more clarity about creditor rights as well as more bidders.

The country’s banking regulator has urged banks to look into lending to companies in line with their carbon credits. Shanghai Stock Exchange where they trade started last fridayhas expanded the pool of collateral against which banks can lend, Ye Yanfei, deputy general director of the policy research bureau of the China Banking and Insurance Regulatory Commission, said last week.

Traditionally Chinese banks require smaller companies with a weaker credit profile to provide real estate loans. But given that China’s National Emissions Trading Scheme (ETS) allocates more than 4 billion tonnes of carbon credits to the first batch of participants, this equates to about 213 billion yuan (US $ 32.9 billion) – based on the average closing price in 53.28 yuan a ton on Tuesday. – the volume of such quotas has become available and can be used by banks to secure their loans.

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“How [market] carbon pricing is slowly emerging, these allowances will be effective collateral in the future, providing a basis for collateral for banks to expand their funding [to borrowers], “Said E.

Beijing pledged reaching peak emissions until 2030 and net zero emissions by 2060… The use of carbon credits by banks as collateral will help to achieve these goals, because small businesses will be able to monetize their carbon quotas and receive loans.

“As carbon trading moves from OTC trading to an exchange trading environment, this should have a positive impact on the prospects for using carbon credits to secure credit,” said Frank Fang, head of commercial banking, Hong Kong at HSBC.

While loans secured by such quotas are not new in China, the industry needs more clarity on details such as enforcement of creditors’ rights to such collateral under Chinese law, among other things, Fang added.

Several early examples of loans granted Chinese banks illustrate the problems faced by lenders.

For example, in September 2014, Hubei Yihua Chemical Industry received a loan of RMB 40 million from Industrial Bank, which it used to improve its energy-saving capacity. The carbon-backed loan was offered in collaboration with the Hubei Emission Exchange using the 2.1 million tonnes of emissions that the chemical company had as collateral.

However, other exchanges, such as the Guangzhou Carbon Exchange, are partnering with banks to offer loans with emission credits under a mortgage agreement, under which the borrower still owns the credit in full. This differs from collateralized loans where the lender receives quotas, preventing the borrower from using them.

The Hubei and Guangzhou exchanges were part of China’s emissions trading pilot programs, which began in seven regional markets in 2013-2014, before the national exchange went live last week.

Industry players say there are no national standards to help banks deal with such regional inconsistencies. These options also raise questions about how banks can enforce their legal rights over such collateral.

Some analysts also question whether banks can resell carbon credits in the marketplace as easily as other collateral, such as a factory building, in the event of a default.

“The national ETS only covers coal and gas generators, so the scope is inherently limited in terms of sectors, and it can be difficult for banks to resell allowances when they need to monetize them,” said Dennis Yip, head of Electricity and Renewable Energy Research. Hong Kong and China at Daiwa Capital Markets.

IN ETS initially covers about 2,162 power generators, each of which emits more than 26,000 tons of carbon dioxide per year, or about 40 percent of China’s carbon emissions. Gradually, it will cover other sectors such as petrochemicals, aviation and steel.

“Banks may have to make sure there are buyers of quotas before lending to a borrower to make sure they can monetize assets in the event of default,” added the SP.

This article originally appeared in South China Morning Mail (SCMP), the most authoritative voice reporting on China and Asia in over a century. To learn more about SCMP, see SCMP application or visit SCMP Facebook and Twitter pages. Copyright © 2021 South China Morning Post Publishers Ltd. All rights reserved.

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