New tool set to increase lending to emission reduction projects

China's new monetary policy tool will leverage a large amount of cheaper funding to accelerate the economic transition toward a low-carbon, environmentally friendly growth model, experts said on Tuesday.

The new monetary policy measure debuted on Monday to increase bank lending to carbon emission reduction projects, according to a statement from the People's Bank of China, the central bank.

Using such a tool will increase the central bank's supply of base money, according to experts, although the official announcement didn't clarify the total amount of new credit.

A projection from China International Capital Corp Ltd indicated that the central bank could provide 1.06 trillion yuan ($165.9 billion) to 1.87 trillion yuan through this new lending facility, and the company predicted that total loans for carbon emission reduction might account for as much as 66.9 percent of the country's green debt in the next year.

Many stocks of the photovoltaic, energy storage and energy-saving sectors surged more than 9 percent on Tuesday.

According to the PBOC, after financial institutions issue carbon emission reduction loans to eligible companies, the lenders can apply for loans from the central bank equal to 60 percent of the principal, at an interest rate of 1.75 percent for one year.

The interest rate for companies will be close to the level of the country's benchmark lending rate－the loan prime rate, which is at 3.85 percent for one year, said the central bank.

It will help to increase net profits of nationwide commercial banks by 0.38 percent to 0.68 percent, as the net interest margin is relatively wider than using other relending facilities offered by the PBOC, according to China International Capital Corp research. The interest rates of the relending program for agricultural and small businesses are currently at 1.95 percent to 2.25 percent.

The new tool aims to leverage more social capital to promote the low-carbon transition of key industries and support the development of clean energy, energy saving, environmental protection and carbon emission reduction technologies, said the PBOC announcement.

Lenders can choose projects by themselves and can roll over the loans twice. They should provide qualified pledges to the central bank.

The PBOC requires financial institutions to disclose such information as the number of projects, the amount of loans, the weighted average interest rates and carbon emission reduction data supported by the new tool. The information disclosure will be verified by a third-party professional institution and subject to public supervision.

"It is unrealistic to expect the central bank to release huge liquidity over a short term through such a tool," said Li Qilin, a senior analyst with Hongta Securities.

It can be seen as a signal of credit easing in some specific industries that can bring effective results in terms of carbon emission reduction, and the lending costs of commercial banks will drop, Li said.

Li Chao, chief economist with Zheshang Securities, said the launch of the tool could have a similar effect to cutting interest rates for some banks by 120 basis points from the level of the medium-term lending facility. Later, this tool may replace a certain amount of expired medium-term lending facility loans.