Report: Extra RMB1.1 Trillion Needed Annually For China 2060 Net Zero

Shanghai, July 21, 2022 - China’s transition to net zero will require an enormous amount of green financing – about RMB140 trillion ($22 trillion) in aggregate for the 2020-60 period across electricity, steel, mobility, and construction and real estate, according to a new report by the World Economic Forum and Oliver Wyman. Currently, however, an annual funding gap of about RMB1.1 trillion ($170 billion) exists between this total and the likely supply of funds.

The report titled China’s Climate Challenge: Financing the Transition to a Net-Zero Future, says the core of this gap is the need to finance innovative technology. “China’s net-zero commitment will require a revolutionary transformation of its economy driven by the widespread adoption of green technologies, all of which will require enormous investment,” said Hang Qian, Partner at Oliver Wyman. “China’s unique economic model will shape this transition.”

“The country’s top-down approach to economic planning by the central government and provincial administrations may prove advantageous in investing for the long term. State-owned enterprises will also be important due to their substantial market share in many industries, including the carbon-heavy industries needing to transition and the financial services that will have to finance this transition. Public funding will also play a more significant role in China than elsewhere,” Qian added.

According to the report, one of the key financing challenges are the structural mismatches, including those between the types of instruments, deal structures, and tenors available. Bank lending is the backbone of corporate finance in China. Banks, however, being risk averse, target large state-owned and private enterprises, leading to inadequate financial support for small and medium-sized enterprises, which account for 65% of the total CO₂ emissions in China. Other challenges include the sub-optimal data granularity and quality, lack of clear policy support, and lack of cross-supply chain collaboration.

The report looks at the three carbon-heavy sectors core to achieving net zero: construction and real estate, steel, and mobility, and the technology breakthroughs and financing needs that these sectors require to achieve net zero (Exhibit 1). For example, the steel industry faces a gap in the unfunded process optimization of around RMB3-4 trillion from 2020 to 2060, approximately half of the entire steel industry’s gap. Wide adoption of electric furnaces, which have shorter processes and lower emissions, along with scrap steel as raw materials, could contribute to reducing the industry’s emissions by about 8-10% by 2060. Considering that the steel industry is responsible for 13% of CO₂ emissions in China (according to the International Energy Agency), this technology adoption is expected to contribute significantly to 2060 net zero.

Kai Keller, Platform Curator of The Future of Financial Services in China and Beyond at the World Economic Forum said: “While the road ahead is steep, if China gets this right, it could drive the next green revolution globally, given the country’s scale and position in the global economy and supply chains. This will require significant innovation in financing, adequate policy support, and cross-industry collaboration.”

The report says comprehensive government support, including tax, land, approvals, and financing, are effective in promoting the green transition. In addition, financial institutions must introduce innovative products and services, including new term structures, collateral requirements, instrument archetypes, and portfolio strategies, to ease the shortage of equity green financing and long-term green loans in China. Finally, industry players need to connect with their value chain partners to establish holistic emission-reduction goals, especially regarding the reduction of their Scope 3 emissions.

“As much as this is a challenge, it also presents a significant business opportunity. The most agile industry leaders will drive coordination efforts between different parties and institutions in order to serve industrial customers with more sophisticated product and service propositions that look holistically across their supply chains. To do this, financiers need to accelerate internal and external innovation and expand ecosystem networks – be it products, data sharing, reporting and tracking, or commercial incentives,” Keller added.

About Oliver Wyman
Oliver Wyman is a global leader in management consulting. With offices in more than 70 cities across 30 countries, Oliver Wyman combines deep industry knowledge with specialized expertise in strategy, operations, risk management, and organization transformation. The firm has more than 5,700 professionals around the world who work with clients to optimize their business, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities. Oliver Wyman is a business of Marsh McLennan [NYSE: MMC]. For more information, visit www.oliverwyman.com. Follow Oliver Wyman on Twitter @OliverWyman.