China has built the world's largest green finance system. This achievement is not an isolated economic phenomenon, but a profound reflection of the national strategy of ecological civilization construction in the financial sector. Starting in the second decade of the 21st century, China, through systematic institutional design, market cultivation, and local trials, has successfully incorporated environmental protection, climate change response, and efficient resource utilization into the core logic of financial resource allocation. The essence of green finance is defined as financial services that support environmental improvement, climate change response, and efficient resource utilization. Its core mission is to guide social capital towards green industries while curbing polluting investments, thereby achieving a high degree of unity between economic and environmental benefits.
From a macro-historical perspective, the development trajectory of green finance in China shows an evolutionary logic from partial exploration to comprehensive implementation. This process not only reflects the depth of supply-side structural reform in the financial sector but also highlights China's leadership transformation in global environmental governance. By establishing a multi-level, broad-coverage policy framework, China has achieved global leadership in both green credit and green bond balances in less than a decade. The driving force behind this lies in the efficient synergy between "policy guidance" and "market incentives."
The Logical Evolution of Top-Level Design: From Strategic Blueprint to Action Plan
The construction of China's green finance system began with a breakthrough in top-level design. In 2016, seven ministries, including the People's Bank of China, jointly issued the "Guiding Opinions on Building a Green Finance System," marking China as the first country in the world to formulate a top-level design for green finance. This landmark document not only defined the official scope of green finance but also clarified key tasks including green credit, green bonds, green funds, green insurance, and environmental rights trading.
The success of this top-level design lies in its inter-ministerial collaborative mechanism. Through the deep participation of the Ministry of Finance, the National Development and Reform Commission, the Ministry of Environmental Protection (now the Ministry of Ecology and Environment), the China Banking Regulatory Commission, the China Securities Regulatory Commission, and the China Insurance Regulatory Commission, green finance was integrated into every aspect of economic operation. This "top-down" driving force effectively solved the problem of environmental externalities and compensated for the initial cost disadvantages of green projects through policy dividends.
With the establishment of "dual carbon" targets, the green finance system entered its 2.0 era. The "Guiding Opinions on Further Strengthening Financial Support for Green and Low-Carbon Development," released in 2024, further emphasized the importance of low-carbon development based on the 2016 version, setting targets for 2030 and 2035. The focus of this phase shifted to supporting the low-carbon transformation of high-emission industries, extending the breadth of financial support from "purely green" to "towards green" by introducing the concept of transition finance.
Pillar One: The Establishment and Unification of Standards System – The Underlying Logic for Eliminating “Greenwashing” Risks
Standards are the logical starting point and cornerstone of trust in green finance. In building its green finance system, China has consistently prioritized the scientific rigor and uniformity of its standards. The national standard "Green Finance Terminology," released in 2025, marks a new stage of unified and coordinated development for China's green finance standards, effectively resolving the past confusion caused by inconsistent definitions across different regulatory departments and financial products.
In its standardization efforts, China has adopted a phased approach. Initially, it screened existing projects through classification catalogs of green credit and green bonds, and then gradually expanded to deeper standards such as ESG assessments, carbon accounting, and transition finance. Particularly in the area of transition finance, China has developed industry-specific transition catalogs, providing clear technical guidelines for financial institutions to support energy conservation and emission reduction in sectors such as coal power and steel, effectively preventing social risks from indiscriminate "loan cut-offs" and credit risks from "greenwashing".
Pillar Two: Information Disclosure and Constraint Mechanisms – Internalizing Climate Risks and a Transparency Revolution
Environmental information disclosure is the guarantee of transparency for the operation of the green finance system. Regulatory authorities are gradually promoting the establishment of a mandatory environmental information disclosure system, requiring financial institutions and listed entities not only to disclose their "green achievements" but also the physical and transitional risks faced by their operations. The initial design of this mechanism aims to use market mechanisms to force enterprises and institutions to internalize environmental externalities as financial costs, thereby achieving a reasonable correction of asset premiums.
Currently, Chinese financial institutions are actively exploring disclosure methods based on the framework of the Working Group on Climate-Related Financial Disclosures (TCFD). By quantitatively assessing how the externalities of environmental change translate into banks' risk exposures, financial institutions can allocate capital more accurately. For example, institutions such as Guangzhou Rural Commercial Bank have established quantitative analysis systems to assess the impact of extreme weather on the value of credit assets and collateral. The widespread adoption of this "stress test" mindset has significantly enhanced the ability of China's financial system to withstand climate-related risks.
Pillar Three: Innovation in Incentive and Constraint Mechanisms – The Multiplier Effect of Monetary Policy Tools and Fiscal Coordination
To address the mismatch between the returns on green projects and financial institutions' investment, China has innovatively employed various incentive and constraint mechanisms, the most representative being the carbon emission reduction support tool. This tool provides a stable and low-cost source of funds for financial institutions to issue low-interest loans to carbon reduction projects by offering one-year relending funds.
In addition to central-level tools, local government finance has also played a significant role. Through interest subsidies, guarantees, and risk compensation funds, local governments and financial institutions have formed a synergy. In green finance reform and innovation pilot zones in Guizhou and Xinjiang, this "monetary + fiscal" synergy model has successfully leveraged several times the amount of social capital invested by the government into the green sector. Furthermore, regulatory authorities have incorporated green credit, green bonds, and overseas green assets into the evaluation system for financial institutions, directly affecting the institutions' macroprudential assessment (MPA) results, thus creating a rigid constraint at the internal management level.
Pillar Four: A Multi-Tiered Product Market System – Scalable Breakthrough in Green Credit and Bonds
China has built the world's most prosperous green finance product market. Green credit, as the ballast of the system, has consistently maintained a dominant position in scale. As of the end of Q1 2024, the outstanding balance of green loans in China's local and foreign currencies reached 33.77 trillion yuan, with a record quarterly increase of 3.7 trillion yuan. These funds flowed to core areas such as clean energy, green upgrades of urban infrastructure, and the application of energy-saving and environmental protection technologies
In the green bond sector, the Chinese market has demonstrated strong resilience and innovation. The issuance scale in 2025 remained at the trillion-yuan level, and the amount under custody steadily increased to over 2.4 trillion yuan. The optimization of the market structure is particularly significant, with a substantial increase in the activity of green financial bonds and green corporate credit bonds, demonstrating the high recognition of green financing by financial institutions and real economy enterprises. Furthermore, the liquidity of the secondary market has improved significantly, with a turnover of nearly 1.2 trillion yuan in 2025 and a turnover rate of 57.1%, reflecting the market's mature ability to price green assets
The booming development of the carbon market has injected new vitality into the green finance system. The restart of the National Voluntary Greenhouse Gas Emission Reduction Trading (CCER) market not only provides a window for realizing the value of emission reduction projects such as afforestation carbon sinks and mangrove restoration, but also provides financial institutions with underlying assets for developing derivative instruments such as mortgage loans and bonds linked to carbon emission rights. By incorporating carbon prices into asset valuation models, green finance is transforming from traditional "project-based" financing to "asset-based" operation.
Pillar Five: International Cooperation and Consensus Building – The Cross-Border Bridging Role of the China-EU Common Classification for Sustainable Finance
Against the backdrop of severe fragmentation in global climate governance, China is committed to eliminating the “standard deviation” in the cross-border flow of green assets through active international cooperation. The publication and continuous updating of the China-EU Common Classification for Sustainable Finance (CGT) is a core manifestation of this effort. As a “translation tool,” the CGT provides a clear guide for global green investors by identifying the intersection of climate change mitigation activities in the two major markets of China and the EU.
The influence of the CGT extends far beyond bilateral cooperation. By 2025, the CGT will not only be used for international green bond issuance by at least 15 financial institutions, but will also become an important reference for countries and regions such as Sri Lanka, Hong Kong, and Canada in compiling their own classification directories. Furthermore, the multilateral Common Classification for Sustainable Finance (MCGT), currently under exploration, is attracting the participation of more members, including Singapore, indicating that a global consensus on green finance that takes into account the differences between developed and developing economies is being promoted by China.
Transition Finance: The Next Wave Supporting Decarbonization in High-Carbon Industries
After green finance made decisive progress in supporting new energy and electric vehicles, China turned its strategic attention to high-carbon industries, which account for the vast majority of carbon emissions. The concept of transition finance emerged to provide orderly exit pathways or funding for technological upgrades for industries such as steel, cement, chemicals, and coal-fired power.
The core of successful transition finance lies in its "dynamic linkage mechanism." Taking a power group's transition bond underwritten by China Construction Bank as an example, this instrument deeply links the bond interest rate to the carbon emission reduction performance indicators after unit upgrades. If the company fails to meet the emission reduction targets within the agreed time, its financing costs will automatically increase. This mechanism design provides both an incentive for low-cost funding and a binding penalty mechanism, ensuring that funds flow to genuine carbon reduction activities rather than "greenwashing''.
Risk Management and Foresight: Climate Stress Testing and the Construction of a Financial Safety Net
With the expansion of green finance, climate risk is evolving from an environmental issue into a systemic financial risk. Large Chinese financial institutions have demonstrated foresight in climate risk management. The Industrial and Commercial Bank of China (ICBC) has established a mature quantitative model of environmental risk by studying the impact of environmental factors on corporate production costs, analyzing how stricter environmental standards translate into credit risk for commercial banks.
China Construction Bank (CCB) has built its own climate risk stress testing system, with testing coverage extending to more than 10 carbon-intensive industries. Through simulations under three scenarios—orderly transition, disorderly transition, and current policies—CCB can monitor the exposure of its loan portfolio to climate risk on a monthly basis and establish a risk appetite threshold. This refined management approach ensures that Chinese financial institutions, while pursuing asset expansion, can effectively identify and prevent potential losses from "stranded assets."
Conclusion: Building a Long-Term Financial Mechanism to Support Sustainable Development
China has built the world's largest green finance system. Its success can be summarized as: the guiding role of top-level design, the systematic nature of its five pillars, and the inclusiveness of international cooperation. By transforming its ecological civilization strategy into a concrete financial system, China has successfully achieved a significant shift in the allocation of financial resources.
Looking towards 2035, China's green finance system is evolving towards greater maturity. Future work will focus on the nationwide unification of transitional financial standards, the deep coverage of mandatory environmental information disclosure, and the full integration of all elements of the carbon finance market. By further strengthening guidance on financial support for green and low-carbon development, China is committed to building a modern green finance system that not only supports "carbon reduction, pollution reduction, and green expansion" but also synergizes with "growth." This process will not only provide a continuous source of funding for China to achieve its "dual carbon" goals but also contribute a replicable and scalable set of Chinese wisdom to the green recovery of the global economy. In addressing the ultimate challenge of climate change facing all of humanity, China's green finance system is no longer just a branch of the financial market but has become a core driving force for achieving high-quality economic and social development and building a beautiful China.