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The scope and scale of the Belt and Road Initiative are

expanding rapidly…

…as is the demand for green financing

This report looks at how these two goals – the size and

sustainability of this ambitious project – are compatible

Size and sustainability: China always thinks big. In 2014, when we first started

writing about China’s plan to build a New Silk Road along the centuries-old trading

routes, it was little more than a bold idea. More than three years on, what has come

to be known as the Belt and Road Initiative (BRI), is being billed by President Xi

Jinping as “the project of the century”, encompassing almost two-thirds of the

world’s population and 29% of global GDP. But the country’s leadership also wants

this ambitious plan to be economically sustainable and environmentally friendly.

Railways, highways, airports and infrastructure: The BRI aims to increase

infrastructure investment and promote cross-border trade to ensure that goods,

services and capital can flow easily on land (the “belt” connecting China, Central

Asia, Russia and Europe) and sea (the “road” linking China to ASEAN, India and

Africa). This presents an historic opportunity to not only provide much-needed

infrastructure in the form of transportation links and energy systems, but also to

ensure it is directed along an environmentally sustainable path. We look at the

economic logic of this ambitious project, and the available funding approaches.

Green belt, green road, green infrastructure: Infrastructure should be designed to

last. Climate resilience is important as evidenced by the extreme events of the past

year, where Munich Re expects insured losses to be the highest ever. At the same

time, we think infrastructure should be built in a way that avoids carbon lock-in. Since

these structures and systems will maintain their emissions profile for decades, their

emissions should be low, in our view. The UN’s Sustainable Development Goals are

also giving new direction to financiers as they fund large infrastructure projects.

Greener finance: Infrastructure must be financed and we believe green financing

has an important role to play in the transition to a lower-carbon future. The signs are

good – President Xi has offered strong policy support and Chinese banks are

beginning to issue BRI-focused green bonds. For financial instruments such as

bonds, loans, insurance and securities, explicit “green labelling” signals a

commitment to sustainability to the outside world. If “the project of the century” is to

be climate-resilient and sustainable, we think it should also be ‘green-financed’.

10 January 2018

Wai-Shin Chan, CFA Head, Climate Change Centre

The Hongkong and Shanghai Banking Corporation Limited

wai.shin.chan@hsbc.com.hk

+852 2822 4870

Qu Hongbin

Chief Economist, Greater China

The Hongkong and Shanghai Banking Corporation Limited

hongbinqu@hsbc.com.hk +852 2822 2025 Anderson Chow*

Global Co-Head of Industrials Research

The Hongkong and Shanghai Banking Corporation Limited

andersonchow@hsbc.com.hk

+852 2996 6669

*Employed by a non-US affiliate of HSBC Securities (USA)

Inc, and is not registered/ qualified pursuant to FINRA regulations

China’s BRI challenge CLIMATE CHANGE / ECONOMICS / EQUITIES CHINA

The greening of the Belt and Road

CLIMATE CHANGE / ECONOMICS / EQUITIES ● CHINA

10 January 2018

2

Belt and Road Initiative: scope, size and sustainability

Source: HSBC, Global Infrastructure Outlook, Asian Development Bank, BP Statistical Review, World Bank

Under the BRI, China’s government has said it will invest

USD4 trillionin developing infrastructure and regional connectivity

across strategic land and maritime routes

Opening up trade corridors will make it easier for

companies to reach the growing middle-class.

By 2030 it is estimated that

66% of the world’s middle-classwill live in Asia – many along the Belt and Road

China has become the main driver for growth in

the global market for green bonds:

The carbon intensity of China’s economy has

fallen steadily over the past 25 years…

… but China still accounts for around a

quarter of total global greenhouse gases

USD1bnworth of green bonds were issued by China in 2015…

USD30bn

…in 2017 this increased to

The BRI encompasses

countries that account for

29% of global GDP

The initiative will connect more

than 65 countries across Europe,

Asia and Africa covering 63% of

the world’s population

Estimates indicate that BRI

infrastructure in Asia alone will

cost USD1.7 trillion a year

through 2020

2.5

USD trn

35%

30%

25%

20%

2.0

1.5

1.0

0.5

0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016e

Investment in infrastructure by China increased by c80% between

2007-16, where global investment increased only by 36%

Global China China share of global investment in infrastructure

Carbon intensity of GDP (kgCO² /USD)

6.00

4.00

2.00

0

1966 1990 2016

3

CLIMATE CHANGE / ECONOMICS / EQUITIES ● CHINA

10 January 2018

Infrastructure builds and supports economies

Infrastructure systems are the lifeblood of the economy. Energy systems power homes and

factories, transport systems get people to work and water systems maintain good health.

Transport, power, telecommunications, water supply and sanitation all play an essential role in

increasing living standards and trade, GDP and consumption. It is a virtuous circle –

infrastructure investment drives economic growth and, in turn, economic growth drives further

infrastructure demand. And the need for quality infrastructure in Asia is increasing every year.

Chart 1: China takes a large share of global infrastructure spending

Source: Global Infrastructure Outlook

The ever-growing need for infrastructure spending

The Asia Development Bank (ADB) estimates that developing Asia will need to invest around

USD26trn from now to 2030 in order to maintain growth momentum, eradicate poverty, and

respond to climate change. That is more than double the ADB’s estimate in 2009. To put these

numbers in context, the region currently invests an estimated USD881bn in infrastructure

annually, about half what is needed, according to the ADB’s estimate. Ambitious plans are

already in place to narrow the funding gap and the BRI is leading the way.

Chart 2: Infrastructure spending has been growing, broadly in tandem with GDP

Source: Global Infrastructure Outlook

20%

25%

30%

35%

0.0

0.5

1.0

1.5

2.0

2.5

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016e

Global China China share of global (RHS)

USDtn Investment in infrastructure by China increased by c80% between 2007-16, where global investment increased only by 36%

5

6

7

8

9

0.4

0.5

0.6

0.7

0.8

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016e

China % of China GDP (RHS)

USDtn %

Infrastructure and economic

growth are complementary

Infrastructure spend should

double to meet growth and

sustainability challenges,

according to the ADB

CLIMATE CHANGE / ECONOMICS / EQUITIES ● CHINA

10 January 2018

4

The Belt and Road Initiative (BRI)

The first time the Belt and Road Initiative was mentioned was back in September 2013, when

President Xi announced his ambition to revive the routes along the ancient Silk Road during a

visit to Kazakhstan. More than four years on, he took the opportunity to highlight the importance

of this grand plan during his speech that opened the 19th Party Congress in October 2017. See

Infographic on page 2.

Last year, at the inaugural Belt and Road Forum in Beijing in May 2017, President Xi announced an

additional USD136bn of funding support for BRI-related infrastructure projects (Table 1). At the

financial integration session of the forum, the People’s Bank of China (PBoC) governor Zhou

Xiaochuan stressed that funding of projects related to the BRI should be raised through a market-

oriented, sustainable and mutually beneficial investment and financing system.

Table 1: Increased financial support to the BRI by China

Action RMBbn USDbn equivalent

Silk Road Fund capital 100 14.5 Encouraging financial institutions’ overseas fund business in RMB to provide support for the BRI 300 43.5 China-Russia Regional Cooperation Development Investment Fund* 100 14.5 China Development Bank (CDB) will set up the B&R Multi-currency Special Lending Scheme for Infrastructure Development

100 14.5

CDB will set up the B&R Multi-currency Special Lending Scheme for Industrial Cooperation 100 14.5 CDB will set up the B&R Multi-currency Special Credit Lines for Overseas Financial Institutions 50 7.3 EXIM will set up the B&R Multi-currency Special Lending Scheme 100 14.5 EXIM will set up the B&R Multi-currency Special Lending Scheme for Infrastructure Development 30 4.4 Assistance to developing countries 60 8.7 RMB940bn USD136.5bn

Source: Belt and Road Portal. Note: announced during the BRF; * Initial RMB10bn to promote cooperation between China’s Northeast and Russia’s Far East

Vast quantities of foreign exchange reserves

Although not directly related to infrastructure spending, China has vast quantities over foreign

exchange reserves, which have been building up since its ascension to the World Trade

Organisation in 2001. They have come down from their peak in 2014 but are still large at around

USD3 trillion. The size of these reserves indicates China’s ability to tap capital (should it be

necessary) for long-term use and without worrying about rate volatility.

China has been building up its domestic infrastructure for many years and this, coupled with

reserves, can be considered as “national savings”. As China gradually lowers its domestic

investment in the future (as the economy matures), these reserves provide a back-up supply of

capital for global infrastructure spending if ultimately required.

Chart 3: China’s foreign exchange reserves

Source: State Administration of Foreign Exchange (SAFE)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

tn USD

China is increasing financial

support for BRI projects

China’s financial situation

provides “deep pockets” for

infrastructure spending

5

CLIMATE CHANGE / ECONOMICS / EQUITIES ● CHINA

10 January 2018

Chinese overseas spending

Overseas spending by China has grown in recent years as more people have been brought out

of poverty to join the ranks of the middle class. China now accounts for roughly a fifth of global

outbound tourism, double that of the US. It shows the increasing appetite for Chinese to look

outwards, both on a more individual level as well as nationally. Infrastructure spending will

facilitate further overseas investment and support sustained consumption growth in the future.

Chart 4: China now accounts for around a fifth of global outbound tourism expenditure

Source: World Bank (based on World Tourism Organization, Yearbook of Tourism Statistics)

The advance of green – at home and abroad

The rise of the ‘green’ agenda domestically in China has been swift. The country is the world’s

largest greenhouse gas (GHG) emitter in absolute terms and has, in recent years, come to

embrace its important role in achieving the international goal of limiting global average

temperature rises to within 2°C through the Paris Agreement. The carbon intensity of its

economy has fallen steadily since the start of economic reforms and the opening up of its

economy in the late 1970s. China now emits 73% less carbon dioxide per unit of real GDP than

it did 35 years ago. However, it still accounts for around a quarter of total global GHGs.

Chart 5: China’s carbon intensity of GDP Chart 6: China’s GHG as % of world

Source: BP Statistical Review, World Bank Source: PRIMAP DATASET

Domestic environmental-related targets were first incorporated in the 11th Five-Year Plan

(2006-10). Since 2013, the legal, regulatory and institutional framework for environmental

protection has been expanded widely through new laws and regulations. We think China’s

0%

5%

10%

15%

20%

25%

30%

0

50

100

150

200

250

300

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

China % of world

USD bn

0.00

1.00

2.00

3.00

4.00

5.00

6.00

1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016

kgCO2/ USD

0

20

40

60

0%

5%

10%

15%

20%

25%

1965 1971 1977 1983 1989 1995 2001 2007 2013% Share China World (RHS)

China's share of world GHG's increased to 24% in 2014

GtCO2e

Infrastructure spending

supports growth of overseas

investment and consumption

China, the world’s largest

emitter, has an important role

in addressing climate change

China is actively addressing

its domestic environmental

issues

CLIMATE CHANGE / ECONOMICS / EQUITIES ● CHINA

10 January 2018

6

medium-term environmental targets, which include emissions, energy intensity goals, and

specific pollution reduction, are achievable. China is also accelerating the implementation of

policies for specific industries and regions. For example, it already has several regional carbon

trading schemes up and running and launched a national trading scheme in late December.

We believe environmental protection is fundamentally compatible with and good for growth, in

three ways:

1. A healthier and more productive labour force;

2. The shift to environmental-friendly technology and ultimately greener sources of energy

drives new growth opportunities; and

3. A reduced fiscal burden on healthcare

In the coming years, we expect continued development in climate and environmental policies to

address the transition away from China’s dependence on coal, the country’s ongoing ‘war on

pollution’ and its growing leadership on the world stage.

Advancing green – internationally

As China’s reach and influence grows on the world stage, we think there is an opportunity to

showcase green leadership abroad as well as at home. Besides being the world’s factory, and

increasingly the world’s innovator, China’s endeavours abroad can have a significant influence

on the trajectory of global emissions as well as its overall environmental footprint.

China will…. conscientiously perform its due international

obligations and responsibilities, keep its promises on

global climate change, actively push forward the

implementation of the Belt and Road Initiative

President Xi Jinping, New Year address to the nation, 31 December 2017

Chart 7: China made rapid infrastructure ODI expansions in recent years

Source: CEIC, HSBC

-40

-20

0

20

40

60

80

100

0

5

10

15

20

25

2011 2012 2013 2014 2015 2016

%/yr%

Infrastructure as % of total outward investment Growth of infrastructure ODI (RHS)

Protecting the environment is

good for growth, in our view

The scale of China’s

economy and global ambition

means it will influence the

trajectory of global emissions

7

CLIMATE CHANGE / ECONOMICS / EQUITIES ● CHINA

10 January 2018

As China looks more outwards, it is looking to be a leader in sustainability. Success at home –

in renewable energy capacity and improving energy efficiency, in world-class infrastructure and

public transportation – can be replicated abroad. China’s reach in Asia Pacific, but also the

major trade routes of East-West and South-South, afford it the opportunity to be a part of the

growth that will affect two-thirds of the world’s middle class.

Sustainable infrastructure builds for the future

Many financiers do not take into account climate considerations when providing capital – they

merely supply capital to projects consistent with their risk-reward profile. For those that do

consider climate change, many do not explicitly label the project as being climate-aligned,

related or resilient. We think the explicit signalling of the sustainability considerations through

more transparent labelling is important because it indicates the direction of travel – towards a

lower-carbon future and a more sustainable world. There are signs that this is changing.

Embedding sustainability within infrastructure

Infrastructure should be designed and constructed to last. However, infrastructure systems

designed for current norms or historical patterns of usage, wear and tear may not be sufficiently

prepared for the future. For example, climate change may bring such variations of future wear

and tear that are outside the boundaries of current planning – this is why embedding climate

resilience is important. Also, sustainability considerations should take into account the full life-

cycle of the asset.

Climate resilience is important: 2017 was a year when the importance of addressing climate

change became clear. Extreme events such as floods, storms, and wildfires caused physical

and social devastation across many parts of the world – the severity of these events was

magnified by climate change. Rising temperatures affect the severity of nature’s extreme events

since there is more energy in earth’s many systems; over the longer term, the effects can be felt

through “slow-onset events” such as rising sea levels. The Intergovernmental Panel on Climate

Change’s (IPCC) Fifth Assessment Report (AR5) goes into detail at the possible impacts across

the world (Figure 1).

Successes in sustainability

advances at home can be

replicated abroad

Financial decisions should

take climate considerations

into account, in our opinion

Climate change may test the

limits of tolerance for

infrastructure systems…

…as it magnifies the severity

of extreme events

CLIMATE CHANGE / ECONOMICS / EQUITIES ● CHINA

10 January 2018

8

Figure 1: The IPCC details the potential impacts of climate change across Asia

Source: Intergovernmental Panel on Climate Change (IPCC), HSBC

Warming trends andtemperature extremes

More extreme precipitation trends, varying

across Asia, combined with:

Increased

warm days

Decreased

cold days

Water scarcityA growing population in the region, combined with

higher standards of living, leading to:

Increased

water demand

Food scarcityFood production in Asia varies by region. Though hard to

predict full effects with uncertain precipitation forecasts,

higher temperatures are expected to lead to:

Decreased rice yields, and lower

food productivity

VegetationThough precipitation forecasts are uncertain, changes to

arid and semi-arid land can be expected, and therefore

changes to animal distribution

Coastal and marine impactsHigher seal levels are expected, affecting ice-free

seasons and coastal erosion processes. Marine

biodiversity will be impacted

Urbanisation and industrialdevelopments

Increased urbanisation, industrialisation and economic

development can be exptected in Asia, leading to:

Increased pressure

on natural resources

Health, security and livelihoodsChanges to precipitation patterns, the severity of extreme events and temperature

increases will vary across Asia, but in the worst cases will lead to:

Increased mortality

and morbidity

Increased risk of malaria

and dengue fever

9

CLIMATE CHANGE / ECONOMICS / EQUITIES ● CHINA

10 January 2018

As such, we think infrastructure should be embedded with a higher level of climate-resilience –

that is, a higher risk tolerance to more severe extreme weather events. This cost to embed a

higher risk tolerance is most likely going to be slightly higher than building with standard risk

tolerance – all other things being equal. However, over the longer run, we think preparation by

resilience is more cost-effective than rebuilding post disaster.

Avoiding carbon lock-in within new infrastructure

Infrastructure is usually designed to last many decades. Over the long term, we believe avoiding high

carbon lock-in is important from a climate perspective. This is particularly true for energy

infrastructure, where power stations can operate for over 40 years. Notwithstanding high-cost retrofits,

the emissions profile of infrastructure is likely to remain fixed throughout its lifetime. Thus, a high-

carbon asset is likely to remain a high-emitter for 40 years. When the differences are accumulated

across the world, over a long time frame, the incremental emissions can be very large indeed.

In our view, these emissions can be avoided by choosing infrastructure that utilises newer

technologies, embeds more efficiencies and embraces more sustainability (Figure 2 overleaf).

Figure 2: Sustainable infrastructure is a crucial aspect of emissions reduction

Source: HSBC

CoalHigh carbon dioxide emissions in

power, air pollution

Renewable energyZero carbon, sustainable, a

clean energy source

GridInefficient, inflexible with intermittency

can lead to curtailment

StorageLess energy wastage, catalyses intermittent

renewables, power mix decarbonisation,

off grid opportunities

BuildingsHigh energy consumption, poor

insulation, relient on power from the grid

Green buildingsEnergy efficient via improved insulation, glazing,

appliances and materials, self sufficient clean

power generation and heating

TransportInefficiency, high dependence on

oil, localised air pollution

Electric & autonomous transportEnergy efficient, emissions and pollution reductions

Choosing lower-carbon

assets now avoids multiple

years of higher emissions

CLIMATE CHANGE / ECONOMICS / EQUITIES ● CHINA

10 January 2018

10

New infrastructure that does not impact other areas of the environment

There is also a growing consensus that the construction and operation of infrastructure systems

should be sustainable – that is, not cause (any or further) degradation to the environment, or

those that depend on it. This encompasses the earth’s atmosphere, the quality of the air, the

surrounding waterways, the quality of the land as well as the ecosystems and livelihoods that

depend upon these. A healthy environment contributes significantly to the steady and healthy

growth of an economy over the long term through, for example, stable and reliable systems and

a healthier and more productive workforce.

Linkage with the Sustainable Development Goals

We also see more linkages with the UN’s Sustainable Development Goals (SDGs), adopted in

2015. These goals cover 17 different areas of sustainability, comprise of 169 specific targets,

and are to be reached by 2030. A number of these relate specifically to climate change and the

environment. In our view, the infrastructure to be built under the Belt and Road Initiative should

also embrace these issues.

SDG #6 – Clean water and sanitation: Ensure access to water and sanitation for all

SDG #7 – Affordable and clean energy: Ensure access to affordable, reliable, sustainable

and modern energy for all

SDG #11 – Sustainable cities and communities: Make cities and human settlements

inclusive, safe, resilient and sustainable

SDG #13 – Climate action: Take urgent action to combat climate change and its impacts

SDG #17 – Partnerships for the goals: Strengthen the means of implementation and

revitalise the global partnership for sustainable development

We expect more national policies to address the SDGs in many countries touched by the BRI. In

addition, there have been a growing number of organisations – including financial institutions –

which have launched programmes and funds structured around the SDGs.

Green finance builds for the future

Sustainable, low-carbon and climate-resilient infrastructure and systems still need to be

financed. Investors tend to look for an appropriate balance between risk and reward.

Historically, high-carbon investments were seen as lower-risk, with higher reward than low-

carbon investments. However, we think this is changing as low-carbon technologies grow more

mature and, perhaps more importantly, as the risk profile begins to invert.

More financial institutions are beginning to shun higher-carbon activities in favour of lower-

carbon activities. For example, the World Bank will cease to fund oil and gas exploration after

2019; some firms are pulling back from investing in oil-sands; and many financial institutions will

only provide funds to coal-fired power generation under special circumstances. We think this is

because of the longer-term risks associated with higher-carbon activities such as:

Policy risk – as the world works together to implement the Paris Agreement

Carbon price risk – putting a price on emissions of greenhouse gases

Competition risk – as lower-carbon businesses and technology gain market share

Demand risk – as consumers are less inclined to purchase high-carbon goods and services

That is not to say that lower-carbon activities are not without these, or their own types of risk –

but it can be argued that they are less exposed to these “transition risks” (risks associated with

the transition to a lower-carbon economy). We believe funding should be more explicit in its

labelling – by signalling that it is part of the low-carbon transition and contributing to a more

sustainable world. This visibility gives both a policy signal and a momentum signal.

Infrastructure investments

should also consider impacts

on local environments,

ecosystems and livelihoods

The BRI also has a role in

achieving SDGs as they grow

to become part of country

policies worldwide

Finance is shifting focus as

the risks surrounding higher-

carbon activities become

more apparent

11

CLIMATE CHANGE / ECONOMICS / EQUITIES ● CHINA

10 January 2018

Policy signal – labelling would signal demand for policies that aid the low-carbon transition.

The ‘International Business Declaration’ signed by 54 global companies last month calls for

the framework conditions i.e. political and regulatory, to deliver the Paris Agreement and a

decarbonisation of the global economy.

Momentum signal – ‘crowding in’ or ‘herd instinct’, more green labelling would raise awareness

among other financiers and investors of greener financing. This in turn would encourage others

to consider the greenness of their own investments as well as more policy frameworks, as larger

volumes of green finance arguably require some form of regulation.

There are many multilateral banks globally, with many of them focusing on development and

infrastructure. We are seeing some of these institutions embed sustainability through their

policies, strategies and focus areas (Table 2).

Table 2: Multilateral development banks are embracing sustainability

Asian Infrastructure Investment Bank (AIIB)

New Development Bank (NDB) Asian Development Bank (ADB)

Date of establishment 2014 2015 1966 No. of members 77 Brazil, Russia, India, China, South Africa 67 Purpose Multilateral financial institution to address

infrastructure needs across Asia Finance infrastructure and sustainable development projects in BRICS countries

Partner with member governments, independent specialists and other financial institutions on delivering projects that create economic and development impact

Sustainability Sustainable Infrastructure a thematic priority with six focus areas; sustainable energy for Asia is a key sector strategy; support member climate pledges under the Paris Agreement

Sustainability is a key value; key mandate is infrastructure and sustainable development projects; believes environmental and social sustainability are crucial to addressing infrastructure gaps

Environmentally sustainable growth one of three complementary agendas; upcoming 2030 strategy will align with the Sustainable Development Goals and the Paris Agreement

Source: AIIB, NDB, ADB

Green bonds on the rise

Green bonds have seen strong growth over the past few years, to over USD129bn of issuance

in 2017, according to HSBC calculations. These bonds are essentially standard financial

instruments except that the use of proceeds are designated for green projects. Different

countries adhere to different standards i.e. what constitutes green or mandatory ring-fencing,

but we think the important aspect here is that the bonds are labelled as green. This signal is

helpful to investors, other businesses and governments in terms of a commitment to

sustainability. Furthermore, we think disclosure and transparency are very important for the

sake of environmental integrity.

Explicit green labelling is

beneficial as it provides a

signalling mechanism

Green bonds have been the

most visible part of green

financing in recent years….

Chart 8: Green bonds have seen strong growth in recent years

Source: Climate Bonds Initiative. Note: numbers may differ due to different methods of aggregation for bonds that qualify as green

0

20

40

60

80

100

120

2013 2014 2015 2016 2017

bn USD

CLIMATE CHANGE / ECONOMICS / EQUITIES ● CHINA

10 January 2018

12

China’s green bond market is among the largest in the world and the growing appetite for this

investment category is obvious. The country has become one of the main drivers of growth in

the global market for green bonds. Around USD30bn worth of Chinese green bonds were

issued last year – over one-fifth of the global total – and up from just USD1bn in 2015.

The BRI is playing its part: In September, the Industrial and Commercial Bank of China

(ICBC) issued its first One Belt One Road Green Climate Bonds offshore in Luxembourg. The

bonds, issued in USD and EUR, raised USD2.15 billion. ICBC plans to use the proceeds to

finance and refinance green assets in the field of renewable energy, low-carbon and low-

emission transport, energy efficiency and management of sustainable water resources.

Government policy support remains strong: In September, China hosted an International

Green Finance Forum in Beijing. The forum discussed specific green finance tools and products

such as environmental risk analysis and green bonds, to explore ways to enhance the green

preference of investors investing in the BRI region. The deputy governor of the People’s Bank of

China, Yin Yong, believes that “green finance should be a pillar of its [the BRI] success.”

China will honour our commitment to reduce carbon

emissions and make more efforts to promote green finance

globally, including facilitating green investment in the Belt

and Road region.

Yin Yong, deputy governor, PBoC (Green Finance Forum, September 2017)

In October, on the country’s biggest stage – the twice-a-decade Party Congress – President Xi

Jinping endorsed green finance yet again. After saying that “building an ecological civilization is

vital to sustain the Chinese nation's development”, President Xi discussed efforts to promote

green development – including “establish a legal and policy framework”, market-based systems

and “develop green finance”.

Other green financing tools and instruments are being developed besides green bonds.

These include:

Green loans – where loans may be offered at a discount if the project satisfies certain

green criteria such as embedding resilience or reducing environmental impact

Green securities – where banks and investors allow the cost of capital to be lower if certain

green criteria are met; or regulators mandate green criteria as part of listing or approval

Green insurance – where insurance costs are lower if certain resilience criteria are met or

businesses demonstrate a strong climate and environmental strategy to lower future risks

Green banks – which make loans and advise on green and low-carbon themes

Green funds – which invest and provide capital according to green and low-carbon themes

For all of these financing means, we believe transparency and disclosure are important to ensure

environmental integrity is being upheld. We expect the appropriate regulatory frameworks and

policies to be enacted in China and other countries to build out more green and sustainable finance.

…and China is one of the

largest players in the global

green bond market

But green finance also

includes other instruments –

the Chinese government is

supporting development

Transparency and disclosure

are important

13

CLIMATE CHANGE / ECONOMICS / EQUITIES ● CHINA

10 January 2018

Conclusion

Infrastructure is important to the smooth running of economies, and increasingly the global

economy. There is still a lot of investment opportunity in this area as global infrastructure

development will require trillions over the next decade or so to 2030.

Sustainability or environmental considerations are very important from a design, construction

and operational viewpoint over the entire life of the asset and beyond. We think the various

financing options available for these projects could tweak the level of sustainability embedded

within them. China’s Belt and Road Initiative is an important confluence of all of these themes

given its vast reach, its vast scale and its ability to shape global contours in years to come.

Whilst green finance can help spur investment in green assets, we think it is important to

consider the environmental integrity, impact and climate resilience of these assets. We think a

broad range of green financing tools and the appropriate regulatory policies are necessary to

embed sustainability into “the project of the century”.

CLIMATE CHANGE / ECONOMICS / EQUITIES ● CHINA

10 January 2018

14

Related HSBC reports

Green Bond Insights: 2018 Market outlook, 9 January 2018

The climate in 2018: Driving ambition to the next level, 2 January 2018

Commodities Digest: China’s Belt and Road Initiative, 14 June 2017

China goes green…and that’s not all bad for growth, 13 November 2017

China’s Belt and Road Initiative, The unstoppable rise of Asian infrastructure, 31 May 2017

On the New Silk Road VI, Financing the BRI, 31 May 2017

China Belt and Road Forum, 15 May 2017

On the New Silk Road V, 17 November 2016

On the New Silk Road IV, 18 March 2016

On the New Silk Road III, 21 April 2015

Xi’s New Silk Road Plan, 18 November 2014

Keeping it cool: Financing a 2°C world, 10 September 2014

Building on China’s overseas investment, 8 August 2014

15

CLIMATE CHANGE / ECONOMICS / EQUITIES ● CHINA

10 January 2018

Disclosure appendix Analyst Certification

The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s)

whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering

analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or

issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any

other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately

reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific

recommendation(s) or views contained in this research report: Wai-Shin Chan, CFA, Qu Hongbin and Anderson Chow

Important disclosures

Equities: Stock ratings and basis for financial analysis

HSBC and its affiliates, including the issuer of this report (“HSBC”) believes an investor's decision to buy or sell a stock should

depend on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations and that

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From 23rd March 2015 HSBC has assigned ratings on the following basis:

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however, volatility had to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.

Rating distribution for long-term investment opportunities

As of 09 January 2018, the distribution of all independent ratings published by HSBC is as follows:

Buy 45% ( 28% of these provided with Investment Banking Services )

Hold 42% ( 26% of these provided with Investment Banking Services )

Sell 13% ( 20% of these provided with Investment Banking Services )

CLIMATE CHANGE / ECONOMICS / EQUITIES ● CHINA

10 January 2018

16

For the purposes of the distribution above the following mapping structure is used during the transition from the previous to

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1. This report is dated as at 10 January 2018.

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https://www.research.hsbc.com/R/34/F7LHsqm

17

CLIMATE CHANGE / ECONOMICS / EQUITIES ● CHINA

10 January 2018

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[1046017]

18

Climate Change Centre of Excellence

Head, Climate Change Centre of Excellence Wai-Shin Chan, CFA +852 2822 4870 wai.shin.chan@hsbc.com.hk

Director, Climate Change Strategy Ashim Paun, CAIA +44 20 7992 3591 ashim.paun@hsbcib.com

Alternative Energy

Industrials / Clean Technology Analyst Sean McLoughlin +44 20 7991 3464 sean.mcloughlin@hsbcib.com

Head of Alternative Energy, Asia-Pacific Evan Li +852 2996 6619 evan.m.h.li@hsbc.com.hk

Environmental, Social and Governance (ESG)

Research

Asia

Head of ESG Research, Asia Pacific Wai-Shin Chan, CFA +852 2822 4870 wai.shin.chan@hsbc.com.hk

Charanjit Singh +91 80 4555 2760 charanjit2singh@hsbc.co.in

Europe

Ashim Paun, CAIA +44 20 7992 3591 ashim.paun@hsbcib.com

Laurie Fitzjohn-Sykes, CFA +44 20 7992 3689 laurie.fitzjohn-sykes@hsbc.com

Lucy Acton +44 20 3359 3365 lucy.acton@hsbc.com

Tarek Soliman +44 20 3268 5528 tarek.soliman@hsbc.com

Equity Strategy

Global Equity Strategist, Global Head of Equity Sector Research, Head of Americas Research Ben Laidler +1 212 525 3460 ben.m.laidler@us.hsbc.com

Amit Shrivastava +91 80 4555 2759 amit1.shrivastava@hsbc.co.in

Green Bonds Research

Green Bonds and Corporate Credit Analyst Michael Ridley, PhD +44 20 7991 5918 michael.a.ridley@hsbc.com

Global Climate Change & ESG Team

Global

Global Chief Economist Janet Henry +44 20 7991 6711 janet.henry@hsbcib.com

Global Economist James Pomeroy +44 20 7991 6714 james.pomeroy@hsbc.com

Senior Trade Economist Douglas Lippoldt +44 20 7992 0375 douglas.lippoldt@hsbc.com

Europe

Chief European Economist Simon Wells +44 20 7991 6718 simon.wells@hsbcib.com

European Economist Fabio Balboni +44 20 7992 0374 fabio.balboni@hsbc.com

Economist Chris Hare +44 20 7991 2995 chris.hare@hsbc.com

United Kingdom

Economist Elizabeth Martins +44 20 7991 2170 liz.martins@hsbc.com

Germany

Stefan Schilbe +49 211910 3137 stefan.schilbe@hsbc.de

Rainer Sartoris +49 211910 2470 rainer.sartoris@hsbc.de

France

Olivier Vigna +33 1 4070 3266 olivier.vigna@hsbc.fr

Chantana Sam +33 1 4070 7795 chantana.sam@hsbc.fr

North America

US

Chief US Economist Kevin Logan +1 212 525 3195 kevin.r.logan@us.hsbc.com

Ryan Wang +1 212 525 3181 ryan.wang@us.hsbc.com

Canada

David G Watt +1 416 868 8130 david.g.watt@hsbc.ca

Asia Pacific

Managing Director, Co-head Asian Economics Research and Chief Economist Greater China Qu Hongbin +852 2822 2025 hongbinqu@hsbc.com.hk

Managing Director, Co-head Asian Economics Research Frederic Neumann +852 2822 4556 fredericneumann@hsbc.com.hk

Chief Economist, Australia, New Zealand and Global Commodities Paul Bloxham +612 9255 2635 paulbloxham@hsbc.com.au

Sophia Ma +86 10 5999 8232 xiaopingma@hsbc.com.cn

Joseph Incalcaterra +852 2822 4687 joseph.f.incalcaterra@hsbc.com.hk

Jingyang Chen +852 2996 6558 Jingyang.chen@hsbc.com.hk

Julia Wang +852 3604 3663 juliarwang@hsbc.com.hk

Daniel John Smith +612 9006 5729 daniel.john.smith@hsbc.com.au

James Lee +852 2822 1647 james.dh.lee@hsbc.com.hk

Noelan Arbis +852 2822 4325 noelan.arbis@hsbc.com.hk

Ji Won Kwon +852 2996 6621 ji.won.kwon@hsbc.com.hk

Kelvin Lam +852 2996 6975 kelvin.h.p.lam@hsbc.com.hk

Aayushi Chaudhary +91 22 2268 5543 aayushi.b.chaudhary@hsbc.co.in

Aakanksha Bhat +852 2822 4297 aakanksha.bhat@hsbc.com.hk

CEEMEA

Chief Economist, CEEMEA Simon Williams +44 20 7718 9563 simon.williams@hsbc.com

Economist, Russia and CIS Artem Biryukov +7 495 721 1515 artem.biryukov@hsbc.com

Economist, CEE Agata Urbanska-Giner +44 20 7992 2774 agata.urbanska@hsbcib.com

Chief Economist, Turkey Melis Metiner +44 20 3359 2636 melismetiner@hsbcib.com

Economist, South Africa David Faulkner +27 11 676 4569 david.faulkner@za.hsbc.com

Economist, Middle East and North Africa Razan Nasser +971 4 423 6925 razan.nasser@hsbc.com

Latin America

Chief Economist, Latin America John Welch +1 212 525 4109 john.h.welch@us.hsbc.com

Argentina

Chief Economist, South America Javier Finkman +54 11 4344 8144 javier.finkman@hsbc.com.ar

Senior Economist Ramiro D Blazquez +54 11 4348 2616 ramiro.blazquez@hsbc.com.ar

Senior Economist Jorge Morgenstern +54 11 4130 9229 jorge.morgenstern@hsbc.com.ar

Mexico

Chief Economist, Mexico Alexis Milo +52 55 5721 2172 alexis.milo@hsbc.com.mx

Marina Valentini +52 55 5721 6046 marina.valentini@hsbc.com.mx

Global Economics Research Team

20

Industrials

Analyst Michael Hagmann +44 20 7991 2405 michael.hagmann@hsbcib.com

Analyst Scott Cagehin +44 20 7992 1444 scott.cagehin@hsbc.com

Analyst Debashis Chand +91 80 4555 2755 debashischand@hsbc.co.in

Head of Research, Korea Brian Cho +822 3706 8750 briancho@kr.hsbc.com

Analyst Paul Choi +822 3706 8758 paulchoi@kr.hsbc.com

Analyst Anderson Chow +852 2996 6669 andersonchow@hsbc.com.hk

Analyst Puneet Gulati +91 22 2268 1235 puneetgulati@hsbc.co.in

Analyst Yeon Lee +822 3706 8778 yeonlee@kr.hsbc.com

Analyst Helen Fang +852 2996 6942 helen.c.fang@hsbc.com.hk

Analyst Sean McLoughlin +44 20 7991 3464 sean.mcloughlin@hsbcib.com

Analyst Edward Perry +44 20 7991 8415 edward.perry@hsbc.com

Analyst Shrinidhi Karlekar +91 22 6164 0689 shrinidhi.karlekar@hsbc.co.in

Analyst Nick Webster +27 11 676 4537 nick.webster@za.hsbc.com

Analyst Jörg-André Finke, CFA +49 211 910 3722 joerg-andre.finke@hsbc.de

Analyst Somesh Agarwal +65 6658 0616 somesh.kumar.agarwal@hsbc.com.sg

Analyst Richard Schramm +49 211 910 2837 richard.schramm@hsbc.de

Analyst Philip Saliba +49 211 910 2672 philip.saliba@hsbc.de

Associate Tracy Li +852-2996 6751 tracy.s.w.li@hsbc.com.hk

Autos

Analyst Horst Schneider +49 211 910 3285 horst.schneider@hsbc.de

Analyst Yogesh Aggarwal +91 22 2268 1246 yogeshaggarwal@hsbc.co.in

Analyst Henning Cosman +44 207 991 0369 henning.cosman@hsbc.com

Analyst Vivek Gedda +91 22 6164 0693 vivekgedda@hsbc.co.in

Analyst Vikas Ahuja +91 22 3396 0690 vikasahuja@hsbc.co.in

Analyst Tarun Bhatnagar +65 6658 0614 tarunbhatnagar@hsbc.com.sg

Analyst John Chung +8862 6631 2868 john.chung@hsbc.com.tw

Associate Hanmin Kim +822 3706 8763 hanmin.kim@kr.hsbc.com

Transportation

Analyst Andrew Lobbenberg +44 20 7991 6816 andrew.lobbenberg@hsbcib.com

Analyst Edward Stanford +44 20 7992 4207 edward.stanford@hsbc.com

Analyst Parash Jain +852 2996 6717 parashjain@hsbc.com.hk

Analyst Achal Kumar +91 80 4555 2751 achalkumar@hsbc.co.in

Analyst Wei Sim +852 2996 6602 weisim@hsbc.com.hk

Analyst Joe Thomas +44 20 7992 3618 joe.thomas@hsbcib.com

Analyst Alexandre Falcao +1 212 525 4449 alexandre.p.falcao@us.hsbc.com

Analyst Augusto A Ensiki +1 212 525 4915 augusto.a.ensiki@us.hsbc.com

Analyst Mauricio Arellano +52 55 5721 3863 mauricio.arellano@hsbc.com.mx

Analyst Ricardo N Rezende, CFA +44 203 268 3325 ricardo.n.rezende@hsbc.com

Construction & Engineering

Analyst Tarun Bhatnagar +65 6658 0614 tarunbhatnagar@hsbc.com.sg

Head of French Research Pierre Bosset +33 1 56 52 43 10 pierre.bosset@hsbc.com

Analyst Jonathan Brandt, CFA +1 212 525 4499 jonathan.l.brandt@us.hsbc.com

Analyst Yevgeniy Shelkovskiy +1 212 525 3035 yevgeniy.x.shelkovskiy@us.hsbc.com

Analyst Eduardo Altamirano +1 212 525 8333 eduardo.x.altamirano@us.hsbc.com

Analyst, LatAm Cement and Constructions, Real Estate Javier Santiago +52 55 5721 2397 javier.santiago@hsbc.com.mx

Analyst Coleman Clyde +1 212 525 2441 coleman.l.clyde@us.hsbc.com

Global Equity Head of Building Materials John Fraser-Andrews +44 20 7991 6732 john.fraser-andrews@hsbcib.com

Analyst Lesley Liu +852 2822 4524 lesleylliu@hsbc.com.hk

Analyst Nicholas Paton, CFA +971 4 423 6923 nicholas.paton@hsbc.com

Analyst Emily Li +852 2996 6599 emily.c.li@hsbc.com.hk

Associate Hanmin Kim +822 3706 8763 hanmin.kim@kr.hsbc.com

Specialist Sales

Rod Turnbull +44 20 7991 5363 rod.turnbull@hsbcib.com

Oliver Magis +49 21 1910 4402 oliver.magis@hsbc.de

Billal Ismail +44 20 7991 5362 billal.ismail@hsbcib.com

Jean Gael Tabet +44 20 7991 5342 jeangael.tabet@hsbcib.com

Global Industrials Research Team