Environmental Financing in China Project Phase I
(August 2001-December 2002)

The U.S. Environmental Protection Agency provided the Woodrow Wilson Center's China Environment Forum with a grant to support a project aimed at understanding the current status and challenges for environmental infrastructure financing in China. The research and study tour activities of this project were meant to identify some Chinese partners with which U.S. agencies and organizations could work and explore opportunities for developing sustainable systems of environmental financing in China.

In December 2002, the Wilson Center's China Environment Forum joined with the National Committee on U.S.-China Relations to organize a team of five U.S. municipal bond experts to speak at a series of workshops and seminars on municipal finance in three Chinese cities (Beijing, Shanghai, and Hangzhou). At these seminars and workshops the U.S. team met with a wide range of central and municipal-level officials, including the Chinese National Development and Reform Commission (which sponsored a workshop for the team in Beijing), Ministry of Finance, Ministry of Construction, State Environmental Protection Administration, State Council Development Research Center, and municipal government officials. For more information on this study tour please see the China Study Tour document.

Environmental Financing in China Project Phase II
(January 2003-April 2004)

Following the December 2002 study tour the China Environment Form organized a Washington, DC study tour for a group of key central government officials and researchers who participated in the Beijing and Shanghai workshops in China. This study tour was designed to provide Chinese officials with training on municipal bonds and other financing mechanisms for environmental infrastructure, with a particular focus on:

  1. Role of central and local governments and the regulatory system regarding municipal revenue bonds;
  2. Design elements—the various elements (fees, rates, etc.) that an issuer of a municipal bond must take into account;
  3. Comparisons of municipal systems and lessons learned (drawing on different country case studies); and,
  4. Other types of financing mechanisms (revolving funds, grants, loans, and privatization).

The discussions for the Chinese delegation were led by U.S. experts from government, the private sector, and academia, many of whom were brought to Washington from around the country in order to ensure a high-level of discussion. Members of the Chinese delegation also spoke at the Wilson Center about the municipal financing situation in China to help the U.S. experts better understand their challenges facing the Chinese government in financing environmental infrastructure projects. See Washington DC study tour document for more information on the content of this training.

Drawing on the independent research and information gained from the study tours, the China Environment Forum staff and consultant Pam Baldinger has written a report providing a succinct overview of the status and challenges facing environmental financing in China. More information on environmental financing in China can be found from the 30 July 2003 meeting summary, which featured four of the Chinese delegation in Washington, DC.

Conclusion and Potential Next Steps of the Project
Upon conclusion of the workshops in China and Washington, DC members of the Chinese delegation clarified that despite the significant obstacles currently inhibiting development of municipal bond markets in China, there is considerable interest in reforming the sector as recognition of its potential grows. The delegation members identified the following steps as priorities for further development of the Chinese bond market for environmental infrastructure. Each step offers potential areas for U.S. government and the private sector to assist and cooperate:

  1. Adjust existing laws and regulations to encourage investors to enter the municipal bond market, especially: (1) regulation/supervision of issuing entities, (2) rights/education of investors, and (3) strengthening of intermediaries.
  2. Prepare policy recommendations, such as tax benefits to promote enterprise bonds.
  3. Establish nationwide standards in areas such as: (1) which local governments should be allowed to issue bonds, and (2) what is the scale of such bonds.
  4. Create mechanisms and laws to minimize risks of municipal bonds. The Chinese noted they had some experience in risk management in terms of bank loans and stocks, but not in the municipal bond area.

The study tour participants noted that the U.S. experience had given them ideas along all of the above lines, but that they needed to do further research to figure out how such ideas could be applied in China, given the significant differences between the two countries' financial and legal systems and cultural traditions. The Chinese noted they would like further technical assistance from U.S. experts. Several of the Chinese participants stressed the need to choose a city for a pilot municipal bond; some thought the Olympics would make Beijing a natural choice, though other cities were also mentioned. The Chinese delegation was impressed with the quality of the study tour the Wilson Center organized and indicated the Wilson Center could be a good partner to help in future training.

Impact of the Project
Some of the impacts and opportunities created by this Wilson Center China Environment Forum project include:

1) Sparking TDA Support. The Wilson Center project has already resulted in technical assistance between the United States and China on municipal debt markets. After completing her first research trip to China for this project, the Wilson Center's consultant Pam Baldinger broached the idea with TDA officials of a feasibility study on using municipal bonds to finance environmental infrastructure in China, and then provided TDA officials with the contact information and relevant information on the World Bank's Shanghai Urban Environment Project. As a result, TDA issued an RFA for a $500,000 feasibility study on the use of longer-term bonds as a means of financing the wastewater treatment investments in the Shanghai project. Awarded in 2003, the RFA was won by a team led by two of the Wilson Center experts—Al Appleton and Hy Grossman—who participated in the Phase I study tour. The World Bank may provide additional funds to extend the assistance once the TDA scope of work is completed.

2) Promoting Collaboration on an EPA project in Tianjin. The U.S. EPA Office of International Cooperation requested the Wilson Center include Mr. Jinghua Wu, a finance department representative from Tianjin, to participate in the Washington, DC study tour. Mr. Wu is one of the Tianjin officials now working with the EPA on a new river management and financing project in Tianjin. His participation in the municipal finance study tour helped educate and prepare him for his collaboration with the EPA in Tianjin.

3) Disseminating information among U.S. and Chinese policy and research communities on municipal finance in both countries. In addition to the two study tours which provided numerous opportunities for U.S. and Chinese environmental and finance experts to exchange information, the Woodrow Wilson Center's China Environment Forum has launched this link on its web site to share the report and the project activities with a wider audience.

4) Promoting professional development of Chinese government and research communities. The Chinese participants in both the China and Washington, DC meetings expressed considerable enthusiasm for the information and training our project provided. The Wilson Center hopes that the U.S. EPA staff and other experts who interacted with the Chinese delegation will take advantage of these contacts to create future training and exchange programs. The China Environment Forum staff stands ready to continue helping to facilitate EPA and other U.S. government and research dialogues with any and all of the contacts we established throughout the course of this project.

5) Enabling the Wilson Center to undertake other financing projects. The Japan Foundation's Center for Global Partnership awarded the Wilson Center's China Environment Forum a grant on river basin governance, in which one area of research is financing.

6) Providing possible input for the next Five-Year Plan in China. In conversations following the training, some of the NDRC participants noted they were discussing with colleagues the possibility of requesting some pilot projects for municipal bonds aimed at environmental infrastructure in China's next Five-Year Plan.

For more information on this environmental financing project in China or other environmental issues related to China, please contact the China Environment Forum coordinator Jennifer L. Turner (202-691-4233).

Photo Credits: FreeFoto.com; Remote Sensing Tutorial; Oriental Education Network; and Quad Cities Regional Economic Development Authority.