Greening China’s Financial System

BEIJING – China’s establishment of the Asian Infrastructure Investment Bank (AIIB) has intensified debate about whether a new generation of development banks, led by emerging countries, is needed to ensure that financing decisions account adequately for principles of environmentally sustainable growth. Far more important, however, is whether such principles underpin developing countries’ broader capital markets, which have become increasingly central to the international financial system.

The answer, as of now, seems to be yes. Indeed, China and other major emerging economies appear committed to designing financial systems that serve the long-term imperatives of inclusive and sustainable development. But they cannot create a genuinely inclusive and sustainable global economy alone.

Policy-directed investment vehicles, which have grown in number and significance in recent years, are critical to this effort. While the AIIB and the forthcoming New Development Bank, operated by the BRICS countries (Brazil, Russia, India, China, and South Africa), are the most visible internationally, they are only the tip of the iceberg. The world’s two largest development banks – the Brazilian Development Bank and the China Development Bank – together manage about $1.5 trillion in assets.

Sovereign wealth funds – the assets of which have swelled from just over $3 trillion in 2007 to more than $7 trillion today – also have a significant influence on global asset markets. Likewise, monetary authorities have been playing an increasingly active role, with the major central banks’ balance sheets having expanded from about $5.5 trillion in 2005 to $13.9 trillion earlier this year.