China Stress Tests Find Default Risks in High-emitting Sectors

Stranded assets, defaults in thermal power, steel and cement sectors may increase if companies do not shift to low-carbon alternatives.

The People’s Bank of China (PBOC) has revealed the results of its first phase of climate risk stress tests of major banks in the country.

The stress testing was conducted from August to November 2021, with 23 major banks taking took part in the exercise – including two policy banks, six large commercial banks, 12 joint-stock commercial banks and three municipal commercial banks.

The stress tests looked at the impact an increase in emission costs would have on the repayment capabilities of enterprises in high-carbon industries – such as energy, steel and cement –  as well as the subsequent impact on bank asset quality and capital adequacy.

The stress tests highlighted that if enterprises in the thermal power, steel and cement sectors do not carry out low-carbon transformation, they will end up with stranded assets and other transition risks which will impact their repayment capability and present default risks.

However, the PBOC said that all 23 banks that participated in the stress tests satisfied regulatory requirements with regard to capital adequacy ratios, as lending to the energy, steel and cement sectors does not comprise a high percentage of their total loans.

As of end-2020, banks participating in the stress tests had a capital adequacy ratio of 14.89%. The stress tests found that the capital adequacy ratio would fall to 14.57% by 2030 under a ‘light pressure’ scenario, and to 14.27% under a ‘severe pressure’ scenario.

The PBOC said further stress tests will be conducted to evaluate the exposure of banks to other high-emission industries.

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