Insights

In May 2024, the European Financial Reporting Advisory Group (EFRAG) released three documents: "Guidelines for the Implementation of Materiality Assessment", "Guidelines for the Implementation of the Value Chain", and "List of ESRS Data Points". EFRAG aims to support enterprises and other stakeholders in implementing ESRS by issuing implementation guidelines, helping enterprises to focus on the standard content related to them, and explaining the reporting requirements through frequently asked questions. Among them, the "Guidelines for the Implementation of the Value Chain" (hereinafter referred to as the "Guidelines") defines the boundaries of the value chain in the sustainable development report, explains the participation of the value chain in materiality assessment to policies, actions and goals, and outlines the disclosure requirements for the impact of each dimension of ESRS on the value chain.   1. Definition of value chain In the Guidelines, the value chain is defined as the various activities, resources and relationships related to a company's business activities and its external operating environment. The activities, resources and relationships refer to: the personnel involved in the company's own operations, namely human capital; supply, marketing and distribution channels, procurement of materials and services, sales and delivery of products and services; the financing, geographic, geopolitical and regulatory environment of the company's operations, etc.   In addition, the Guidelines define business relationships as relationships between a company and its business partners, entities in the value chain, and entities directly related to its business operations, products, or services. Business relationships are not limited to contractual relationships, but also include indirect business relationships outside the first layer of the company's value chain and equity-invested companies. Whether a company has influence, risks, and opportunities on an investment company is not affected by its shareholding ratio and control ability; however, the company's shareholding ratio affects its ability to obtain information on equity-invested companies.   The following decision diagram summarizes the content that needs to be paid attention to in ESRS E1 "Climate Change" greenhouse gas emissions and ESRS E2 "Pollutants", and this approach is also applicable to the disclosure of information on important sites in ESRS E4 "Biodiversity and Ecosystems".   Figure 2 Value Chain Environmental Dimension Information Disclosure Decision Diagram   2. Importance of the value chain The material impact of the value chain refers to the impact caused or contributed to by the company's operations, products or services. Value chain participants that are not related to the company's operations, products and services are not considered to be material impacts. Material impacts are not limited by neighboring or contractual relationships, but are generated by processes at various stages in the value chain and are mainly related to business activities. In addition to the material impacts, risks and opportunities generated by its own upstream and downstream value chains, companies should provide personalized entity information based on their own circumstances to further reflect the material impacts, risks and opportunities.   3. Materiality Assessment: Obtaining the Materiality, Impact, Risks and Opportunities of the Value Chain Companies should design a reasonable assessment process based on the specific circumstances and comprehensively consider the results of the materiality assessment and the content that needs to be disclosed. Considering that no process is suitable for all companies' economic activities, locations, business relationships or value chains, ESRS does not stipulate how companies should conduct materiality assessments or how to design the process, but provides several aspects that companies should consider when designing a materiality assessment process: Assess the company’s involvement in the value chainCompanies need to distinguish between direct and indirect business relationships to determine the type of impact on the value chain. A company's direct business relationships may have a value chain impact. For example, the company's procurement and payment policies and practices may violate labor standards, or even purchase from suppliers with labor rights violations. Indirect business relationships can also have a value chain impact. If a company purchases products or services produced by suppliers with negative information, it may indirectly lead to significant systemic impacts. Materiality Assessment:Step A: Understand the environment in which your company operates(a) Companies need to understand the business actors, size, industry or nature of activities, geographic locations and processes involved in their value chain; (b) The company's strategy affects its business model, which affects all aspects of its operations and its upstream and downstream value chains. Companies need to understand how their strategy and business model are linked to impacts, risks and opportunities; (c) Companies can identify which parts of the value chain are in high-risk areas by tracking the actors in their value chain activities. In particular, if a company does not have reliable information about the geographic location of its value chain, it can assess the significant global value chain impacts, risks and opportunities related to the materials, products and services it uses or produces.Step B: Identify actual and potential impacts, risks and opportunities; Step C: Assess and determine significant impacts, risks and opportunitiesIdentifying and assessing the impact of the value chain is challenging for companies. Companies should collect reliable data from value chain participants. If reliable data cannot be collected after making reasonable efforts, they may use secondary data as appropriate. Secondary data includes public reports and research, data from local or national official agencies, newspaper articles, databases, etc. Companies can use secondary data to estimate significant impacts, risks and opportunities. Assessment of the importance of environmental dimensions: When companies conduct importance assessments on environmental dimensions, they can introduce the “life cycle” concept to conduct product life cycle assessments. The Value Chain Implementation Guide provides the following two feasible paths:   (a) Companies may consider using an environmental footprint approach to measure and communicate the life cycle environmental performance of their products; (b) Companies may rely on primary, secondary or simulated data collection or other relevant approaches to assess significant impacts, dependencies, risks and opportunities.   4. Disclosure of value chain information involved in the materiality assessment process From a disclosure perspective, companies need to disclose the materiality assessment process and materiality assessment results. The Guidelines also require companies to disclose the extent and scope of coverage of the upstream and downstream value chains as the basis for preparing sustainable development reports.   Disclose the links between market position, strategy, business model and value chainTo help companies understand where significant impacts, risks and opportunities may occur in the value chain, companies should describe the value chain as follows:(a) The main characteristics of the company's upstream and downstream value chains; (b) The company's position in the value chain; (c) A description of the relationship between the main business participants and the company, including suppliers, distributors, consumers and end customers. The specific situation of the company's value chain is reflected by judging the key participants, taking into account the impact and financial importance.Companies should use sustainability due diligence processes to assess impacts along their value chain wherever possible and identify potential “tipping points” by cross-referencing material origins with social and environmental risk databases. Disclosure of value chain considerations in materiality assessmentThe company should describe the materiality assessment process that includes the value chain, as well as the information provided by due diligence, outlining the company's process for identifying, evaluating, prioritizing and monitoring risks and opportunities that may have financial impacts through its own operations or business relationships. The disclosure can be structured as follows:(a) Types of value chain relationships considered in the materiality assessment; (b) Methodology used by the company; (c) Sustainability issues identified.For significant impacts, the company should focus on areas where impacts may occur or are potential, reflecting areas where negative impacts are already severe or may be severe; for risks and opportunities, the materiality assessment process should consider other factors in the value chain that can generate risks and opportunities, including dependence on natural and social resources.During the materiality assessment process, the company should first determine the key sustainability issues for different types of business relationships and value chain links; secondly, identify areas with higher risks of adverse impacts and rank the key sustainability issues based on stakeholder involvement and the severity of the impact. Disclosure of materiality assessment method and its assumptionsThe company should provide information on the methods and assumptions used in the materiality assessment, taking into account the value chain, including the thresholds for determining materiality, and describe the limitations of the materiality assessment procedure with respect to the value chain. Disclosure of the results of the materiality assessmentWhen a company provides information on significant impacts, risks and opportunities or policies, actions or targets, it should focus on disclosing the following:(a) The areas in which significant impacts, risks and opportunities are concentrated in the company’s business model, its own operations and its upstream and downstream value chains;(b) describe the company's involvement in the activities or business relationships and determine whether its activities or business relationships involve significant influence;(c) the current and expected impacts of material influences, risks and opportunities on its business model, value chain, strategy and decision-making, how the company expects to respond to those impacts, and the changes it has made to address them;(d) When key points of strategic and material impact on the value chain are identified, the Guidelines require disclosure of discussions of the company’s management or governance bodies on those impacts;(e) the information disclosed should be consistent with the information taken into account in the materiality assessment along the value chain;(f) The information disclosed should enable people to understand the company’s significant impacts on itself and the external environment, risks and opportunities, as well as the potential impact on the company’s future.At the same time, quantitative information can serve as a useful supplement to qualitative information. Companies disclosing quantitative information can help stakeholders understand the severity of the impact and track the effectiveness of subsequent management actions. 5. Disclosure of policies, actions or targets including value chain information Companies should disclose information related to value chain participants when they have an influence on the formulation of policies, actions or targets. For example:   (a) Policies developed by value chain participants to prevent and control pollution; (b) the company’s anti-bribery and anti-corruption policies and training for value chain participants; (c) the company’s actions and resource commitments related to pollution and its targets to reduce pollution generated by suppliers; (d) clauses in the company’s contracts with value chain participants on respect for fundamental human rights; (e) the company’s audits of high-risk suppliers; (f) the company’s selection criteria for new suppliers, such as the existence of an effective grievance mechanism or measures to protect human rights and freedoms; and (g) the suppliers’ own targets for sustainable material use.   To comply, companies can disclose why they have not yet developed targets, policies and actions related to sustainability matters, and can report when they expect to develop such policies and take actions. In addition, ESRS4 Biodiversity and Ecosystems contains specific requirements for corporate value chain information disclosure:   (a) Set transition plans and targets for biodiversity and ecosystems in corporate strategies and business models; (b) Disclose the process for identifying and assessing significant biodiversity and ecosystem-related impacts, risks, dependencies and opportunities, and setting targets related to biodiversity and ecosystems.   6. Disclosure of indicators including value chain information Companies not only need to disclose indicators covering their own business, but also need to measure and determine whether to disclose indicators related to the value chain. The ESRS lists the following indicators that need to disclose information related to the value chain:   (a) Scope 1, 2, 3 and total GHG emissions; (b) Support for GHG removal and GHG mitigation projects through the purchase of carbon credits ; (c) When companies disclose the materials used in the production of products and services, it is generally only related to their own operations, but they also need to determine whether to provide additional value chain information on an entity-specific basis; (d) Companies should describe the use of resources in the upstream value chain. Although specific value chain information indicators are not specified, the impact of the upstream value chain is covered by the company's procurement information.   Note: Companies may also disclose their land use based on a life cycle assessment if they have determined that they have significant impacts on land use, or on the extent and condition of surrounding ecosystems. The Guidelines provide additional special instructions on the social dimension: employees, consumers and end users are all included in the value chain; at the same time, community impact includes not only the social impact caused by the company, but also the impact caused by value chain participants. Based on the results of the materiality assessment, the company should determine whether it needs to provide additional value chain information indicators from its own perspective or integrate value chain data into its indicators so that stakeholders can understand the impact of the company's actions or track the effectiveness of the company's initiatives. For example:   (a) When companies are involved in upstream value chain activities that have a greater dependence on and impact on the environment, reporting indicators should include supplier impact data; (b) the proportion of workers covered by social security programs in high-risk industry value chains; (c) the percentage reduction in health and safety accidents compared to the previous period.   7. Conclusion The "Value Chain Implementation Guidelines" are of great significance to understanding the CSRD and ESRS frameworks, and provide companies with a complete set of systematic methods to understand and report on their sustainability performance in the value chain. The release of the "Value Chain Implementation Guidelines" will not only help improve the transparency and consistency of corporate sustainable development information disclosure, but also guide companies to better manage their sustainable development factors in the value chain; companies can use this to more comprehensively understand the impact of their operations and upstream and downstream value chains on ESG factors, and formulate more effective sustainable development strategies, goals and action plans, thereby promoting green and low-carbon transformation and the realization of sustainable development goals.

On May 31, 2024, the European Financial Reporting Advisory Group (EFRAG) published the first implementation guidelines to assist in the application of the EU Sustainability Reporting Standards (ESRS), providing guidance for the disclosure of sustainable development information required by the Corporate Sustainability Reporting Directive (CSRD).   This article aims to enhance companies' understanding of the dual materiality concept and the application of the materiality assessment process through an in-depth interpretation of the first of the first batch of implementation guidelines, the Materiality Assessment Implementation Guidance (MAIG), so as to improve their cognition and practical ability on sustainable issues.   The meaning and explanation of dual importance   01The meaning of dual importance Double Materiality (also translated as double materiality) includes impact materiality and financial materiality.   Impact significance refers to the actual or potential, positive or negative, significant impact of sustainability issues on people and the environment in the short, medium or long term, covering the company's own operations and the upstream and downstream value chains (generated through products and services or business relationships);   Financial materiality refers to the actual or expected significant financial impact of the risks and opportunities brought about by sustainability issues on the company, including significant impact on the company's development, financial status, financial performance, cash flow, financing availability, capital cost, etc. in the short/medium/long term.   02 Development of dual importance The concept of dual materiality was first proposed by the European Union in 2017 in the Guidelines on non-financial reporting: Supplement on reporting climate-related information, which requires companies to disclose information related to sustainable development that affects financial performance, as well as information on the impact of corporate production and operations on people and the environment. ESRS follows the principle of dual materiality in this guideline and proposes more detailed and standardized information disclosure requirements for important ESG issues. In addition, ESRS also requires companies to verify the ESG information they disclose and be responsible for the authenticity of the content.   As an application guide for ESRS, the "Guide to Implementation of Materiality Assessment" explains the operation methods and practical cases of dual materiality in more detail, which helps companies better understand the connotation of dual materiality in ESRS. For ESG issues that are confirmed to be of dual materiality after assessment, companies need to further disclose the impacts, risks and opportunities (IROs, hereinafter referred to as "IROs") brought about by the issue, which is also the key content of the EU sustainability statement.   03 Explanation of “Importance” Impact materiality and financial materiality are closely related and interdependent. Risks or opportunities may arise from a company's strategic changes, investments, and management decisions on its impact on people and the environment. Important risks and opportunities often arise from the company's external impacts and its dependence on nature, human resources, etc. (for example, a law firm may lose employees due to higher salaries offered by local peers under the same circumstances, resulting in a decrease in the firm's income), and most important impacts will generate important risks or opportunities over time (for example, an oil and gas company may fail to reach an agreement with local residents on land extraction and use and resident relocation, causing local residents to launch protests and stop extraction production, resulting in actual economic losses due to delayed delivery or abandoned extraction projects).   In addition, if an enterprise omits, misreports or conceals information on risks or opportunities in its sustainable development report and affects the decision-making behavior of users of financial reports, then these risks and opportunities will be considered financially material. The sources of financially material risks or opportunities are not limited to the parent and subsidiary companies within the scope of the enterprise's consolidated financial statements, but extend to related companies in the entire upstream and downstream value chain, including suppliers, customers and partners.   Figure 1 Important sources of risks and opportunities   The time frame covered by financial materiality often exceeds the time frame defined by a company's single financial reporting cycle and management's explanation. When evaluating the financial materiality of an ESG topic, companies should consider the cumulative changes that may occur in financial effects such as revenue and costs over a longer period of time. Similarly, the probability of occurrence of risks or opportunities related to these topics may also change cumulatively over time. Companies' assessments of financial materiality should not be limited to the scope of traditional financial accounting indicators, but should expand their focus to financial impacts related to reliance on natural and social resources, which are often not fully reflected in current accounting recognition standards. Companies' proactive consideration of such financial impacts will help to more comprehensively assess financial materiality.   Materiality Assessment Process The "Guidelines for the Implementation of Materiality Assessment" provides a basic step reference for the materiality assessment process (see Figure 2). Enterprises can make adjustments based on actual conditions to compensate for differences in the industry, country, organizational structure, business operations, and upstream and downstream value chains in which the enterprise is located. Enterprises should establish materiality assessment standards and materiality comparison thresholds that are in line with their own characteristics.   Figure 2 Example of materiality assessment process   The materiality assessment process consists of four steps:   Step A: Understand the background information of the company and its main stakeholders Corporate background information includes corporate economic activities, products/services, and geographic locations where business is conducted. Analyzing corporate business plans, strategies, financial statements, and other information provided to investors, as well as upstream and downstream value chains, types and attributes of business relationships can help companies understand IROs; understanding corporate-specific IROs can be obtained by analyzing corporate-related laws and regulations, regulatory background, and sources of public information such as media, peer analysis, current industry benchmarks, and scientific research reports.   The main stakeholders of an enterprise refer to the entities affected by the business development and upstream and downstream value chains of the enterprise. The situation and demands of the main stakeholders are understood by analyzing the existing stakeholder communication mechanisms (such as dialogue, investor relations, business management, sales and procurement), and the stakeholders are sorted out in accordance with the business activities/relationships, products or services of the enterprise (the corresponding relationship of stakeholders in step A may need to be revised after step B).   Step B: Identify current/potential IROs related to ESG factors   Figure 3 ESRS 1 Appendix A AR 16 List   ESRS 1 Appendix A AR 16 list clearly divides the three-level classification of ESG topics (Topic/Sub-topic/Sub-sub-topics). Enterprises can refer to this list to sort out ESG factors to ensure that there are no omissions. At the same time, they should also consider enterprise-specific ESG factors other than the appendix list. At present, the EU has not yet issued industry ESRS standards, so industry-specific ESG factors can be disclosed according to enterprise-specific ESG factors. Enterprises can use other disclosure frameworks and standards to identify their own unique ESG factors, such as IFRS "International Financial Reporting Standard S2-Climate-related Disclosures" Industry Implementation Guide, GRI "Sustainability Reporting Standards-Industry Standards" , etc. In addition, enterprises can also refer to the "ESRS Data Point List" issued by the European Financial Reporting Advisory Group (EFRAG) to identify ESG factors and important IROs in more detail, although the purpose of the list is to provide data structure support for the digital management of sustainable development reports, rather than for corporate ESG information collection and verification.   Implement the identification methods recommended by the guidelines   Method 1: Companies can first sort out and identify potential ESG factors according to the ESRS 1 Appendix A AR 16 list, and then supplement the company's unique ESG factors according to internal processes (such as due diligence, risk management, and complaint mechanisms) or external processes (such as stakeholder communication and the methods mentioned in step A) to improve them, and finally form a list of corporate ESG factors.   Method 2: Enterprises can directly establish a list of IROs related to their own business model and upstream and downstream value chains in accordance with the reporting process of the GRI Sustainability Reporting Standards and their own internal processes (such as due diligence and risk management), and then check and integrate the three-level ESG themes in the ESRS 1 Appendix A AR 16 list to avoid omissions, and finally form a list of corporate ESG factors. In addition, it is recommended that enterprises refer to the ESRS Data Point List to assist in identifying ESG factors, especially enterprises that disclose sustainability reports for the first time.   Step C: Evaluate and identify significant IROs related to ESG factors   The materiality assessment process starts with the impact of the enterprise on people and the environment, assessing whether these impacts pose risks or opportunities to the enterprise, and then assessing the risks and opportunities caused by the enterprise's resource dependence (for example, the enterprise relies on people and natural resources to conduct its business but the enterprise has no impact on them).   When conducting assessments, companies need to consider the correlation between impact materiality and financial materiality and carry out appropriate and reasonable assessment processes. For example, whether impact materiality assessment and financial materiality assessment should be divided into two independent processes, in principle, it is recommended to integrate the two processes to avoid missing important IROs. The ESRS ESG Theme Standard (i.e., ESRS 1 Appendix A AR 16 Checklist) can provide companies with directions and angles for identifying ESG factors (see Figure 4).   Figure 4 Dual importance assessment   Implement the assessment methods recommended by the guideline   1) Assess the importance of impact The impacts of corporate ESG factors are divided into positive/negative, currently occurring/likely to occur, and the "materiality" judgment value applicable to the company is determined according to the type of impact (see Figure 5). If the severity of a certain impact has a recognized scientific basis, the company can determine that the impact is "material" without further analysis. Communication with stakeholders who are mainly affected can help companies understand the transmission path of the impact, assess the severity of the impact and the possibility of occurrence. Internal communication between companies and functional departments and employees, and communication with report users and relevant experts can help evaluate , verify and ensure the integrity of the materiality assessment results. The "Guidelines for the Implementation of Materiality Assessment" provides a schematic diagram of the judgment process for determining the materiality of impacts for reference by companies (see Figure 5).   Figure 5: Assessment of impact importance   Figure 6 Judging whether the impact is significant   The severity of the negative impact requires the determination of three factors: level, scope, and whether it is remediable. Level refers to the severity of the impact, such as the degree of infringement on the acquisition of basic necessities of life, the degree of infringement on the freedom of education and the freedom to make a living; scope refers to the affected area, such as the number of people affected and the degree of environmental damage; whether the impact is remediable, such as whether the affected people can regain their rights through return or compensation, or whether the ability to repair the environment is limited and cannot be restored to the time before the impact occurred. Any factor may cause the impact to become serious, and the three factors interact with each other. Whether it is remediable will increase the severity as the level of the impact increases. Conversely, the increase in the level of the impact or the expansion of the scope will make it difficult to remedy. Enterprises can use due diligence procedures or risk management procedures to obtain materiality thresholds, analyze the severity of negative impacts and risk priorities, and determine which impacts are important. Enterprises should give priority to supporting evidence that can draw more objective conclusions and set materiality thresholds based on these evidences.   2) Assessing financial materiality   Significant opportunities and risks are usually generated by impacts, dependencies and other factors (such as climate risk exposure and regulatory changes to address systemic risks). Assessing whether opportunities and risks are significant requires the use of reasonable quantitative or qualitative thresholds (such as financial status, financial performance, cash flow, financing availability, capital costs and other financial impacts). The full text of ESRS discusses risks and opportunities as a whole combination when explaining the reporting disclosure requirements. However, it is worth noting that in certain specific situations, ESG factors only trigger a single aspect of risk or opportunity, rather than necessarily both at the same time.   Figure 7 Assessing financial materiality   When evaluating the opportunities and risks brought by ESG factors, companies need to consider the possibility of opportunities and risks, and the possible financial impact in the short, medium and long term. Companies need to establish objective thresholds for possibility, financial impact and the nature of financial impact, and then judge the possible important opportunities and risks identified in step B one by one; they also need to evaluate whether the impact of ESG factors identified in step B has produced important financial impacts; if the risk management established within the company covers sustainable development risks, the possibility of opportunities and risks and the corresponding financial impact can be further evaluated. Communication with functional departments within the company, corporate investors, and other financial partners (such as banks) can help evaluate, verify, and ensure the integrity of the materiality assessment results.   Enterprises can set an absolute or relative value of the monetary limit (such as the percentage change of a certain indicator in the financial report, such as the income, cost, total assets or net assets), which is close to the importance threshold used to evaluate a certain indicator when preparing financial reports. If an ESG factor is financially important but the financial impact it causes cannot be accurately measured when the report is issued, the enterprise can refer more to qualitative factors and factors of the probability of occurrence to determine the importance threshold. In addition, the qualitative assessment of the importance threshold also includes the following situations: Enterprises may have reputation risks that investors are concerned about because they are engaged in multiple industries or have unique business models. Although the financial impact on cash flow cannot be quantified, reputation risks will cause changes in financing costs and financing methods, which will also be deemed to be financially important.   3) Integrate the evaluation results   The company integrates the results of the assessment process from step A to step C to form a list of important IROs to prepare for the disclosure of the sustainable development report. Analyze the important three-level (theme-sub-theme-sub-theme) ESG issues to ensure that they are all converted into IROs. The individual impacts, risks, and opportunities assessed by the company based on appropriate materiality thresholds and methods need to be appropriately integrated in accordance with the relevant requirements for report disclosure, and the results of the integration must be confirmed with the company's management, in order to fully reflect the company's important IROs.   Step D: Disclose the evaluation process and results of important IROs in accordance with ESRS requirements   ESRS 2 is the disclosure requirement for the EU CSRD sustainable development report, which is divided into the following four parts: basis for report preparation, governance, strategy, and management of impacts, risks and opportunities (see Figure 8).   Figure 8 ESRS 2 content   Among them, there are three disclosure requirements involving dual importance (the bold part in Figure 8), namely, the disclosure of the identification process and evaluation process of important IROs (IRO-1), the relationship between important IROs and corporate strategy and business model (SBM-3), and the explanation of the disclosure of important IROs, including the selection criteria and the importance assessment threshold (IRO-2). ESRS requires companies to disclose the importance assessment method used, the assumptions adopted, the focus and original information of the assessment process, as well as the judgment methods of quantitative/qualitative thresholds, reference standards, etc. ESRS 1 Appendix D provides the ESRS sustainable development reporting framework, while Appendix F provides specific cases for companies to understand how to disclose (see Figure 9).   Figure 9 ESRS 1 Appendix F   Other key points of the Implementation Guide   In addition to explaining how the EU ESRS defines importance, how the importance assessment process is carried out, and how to use other standards and frameworks, the "Guidelines for the Implementation of Importance Assessment" also answers common questions that companies may ask. In addition, the EFRAG website has set up a special ESRS Q&A platform to help collect and answer technical questions raised by stakeholders that have not yet been answered. On July 25, the EFRAG website published the latest version of the explanation of technical issues, and currently has a total of 93 explanations. Other key points raised in the frequently asked questions of the "Implementation Guidelines" are summarized as follows:   01Impact Importance Points [Impacts caused by related activities and business relationships] The related activities of enterprises have an impact on stakeholders. "Related activities" include various forms. The impact caused by the operation and products/services of the enterprise should be the sole responsibility of the enterprise, such as employees working in a dangerous environment without safety measures; the impact caused by the participation of the enterprise, the enterprise's single action and no longer participating cannot reduce the impact, such as multiple factories polluting the local air environment, but the harmful gas emissions of a single factory are all below the harmful limit; the impact caused by the business relationship of the enterprise, the business relationship is not limited to contractual relationships and partners, but also includes the entire upstream and downstream value chain of first-tier suppliers and beyond, such as suppliers outsourcing the embroidery process of textiles to child labor. The negative impact caused by the business relationship of the enterprise is not necessarily "unimportant", but depends on the severity of the impact.   [Impacts cannot be offset by positive or negative impacts] ① Positive and negative impacts cannot be offset and need to be evaluated separately. They cannot be integrated due to the different nature and types of impacts; ② The time ranges corresponding to the impacts are different (for example, in the case of the same type of nature, the actual negative impacts of the current period cannot be offset by the positive impacts of the next few years), and the impacts of their own operations and the impacts of the upstream and downstream value chains cannot be offset; ③ Compensation/offsetting and netting are different concepts, but compensation/offsetting is not included in the impact significance assessment. There are some specific requirements for compensation/offsetting in the thematic ESRS. Please refer to the specific requirements of "ESRS E1 Climate Change" and "ESRS E4 Biodiversity and Ecosystems" for the disclosure of carbon credits and biodiversity credits for important topics.   02 Key points of financial importance [Comparison of similarities and differences between financial materiality and financial reporting materiality] The materiality information in financial reports is different from the financial materiality information in sustainability reports, but the goal of information disclosure is the same. Decision makers who provide or may provide resources to the company in the future determine whether the information is financially material. The scope of financial materiality in sustainability reports is to further expand the scope of "material information" in corporate financial reports. The "European Union Sustainability Reporting Standards (ESRS)" and the "Financial Reporting Standards" have no difference in the concept of "materiality", but the definition of "materiality" information in the standards is different, and the threshold of financial materiality can refer to the recognition standards of accounting elements such as assets and income in financial reports.   Figure 10 Comparison of disclosures in financial reports and sustainable development reports   [Financial materiality is more proactive] Risks and opportunities that have not yet been identified as material in the financial report may be evaluated as material and displayed in the sustainable development report. This is because the recognition of resources/opportunities and risks is earlier than the recognition of assets and liabilities in the financial report.   [Risk Information] Potential future events may lead to the disclosure of expected risks and opportunities in the current sustainable development report, but financial reports generally only record risks that have occurred in the past period. Therefore, prospective information (such as expected financial impact) may be disclosed as important information in the sustainable development report.   [Relationship between financial materiality and financial impact in financial reports] The financial materiality (financial impact) of a sustainability report is not limited to the content disclosed in the financial report. According to the definition of financial impact in Annex 2 of the European Sustainability Reporting Standards (ESRS), it is divided into short-term financial impact (specified and confirmed in the financial report) and expected financial impact (not meeting the confirmation criteria and not included in the current financial report). The financial impact of certain ESG factors in the sustainability report has exceeded the information required to be confirmed and measured in the financial report and the notes to the financial statements.   03Other points [Continuity of materiality assessment] The Corporate Sustainability Reporting Directive (CSRD) requires companies to publish sustainability reports every year. Companies can continue to use previous materiality assessment conclusions if they determine that there are no major organizational and operational changes and no changes in external factors (external factor changes refer to the generation of new or revised old IROs or the impact on certain disclosed information). Major changes include mergers and acquisitions, business/industry changes, major changes in the supply chain, the establishment of major new business relationships, the opening/closing of business lines or business areas, and changes in the definition of severity.   【Materiality Assessment and Information Integration of Group Companies】 ① If the group (parent company) is the disclosing party, it can adopt two methods or a combination of the two methods to conduct the materiality assessment process, from top to bottom ( assessment at the group level , communication with subsidiaries to obtain useful information) and from bottom to top (assessment at the subsidiary level, and aggregation of assessment results at the group level), and reasonably set the materiality threshold of IROs on a cross-industry/business basis to ensure the consistency of the methods used. ② If the group (parent company) is the disclosing party, it can appropriately integrate information based on relevant facts and circumstances on the premise that the content of important IROs is not confused. Enterprises should use separate integration standards for all IROs to reflect important information truthfully, fairly and accurately. For example, if the important IROs of different business regions/assets have a strong correlation with the business region/asset, enterprises should not integrate according to a higher-level integration dimension such as country to prevent enterprises from concealing important information or misleading report users in their judgment of materiality.   [Application order of important IROs] If an enterprise identifies a large number of IROs, it can prioritize them from the perspective of corporate management. From the perspective of report disclosure, the enterprise needs to disclose all important IROs, especially if the enterprise has not yet established a sound system, goals, and action plans to deal with these IROs.   [Data retention and subsequent application] The Corporate Sustainability Reporting Directive (CSRD) requires companies to conduct sustainability report attestation. Companies should retain information on the materiality assessment process of IROs to facilitate inquiries and use by attestation agencies and internal corporate management.   Comparison of relevant standards on ESG information disclosure   From the perspective of standards and criteria for ESG information disclosure, the dual materiality principle has been clearly adopted in the EU and my country (including Hong Kong). In contrast, the United States has not yet issued official sustainable development reporting standards. Its exchanges encourage flexibility in corporate assessments in terms of sustainable development reporting and allow companies to voluntarily disclose ESG information they deem important. The U.S. Securities and Exchange Commission (SEC) has always emphasized the disclosure of "important" information that investors are concerned about from a financial perspective in order to protect the rights and interests of investors. It only involves a small amount of ESG content. For example, the "Rules for Strengthening and Regulating Disclosure of Climate-Related Information to Investors" issued in March 2024 clearly stated the content that listed companies should disclose on climate change issues, which is a milestone.   Figure 11 Comparison of materiality principles adopted by multiple ESG information disclosure standards   summary At present, although my country's three major exchanges and the Ministry of Finance have proposed the use of the "dual materiality" principle in the disclosure of sustainable development information, detailed operational rules have not yet been issued. The "Guidelines for the Implementation of Materiality Assessment" can provide valuable reference and guidance for Chinese companies in implementing this principle, helping them to better understand and apply it.   The "Corporate Sustainable Disclosure Standards - Basic Standards (Draft for Comments)" issued by my country's Ministry of Finance mentioned that the complete "Corporate Sustainable Disclosure Standards" will consist of basic standards, specific standards and application guidelines. Among them, the specific standards are similar to the "EU Sustainability Reporting Standards (ESRS)", which will include information disclosure requirements for sustainable topics in the environment, society and governance of enterprises; unlike the EU, industry information disclosure requirements will serve as the industry application guidelines of the Ministry of Finance, and the standard application guidelines are similar to the three "Implementation Guidelines" issued by EFRAG, which will explain, refine and provide examples for the basic standards and specific standards, and make operational provisions for key and difficult issues. In response to problems encountered by enterprises in the implementation of sustainable disclosure standards, the Ministry of Finance will provide Q&A on the implementation of the standards when necessary, and it is expected to jointly provide guidance for the release of sustainable development reports by listed companies on the three major exchanges.   The disclosure requirements of the EU ESRS standard and the first batch of EFRAG implementation guidelines are more detailed and practical than the Non-Financial Reporting Directive (NFRD), providing a normative reference for EU companies to use dual materiality as the ESG information disclosure principle, laying a solid foundation for the implementation of CSRD. At the same time, the implementation guidelines also provide ideas for ESG supervision and information disclosure in other countries and regions, and provide an effective reference for companies to optimize ESG management.

  Recently, the South China Morning Post (SCMP) in Hong Kong published an interview with Professor Mao Zhenhua in the "Open Issues" column with two full pages, recording Professor Mao Zhenhua's judgment and suggestions on the current Chinese and Hong Kong economy. Founded in 1903, the South China Morning Post is not only the best-selling newspaper in Hong Kong, but also one of the most credible and influential media in Asia. The following is a translation of the English interview.       ◎The following is translated from the original English text:   The era of big real estate developers is over Mao Zhenhua is the founder of China Chengxin Group and co-director of the Institute of Economics at Renmin University of China. A scholar and commentator on the Chinese economy, he has been a professor at the School of Business and Economics of the University of Hong Kong since 2022 and was one of the first to warn of potential pressures on Chinese property prices. In this episode of the "Open Questions" series of interviews, Mao Zhenhua analyzes China's struggling real estate industry, reflects on tensions between China and the United States, interprets the highly anticipated Third Plenum of the Communist Party of China, and explores Hong Kong's changing role in the broader economic evolution.   SCMP: China's real estate market is in crisis after a series of defaults by developer Evergrande in 2021. You noted the potential consequences of Evergrande's liquidity problems a decade ago. How do you now assess the impact of the real estate downturn on the Chinese economy?   Mao: Real estate has become one of the biggest issues affecting China's economic operation. China's real estate was once the focus of investment for the whole society. As real estate prices continued to rise, the unique concept of "only if you have a house can you have a home" has become more deeply rooted in people's minds.   Under such circumstances, owning or buying a house has become the "standard" for middle-class families, and even those families who do not have high income capacity are buying houses by leveraging. In a short period of time around 2017, housing prices were pushed to a new high, which was a sign that the bubble was about to burst.   I noticed that Evergrande started to promote sales by offering 20% discounts as early as 2016. It is generally believed that this is only a case of Evergrande, as the private developer faces liquidity problems due to heavy debts and lack of bank loan support.   However, I think this phenomenon is not an isolated case, but rather a universal phenomenon, which indicates a sales problem for the entire industry: housing prices have peaked and will begin to decline. I was also the first in China to raise the alarm that attention should be paid to the downward trend in Chinese real estate prices. I also called on our regulators to conduct more stress tests, including stress tests on the total debt-paying capacity of China's real estate industry and stress tests on the risk exposure that the financial system will face.   Given that the stress test at the time was not sufficient, I think Evergrande’s problems could have quickly spread to other real estate companies, and the policy was not adjusted until about a year later, when many real estate companies were truly on the verge of bankruptcy.   In 2021, I argued that China, like many other parts of the world, no longer needs so many large real estate companies. The oversupply in China's real estate industry will have two far-reaching effects: first, the real estate industry, as a "pillar industry", will not recover, but will gradually decline. For example, in European countries, especially those with slowing population growth, there are almost no large real estate developers in the market because there is already enough inventory; second, the downward trend in real estate prices may lead to other major economic problems, such as the contraction of the household sector's balance sheet.   SCMP: The Chinese government has taken a number of measures to stabilize the situation, including several strong measures announced on May 17. These measures include lowering the minimum mortgage rate and instructing local governments to buy unsold apartments and convert them into social housing. Do you think these responses are working?   Mao: The introduction of these policies has promoted the recovery of transaction volume, but has not completely reversed the trend of falling housing prices. Therefore, these measures have not achieved the expected results.   My suggestion is to limit supply, such as freezing new land supply and new real estate projects. These measures will send a clear signal of "limited supply" to the market, which will help stabilize housing prices. Otherwise, continuing to expand supply will only aggravate the problem rather than alleviate it. Of course, the projects that have already started construction are an exception, because home buyers have already paid the down payment, and the work of "guaranteeing delivery of the house" must be completed.   Real estate investment has declined in recent years, but the scale of real estate development investment and the newly built area of commercial housing are still large. They are much smaller than the peak periods in 2019 and 2020, but still higher than in 2015 and 2016.   As of the end of May this year, the area of commercial housing for sale in China exceeded 743 million square meters, an increase of 15.8% over the same period last year and an increase of 5 million square meters over 2016. I think there is still a long way to go for China's real estate industry to destock. The scale of land acquired by Chinese real estate developers is an astronomical figure. If all the land is used for real estate development as planned, the task of destocking the real estate market will be difficult to complete.   We must abandon the idea that "real estate must be the mainstay of the economy". It will take a long time to digest the current stock of housing. It can be said that the era of large real estate companies is over. Although we will still see some cities upgraded or renovated, the era of large-scale construction is over.   SCMP: How do you evaluate the impact of these phenomena on Chinese families? What do you think of the current level of consumer demand?   Mao: The debt problem of China's household sector is becoming increasingly prominent. In 2007, before the global financial crisis, the ratio of China's household sector debt to GDP, or the household leverage ratio, was about 18.9%. By the end of last year, the household leverage ratio had climbed to 69.3%.   The new debt of the household sector is mainly used to purchase real estate, but as real estate prices fall, the household debt situation has greatly worsened. A 30% or 40% drop in house prices means that home buyers have almost lost their down payment, which is a huge loss and pressure for the middle class. The shrinkage of real estate assets has also affected residents' consumption, thus placing a great constraint on the economy.   The value of real estate assets declines, but the liabilities are rigid, and the mortgage repayments will not decrease accordingly, which results in a deterioration of the balance sheet. The shrinkage of residents' wealth will trigger some psychological changes. For example, consumers will feel that they hold less money and have greater spending pressure, and will need more savings to cope with debt pressure. And when everyone is reducing consumption, insufficient consumption will bring significant constraints to economic operations.   Insufficient consumption is a long-term problem for the Chinese economy. During the period of rapid economic growth, economic growth was not mainly dependent on the domestic consumer market. Of course, domestic income growth also drove economic growth, but the main driving force for growth still came from globalization and international markets. Among the so-called "troika" of growth engines, namely exports, investment and consumption, exports have been the first driving force of China's economic growth for many years. However, with the outbreak of the global financial crisis in 2008, overseas demand shrank, and trade protectionism in many countries rose, and China turned its focus to domestic demand.   But we soon discovered that boosting domestic demand was difficult. Economists don't talk about desire, but rather demand with the ability to pay. When China's GDP grew at a rate of more than 8% or even 10%, residents' income did not keep up with the pace of economic growth. With the current slowdown in overall growth, residents' consumption capacity will be further constrained.   From 2000 to 2022, Chinese households’ final consumption accounted for only about 38% of GDP, lower than the world average of 57.6%. In contrast, the final consumption rate of American households is about 67.5%. The reason is that the proportion of Chinese residents’ income in the national income has been low for a long time. With the decline in asset prices and the contraction of household balance sheets, there have been some problems of consumption downgrade and sinking in economic operation.   SCMP: In order to reduce dependence on exports, the focus of economic transformation has shifted to domestic demand. How do you think China should promote this process?   Mao: It is both easy and difficult to answer this question. China has always had a tradition of attaching importance to savings and wealth accumulation and despising consumption. In recent years, China has made great progress in basic education and medical care, which has brought certain favorable conditions for increasing consumption. But the problem is that the current economic downturn has reduced people's income levels and income expectations. The income of public institution employees, including civil servants, teachers and hospital staff, has begun to decline, and many other industries have also seen layoffs. The reduction in job opportunities has put tremendous pressure on people's income expectations. More importantly, during the impact of the epidemic, many people were out of work for several months, and the income gap formed during this period has not yet been filled.   I have been calling for economic “stimulus” to be provided to those hit by the pandemic in the form of consumption subsidies or cash handouts since 2020, and have since gone further, suggesting that residents should be provided with RMB 10 trillion (US$ 1.4 trillion ) in cash subsidies.   On paper, this is a very large number, accounting for about 8% of GDP, and it also exceeds the red line of 3% of GDP as a fiscal deficit. But in fact, a subsidy of 10 trillion yuan is not an unattainable number. This is equivalent to a subsidy of 7,000 yuan per person, which is about 1,000 US dollars. We know that the United States has distributed thousands of dollars to its residents during the epidemic, and Hong Kong has also distributed the same amount of cash to its residents.   So how do we raise funds for cash subsidies? I think fiscal deficit is one way, but there are other ways. For example, China has a large number of state-owned enterprises, which generate about 4.6 trillion yuan in profits each year. These profits can be transferred to residents through local governments, and half of the problem is solved. If the scale of 10 trillion yuan is impossible, then 4.6 trillion yuan in subsidies is not a small amount.   I think that the current efficiency of using fiscal funds for infrastructure construction is very low, while the benefits and efficiency of directly distributing them to residents are very high, and the impact on enterprises will be better, because only when terminal consumption rebounds can enterprises achieve sales and profits. Therefore, if public funds can be used more to support consumption and increase demand, I support it; but if public funds are used more in inefficient departments and fields, I oppose it.   According to statistics, the role of state-owned enterprises in innovation is still lacking, and market innovation mainly comes from large companies and private enterprises. For example, most advanced defense technologies are based on the technological development of private enterprises, and the situation in the United States is similar. If we do not have a market-oriented environment, private enterprises such as drone manufacturer DJI will not succeed.   So, what is the current outlook for China's startups? The number of new unicorns (startups valued at $1 billion or more) in China has declined in the past few years. China's entrepreneurial environment is facing tremendous pressure. Venture capital mainly relies on industry funds established by the government, while private investment has decreased. At the same time, some policies that are unfriendly to venture capital funds have also emerged, making it difficult for venture capital to exit and for startups to go public or raise funds.   This leaves startups with no choice but to seek investment from government funds, but government funds often require collateral, and startups lack existing assets. Investments by companies such as Xiaomi, Tencent and Alibaba (current owner of the South China Morning Post) in certain areas have promoted innovation, product development and the development of many startups, but these expanded investment activities have also triggered discussions about the "disorderly expansion" of capital. As a result, many large private enterprises are also facing public pressure in the investment field.   SCMP: As competition between China and the United States deepens, the global economy is expected to further diverge. How do you view these issues and how should China respond?   Mao: The most common question when I visited the United States in 2014 was "What on earth has happened in China?" For the United States, China has undergone tremendous changes since the reform and opening up, but these changes do not meet the original expectations of the United States. During another visit in 2017, I found that the United States is basically convinced that these changes are not in the interests of the United States. Since then, the Republicans and Democrats have reached a consensus to contain China, and this sentiment is very hostile. Therefore, in recent years, not only has the competition with China in the traditional economic field increased, but also the confrontation of ideology and values has emerged.   I believe that the great power game between China and the United States is irreversible. For China, after a period of ambiguity, it has also found its own development path very clearly. With the rise of economic and diplomatic strength, China has also formed a development path that is completely different from that of the United States.   The situation between China and the United States is turning into a long-term confrontation. I think our initial assessment of the Sino-US trade war in 2018 was inadequate. The United States has launched trade disputes against almost all of its trade opponents, including allies such as Canada, the European Union and South Korea, but the key point is that we need to pay attention to the difference between the trade war between the United States and its allies and the trade war with China. The trade war with allies is an adjustment of trade relations, while the trade war with China is an all-round competition or even containment.   I think the China-U.S. trade war is heading toward a "new Cold War," and decoupling is somewhere in between. Both sides believe that their values are irreconcilable with each other, so there must be winners and losers.   SCMP: Over the past year or so, there has been increasing concern in the West about China’s overcapacity. Do you agree with this view?   Mao: I think the United States is trying to weaken China's supply chain capabilities and resilience in the name of correcting the trade imbalance between the two countries.   First, trade imbalances are caused by different industrial structures. In other words, if the United States does not buy goods from China, it will have to buy them from other countries at higher prices. Therefore, in my opinion, the "capacity transfer" or "supply chain diversification" measures must be aimed at weakening China, not necessarily strengthening the United States, and the ultimate goal is to reshuffle the world's supply chain pattern.   Second, I think the US and its allies are trying to curb the development of China's advantageous industries, which happen to be China's "new three": photovoltaics, lithium-ion batteries and new energy vehicles. The overcapacity issues surrounding these industries have already attracted attention.   I was a little disappointed that (U.S. Treasury Secretary) Janet Yellen raised the issue of overcapacity as an economist, because economists know that a country's large exports usually exceed domestic demand. For example, crude oil exports from the Middle East are a form of overproduction, right? There is also overproduction of agricultural products in Australia, and the same is true for grain production in the United States. An exporting country must have overcapacity in its domestic production.   China has experienced several rounds of overcapacity and capacity adjustment, so this is a normal market phenomenon. Of course, we must also see some problems in China itself. During the period of economic growth downturn, our demand shrank faster than supply, while supply-side structural reforms, high-quality development and other policy efforts have driven the recovery of supply faster than demand. In particular, due to the reduction in investment opportunities, companies will strive to seize and seize market opportunities, which is one of the reasons why new energy has become an over-investment area in China.   China needs to take more resolute measures to absorb its own production capacity at home, because we may continue to face obstacles in the trade field under pressure from the United States. China should also further enhance its competitive advantages in key emerging industries. For example, if it can continue to achieve technological innovation in the field of new energy, relying on the current cost advantage, it can greatly reduce its dependence on traditional energy such as fossil fuels, which will also change the global energy landscape.   SCMP: As a newly appointed professor at the University of Hong Kong, how do you view the role that Hong Kong will play as China enters a period of economic transformation?   Mao: Hong Kong's role has changed from being Asia's financial center to being a super link between mainland China and the world. Now I think Hong Kong's future development is becoming clearer.   My own judgment is that in the context of Sino-US competition, Hong Kong cannot simply maintain its position as an international financial center. I think the biggest difference between Singapore and Hong Kong is that Hong Kong can provide financial services for mainland companies to enter the international market. Singapore cannot play this role in Southeast Asia because its economic relations with these countries are not as good as Hong Kong's relations with the mainland. But the problem now is that with the reduction of financial transactions between the mainland and the United States, Hong Kong has lost an important source of business, and the mainland's economy is in a period of transformation, which has also magnified the disadvantages of Hong Kong as a financial center.   However, these unfavorable factors have not brought about fundamental changes to Hong Kong's economic structure and common law system. Hong Kong remains the most international city in China and still has many advantages in areas such as certification, testing, and international arbitration, which are irreplaceable by other Chinese cities.   Education is an important area that Hong Kong can develop in addition to traditional industries. Hong Kong has the highest English proficiency in the country and can provide common law training. Hong Kong has five universities on the list of the world's top 100 universities. In fact, the income brought by the expansion of postgraduate enrollment in Hong Kong in the past two years is also considerable. The annual tuition fee for a student is about US$50,000, and their consumption activities in Hong Kong are also an important source of economic growth. Hong Kong should also recruit students from other countries, including developed countries and countries involved in the "Belt and Road Initiative".   Given the current situation of Sino-US confrontation, Chinese scientists and high-tech practitioners in the West may have the desire to leave the United States, but they have concerns about moving to the mainland. These concerns include children's education, international exchanges and wealth security. They are also worried about their investments, so they may choose to go to Hong Kong first. In addition to attracting these technical talents to Hong Kong's universities, it is also necessary to attract large technology companies from China and other parts of the world to Hong Kong.   Some technology companies in the mainland need to attract international talents, but many international employees may be unwilling to immigrate to the mainland. Hong Kong's low tax rate, coupled with the advantages of the common law system and a high degree of internationalization, can meet their needs for environment and life.   With the development plan of the Guangdong-Hong Kong-Macao Greater Bay Area (regional integration), Hong Kong and Shenzhen can complement each other in terms of technological development, so Hong Kong has the potential to build a technology industry. There is a large amount of idle land in the areas where Hong Kong and Shenzhen are connected, and the cost of using it may be lower than that of Shenzhen. Hong Kong can be at the forefront of China's technological development and play a leading role in the world.   Hong Kong is currently in a period of transformation, although it is a passive transformation. One of the short-term problems it encounters is its dependence on finance, but this also provides motivation and opportunities for Hong Kong to explore development in other areas. If the relationship between China and the West improves in the future, Hong Kong will continue to be an international financial center and has the potential to build itself into a technology center.   SCMP: On July 18, China concluded the Third Plenum, an important meeting of the CPC Central Committee held approximately every five years, which sets the direction for China's economic policies. What do you think of this meeting and its outcomes?   Mao: First, we need to understand the background of this meeting. This year's Third Plenary Session is a core meeting of the Chairman's third term, not an occasion for the new leader to announce groundbreaking ideas. Therefore, the central government will not make a huge policy shift, but will definitely make more comprehensive, specific and systematic arrangements for deepening reform and opening up. This was my judgment before the meeting, and the results also confirmed this.   Secondly, I would like to point out that the Decision adopted and issued by the Third Plenary Session of the 18th CPC Central Committee confirmed that China will continue to adhere to the socialist market economic system, give full play to the decisive role of the market in resource allocation, and equally protect all kinds of ownership economies. These contents have dispelled some doubts in the market and society and will have a positive impact on stabilizing expectations. At the same time, the Third Plenary Session of the 18th CPC Central Committee also clearly put forward the work priorities in the fields of national security, ideology and state-owned economy, which can provide a specific framework for future development.   Third, the Third Plenary Session provided guidance for reforms in important areas of China's economy, such as fiscal and taxation system reform. On the issue of the relationship between the central and local governments, the Decision put forward some new ideas, namely, appropriately expanding the "taxation" rights of local governments, including the central government will gradually transfer consumption tax to local governments, etc. Another important message is to vigorously develop science and technology and emphasize the importance of establishing a unified national market.   Overall, I believe that the Third Plenary Session of the 18th CPC Central Committee is crucial to the stability and recovery of China's economy. Continuing to comprehensively deepen reform and opening up will enhance the total factor productivity of China's economy and also help improve the medium- and long-term growth center of China's economy.

Group photo of the main guests of the forum (from the fourth left: Meng Yu, Chairman of the Hong Kong Chinese Finance Association; Xu Zhengyu, Secretary for Financial Services and the Treasury of Hong Kong; Mao Zhenhua, founder of China Credit Trust Group and chief economist of China Credit International; Cai Hongbin, Dean of the Faculty of Business and Economics of the University of Hong Kong; Chen Zhiwu, Director of the Hong Kong Institute of Humanities and Social Sciences of the University of Hong Kong; Ba Shusong, Chief Economist of the China Banking Association and Adjunct Professor of the Faculty of Business and Economics of the University of Hong Kong)   On the afternoon of July 18, 2024, the "Hong Kong Green and Sustainable Finance Development Forum and the Press Conference on the Recognition of QDI and GSF Qualifications of CCXAP by the Hong Kong Monetary Authority" jointly sponsored by China Chengxin (Asia Pacific) Credit Rating Co., Ltd. (hereinafter referred to as "CCXAP"), CCXGF International Co., Ltd. (hereinafter referred to as "CCXGF International"), and the Hong Kong Chinese Finance Association was successfully held. Mao Zhenhua, founder of China Chengxin Group and chief economist of China Chengxin International, delivered a speech. In his speech, Mao Zhenhua mentioned that green finance, as an important engine to promote economic transformation, has developed rapidly in Hong Kong. He shared the development achievements and future goals of China Chengxin (Asia Pacific) and CCXGF in Hong Kong, pointed out that China Chengxin Group will continue to work closely with all parties to empower the development of the Hong Kong bond market, and expressed confidence in jointly promoting the continued prosperity of the Hong Kong bond market and green finance.   Mao Zhenhua, Founder and Chairman of China Chengxin Group, Professor of Economics, Faculty of Business and Economics, University of Hong Kong     The following is the transcript of the speech:   Dear guests, good afternoon! On behalf of the organizer, I am honored to express my warm welcome and sincere gratitude to all of you for your presence and support.   As an international financial center, Hong Kong's bond market has always played a pivotal role. As of early July, 176 bonds with a value of nearly US$50 billion have been listed on the Hong Kong Stock Exchange this year, of which more than 70% are from issuers in the mainland. In recent years, with the increasing attention paid to sustainable development around the world, green finance, as an important engine to promote economic transformation, has also developed rapidly in Hong Kong. As local rating service agencies, CCXAP and CCXGF are important participants in the market and are fully aware of their responsibilities and missions in this process. I am proud to share that as the largest Chinese-owned rating agency in Hong Kong, we have made significant progress in supporting the development of Hong Kong’s bond market and green finance. CCXAP (Asia Pacific) obtained the license in 2012 and has been deeply involved in the market for more than ten years. Its business has made great progress in recent years. According to the latest statistics, CCXAP has ranked third in the number of rated customers served in Hong Kong and among local institutions in China. ranked first in. What encourages us is that last month, our company received QDI and GSF qualification recognition from the Hong Kong Monetary Authority, becoming the first Chinese-funded credit rating agency to be recognized. Through rigorous rating standards and in-depth industry insights, we will continue to be committed to providing high-quality credit rating services, building a communication bridge between investors and issuers, and ensuring market transparency and stability.   As the bond market and Chinese credit rating agencies develop, the green finance industry is also booming in Hong Kong. Green finance is not only a way of investment, but also one of the important ways for us to cope with global environmental challenges. In order to better provide customers with more professional services, CCXGF Service Company opened in 2023. CCXGF has been actively involved in promoting the transformation of the economy to a more environmentally friendly and sustainable direction by promoting the issuance of green bonds and sustainable development bonds. In the future, CCX Asia Pacific and CCX Green Finance will continue to work closely with all parties in the Hong Kong financial market to support more innovative financial products and services and empower the development of the Hong Kong bond market. We firmly believe that through cooperation and innovation, Hong Kong will continue to play a leading role in the international green finance arena and become the preferred destination for global investors and issuers.   Finally, I sincerely hope that today’s discussion can bring us more inspiration and resonance, and jointly promote the continued prosperity of Hong Kong’s bond market and green finance. Thank you all for coming, thank you! The Hong Kong Green and Sustainable Finance Development Forum focused on the current development trend of global ESG information disclosure, sustainable development strategies of listed companies, the development prospects of Hong Kong's green and sustainable finance, and the internationalization prospects of Chinese rating agencies, and conducted in-depth discussions. Hong Kong Financial Services and Treasury Bureau Director Xu Zhengyu, Hong Kong Chinese Finance Association Chairman Meng Yu, Hong Kong University of Business and Economics Dean Cai Hongbin, Hong Kong University of Hong Kong Institute of Humanities and Social Sciences Director Chen Zhiwu and other important political and academic representatives in Hong Kong attended the forum and spoke. At the forum, Mao Zhenhua, founder of China Chengxin Group and chief economist of China Chengxin International, presented the CCXGF ESG rating results to two industry leading companies, China Power International Development Co., Ltd. and China Construction International Group Co., Ltd.   He Xi, Chairman of the Board of Directors of China Power International Development Co., Ltd. and Chairman of China Power International Development Co., Ltd., accepted the "AA" ESG rating from CCXGF on behalf of the company.   Zhou Zhike, Investor Relations Director of China State Construction International Group Co., Ltd., accepted the "AA" ESG rating from CCXGF on behalf of the company.   Paul Hui, Secretary for Financial Services and the Treasury, Hong Kong   Meng Yu, Chairman of the Hong Kong Chinese Finance Association   Hongbin Cai, Dean of the School of Business and Economics, University of Hong Kong   Chen Zhiwu, Director of the Hong Kong Institute of Humanities and Social Sciences, University of Hong Kong   China Chengxin Group was founded in October 1992. Its predecessor was China Chengxin Securities Rating Co., Ltd., which was established with the approval of the People's Bank of China. It is China's first national non-bank financial institution engaged in credit rating, financial securities consulting and information services. The group has credit industry sectors such as credit rating, credit investigation and credit management consulting. It is one of the largest comprehensive credit industry groups in China with the most complete industrial chain, the richest credit products and the largest scale. There are more than 1,300 employees, more than half of whom have a master's degree or above. While insisting on expanding and strengthening the credit industry, the group actively responds to the national strategies of "Healthy China" and "Dual Carbon Action", actively explores and promotes third-party credit and information service businesses in the fields of big health and dual carbon technology , and enters the fast lane of innovative business layout. In addition, the group has increased its investment in specialized investment areas and participated in a number of equity investment projects at home and abroad. The investment areas cover finance, real estate, skiing and other industry projects, and have achieved fruitful results.

Yang Junhao, CFA, FRM, is currently the CEO of CCX Green Finance International and the Vice President of CCX Asia Pacific. Previously, he was a senior investment banker with more than ten years of experience in the financial industry, and worked at Guotai Junan Securities and China Merchants Securities. Dr. Yang holds a Master of Finance from the University of Sydney, a PhD in Finance from the University of Queensland, and is a postdoctoral fellow in Applied Economics at Renmin University of China.   The Third Plenary Session of the 20th Central Committee of the Communist Party of China was held in Beijing from July 15 to 18, 2024.   The plenary session pointed out that opening up is a distinctive mark of China's modernization. We should steadily expand institutional opening up, deepen foreign trade system reform, deepen foreign investment and outbound investment management system reform, optimize regional opening layout, and improve the mechanism for promoting high-quality joint construction of the "Belt and Road".   As a RMB-denominated bond issued by overseas institutions in China, panda bonds have achieved remarkable results in recent years. According to statistics, the issuance volume of panda bonds in 2023 hit a record high, and the annual issuance scale exceeded the 150 billion yuan mark for the first time.   "Starting from 2022, except for the United States, major developed economies including Europe have raised interest rates. China's repeated interest rate cuts have made financing costs low, attracting many issuers to come to China to raise RMB and issue panda bonds." Yang Junhao, CEO of CCXGF International and Vice President of CCXAP, said in an exclusive interview with a reporter from 21st Century Business Herald recently.   Regarding Panda Bonds, Yang Junhao commented that it is one of the important breakthroughs in China's financial reform and opening up. He said that the positive results of Panda Bonds show that the function of RMB as a financing currency is constantly improving, especially in the context of continued foreign investment in China. With the development of the dual market structure of domestic Panda Bonds and overseas Dim Sum Bonds, the domestic and overseas international bond markets have their own characteristics, and the two complement each other and will achieve common development.   The plenary session pointed out that it is necessary to coordinate development and security, and implement various measures to prevent and resolve risks in key areas such as real estate, local government debt, and small and medium-sized financial institutions.   In recent months, the highly anticipated ultra-long-term special treasury bonds have been launched for sale and have been welcomed by the market. Yang Junhao commented that the issuance of ultra-long-term special treasury bonds will optimize the debt structure of the central and local governments, and part of the funds from the treasury bonds will be used by local governments, which can increase the fiscal space of local governments, especially in places with relatively high debt repayment pressure, certain debt risks, and relatively backward economic development.   From the demand side, "Since the beginning of this year, non-bank institutions including insurance, wealth management, and funds have had a strong demand for ultra-long-term treasury bonds. Ultra-long-term treasury bonds not only meet the investment needs of market institutions for ultra-long-term bonds, but also balance the supply relationship in the treasury bond market. At the same time, the supply of government bonds also increases the liquidity of medium- and long-term investments." Yang Junhao added.   Yang Junhao also pointed out that the issuance of ultra-long-term government bonds and policy bank bonds will accelerate in the future. "We expect that the issuance of government bonds and policy bank bonds will reach a peak in the third quarter."   01Non-bank institutions have strong demand for ultra-long-term government bonds 21st Century : On June 14, China's Ministry of Finance issued 50-year special bonds for the first time, with a total issuance of 35 billion yuan. What do you think of the significance of China's issuance of special bonds? What market impacts are expected to be brought?   Yang Junhao : This year's "Government Work Report" mentioned that the ultra-long-term special treasury bonds will be used specifically for the implementation of major national strategies and the construction of security capabilities in key areas. This is China's fourth issuance of special treasury bonds, and the estimated issuance scale this year is 1 trillion yuan.   I believe that the ultra-long-term special treasury bonds release a positive fiscal policy, which will help boost current market confidence and expectations. First, the funds raised from the treasury bonds will be used for scientific and technological innovation, urban-rural integration, regional coordinated development, food and energy security, and high-quality population development. Measures in these key areas will help expand total demand in the short term, and in the long term will help promote the transformation of new and old economic drivers, build a modern industrial system, and develop new quality productivity.   Secondly, I think that in the short term, the issuance of ultra-long-term special government bonds will have a relatively small impact on the fiscal budget, because special government bonds are not included in the deficit, and their issuance is only included in the management of the government bond balance limit for the year. However, it should be noted that the issuance of long-term government bonds will increase the leverage ratio of the central government. According to our preliminary calculations, the issuance of 1 trillion yuan of special government bonds this year will increase the leverage ratio of the central government by about 0.7 percentage points, reaching 25.5% for the whole year.   In addition, the issuance of ultra-long-term special treasury bonds will also optimize the debt structure of the central and local governments. Part of the funds from the treasury bonds will be used by local governments, which can increase the fiscal space of local governments, especially those with heavy debt repayment pressure, certain debt risks, and relatively backward economic development.   It can be seen from the "Government Work Report" that special government bonds will continue to be issued, which also lays the foundation for the proactive fiscal policy in the next few years, which will help boost market confidence, ensure the stability of expectations, and further optimize the debt relationship between the central government and local governments, and reduce the fiscal pressure and expenditure of local governments. The launch of government bonds and the acceleration of special bonds are carried out simultaneously.   From the perspective of market impact, we have already collected some positive signals. Since the beginning of this year, non-bank institutions including insurance, wealth management, funds, etc. have shown strong demand for ultra-long-term government bonds. Ultra-long-term government bonds not only meet the investment needs of market institutions for ultra-long-term bonds and balance the supply relationship in the government bond market, but also increase the liquidity of medium- and long-term investments. Next, we expect the issuance of ultra-long-term government bonds and policy bank bonds to accelerate. It is expected that the issuance of government bonds and policy bank bonds will reach a peak in the third quarter.   Overall, ultra-long-term government bonds send positive fiscal policy signals. Their impact is not only on the bond market, but also on the entire financial market, sending more positive signals.   21st Century: CCXAP Credit Rating Co., Ltd. believes that if the trend of interest rate differential inversion remains unchanged in the next three quarters of this year, the scale of offshore RMB bond issuance should continue the momentum of the first quarter of this year. Could you please elaborate on how the offshore RMB bond issuance market will develop in the future? What are the important influencing factors?   Yang Junhao : The year-on-year and month-on-month data of the US CPI in the fourth quarter of last year showed that the US inflation control was still good. Therefore, the Federal Reserve did not raise interest rates in the first quarter of this year, and even expressed its intention to cut interest rates soon. At that time, the market generally believed that the Federal Reserve would start to cut interest rates in the middle of this year, so the US Treasury yield has been falling, and the bond yields in the market have begun to rise.   However, in the first quarter of this year, the US CPI data always exceeded expectations, which made the Fed a bit passive. The Fed has to control the overall CPI data and meet economic development, and has been unable to finalize the specific time of interest rate cuts. The market's expectations for the first interest rate cut have also begun to move back. Some believe that it may be at the end of 2024, while others believe that the entire channel of interest rate hikes has not yet ended, which has affected the market's expectations for US bonds.   At the same time, China began to introduce a relatively loose monetary policy in the first quarter of this year to reverse expectations of deflation and change the current situation of sluggish consumption. For example, the People's Bank of China announced a cut in the reserve requirement ratio and loan interest rates in January to promote a reduction in overall social financing costs. These policies pushed China's treasury bond yields to continue to decline in the first quarter, further deepening the inverted interest rate gap between China and the United States.   In 2023, about 350 offshore RMB bonds were issued, totaling about 30 billion yuan, of which about 150, totaling about 8 billion yuan, were issued in the last four quarters. According to data from the first quarter of this year, more than 150 offshore RMB bonds have been issued, totaling more than 9 billion yuan, and the year-on-year growth rate has reached 100%. This is the growth momentum we have seen.   I believe that the momentum of offshore RMB bond issuance will continue in the coming year. The Fed's outlook on interest rates will be an influencing factor. If the Fed quickly reverses to a rate cut trend, the RMB financing cost advantage may be weakened.   On the other hand, if the policy level further tightens restrictions on the overseas financing review system for municipal investment companies, then as an important issuer of offshore RMB bonds, its issuance volume will also affect the overall issuance scale of offshore RMB bonds.   02Interest rate differential between China and other countries promotes the issuance of panda bonds "21st Century": Please talk about the relationship between "dim sum bonds" and the internationalization of the RMB.   Yang Junhao : Dim sum bonds first appeared in 2007, and after so many years of development, they have become a major bond variety. The Federal Reserve has raised interest rates seven times in a row in 2022, and the gradual increase in the cost of the US dollar has promoted the rapid development of dim sum bonds.   Of course, the development of dim sum bonds is closely related to the internationalization of the RMB. The opening and development of the dim sum bond market has made the RMB an important currency, which has not only increased the international acceptance of the RMB, but also increased the settlement and savings functions of the RMB.   In addition, as dim sum bonds continue to develop and improve, more international funds will invest in China through dim sum bonds, join the Chinese bond market, and invest in China's overall financial market. This increases the liquidity of the RMB in the international market, especially cross-border liquidity.   At present, the scale of dim sum bonds has increased significantly, attracting many international investors and foreign institutions such as sovereign funds and pension insurance companies to invest in China. Their participation has made China’s bond market more diversified and increased the market’s ability to resist risks. Improved its stability.   With the development of the dual market structure of domestic panda bonds and overseas dim sum bonds, the international bond markets at home and abroad have their own characteristics, which can be said to complement each other and develop together. Among them, dim sum bonds are more conducive to the expansion of cross-border RMB and play a greater role in helping the two-way opening of the domestic capital market. At the same time, the offshore RMB pricing environment is also more conducive to investors' risk management of exchange rate fluctuations.   "21st Century": According to statistics, the issuance volume of panda bonds in 2023 hit a record high, and the annual issuance scale exceeded the 150 billion yuan mark for the first time. Considering the current interest rate environment, how do you think the market outlook for Panda Bonds will develop? How to attract more overseas issuers to participate in panda bonds?   Yang Junhao : Panda bonds have been very popular recently, mainly due to the interest rate differential between China and developed economies in monetary policy. Starting from 2022, except for the United States, major developed economies including Europe have raised interest rates. China's repeated interest rate cuts have made financing costs low, attracting many issuers to come to China to raise RMB and issue panda bonds. This is the main feature of panda bonds, and the interest rate differential is the main reason for its high issuance volume.   We believe that Panda Bonds are one of the important breakthroughs in China's financial reform and opening up. The function of RMB as a financing currency is constantly improving and strengthening, especially against the backdrop of continued foreign investment in China. With the internationalization of RMB, the frequency of RMB use in cross-border payments, foreign exchange reserves, financial transactions, currency swaps and other fields is increasing, and overseas institutions are also more interested in raising funds by issuing RMB-denominated bonds.   Especially since 2023, we have observed that Russia, India, France and other countries have begun to use RMB in foreign trade transactions and investment and financing. Argentina also announced that it would use RMB to repay foreign debt for the first time. These are all very positive market signals.   According to the Society for Worldwide Interbank Financial Telecommunication (SWIFT), in May 2024, the RMB remained the world's fourth most active currency in the global payment currency ranking based on amount statistics, which means that the RMB's global payment ranking has remained fourth in the world for seven consecutive months. I think the popularity of panda bonds is not only due to the advantage of interest rate spreads, but also closely related to China's macroeconomic development strategy and China's degree of opening up to the outside world.   03The international recognition of Chinese rating agencies continues to increase "21st Century": How do you evaluate the degree of openness of China's bond market?   Yang Junhao : Overall, since the fourth quarter of last year, foreign institutions’ holdings of inter-bank bonds have continued to increase. Specifically, from September 2023 to April 2024, the cumulative increase in positions held by overseas institutions each month reached 820 billion yuan, setting a new high since February 2022. Judging from the transaction situation, the trading activity of overseas institutions has also increased significantly.   In March this year, the transaction volume through CCDC was close to 2 trillion yuan, of which about 1 trillion yuan was through the "Global Connect" channel and the "Bond Connect" channel exceeded 800 billion yuan. The total volume has increased by more than 500 billion yuan compared with February.   We believe that there are several main reasons for this trend. First, China's fundamentals are relatively stable. The government's relatively loose monetary policy and proactive fiscal policy have led to steady economic growth, which is our biggest advantage. Chinese bonds also have the natural function of diversifying risks and have a low correlation with other types of global assets. This is one of the main reasons why domestic and foreign investors choose to invest in Chinese bonds.   Second, since 2019, Chinese bonds have been included in the Bloomberg Barclays Global Aggregate Index (BBGA), the JPMorgan Emerging Markets Bond Index (EMBI), the FTSE World Government Bond Index (WGBI) and other indices. Therefore, international investors have increased their holdings of Chinese bonds when investing passively, bringing in more international funds, especially institutional investors. This is a very favorable growth.   Third, China’s financial market is relatively mature, and many foreign investors are also very good at using financial derivatives such as swap lines to hedge the risks of new bond positions. This also provides foreign investors with more protection and investment tools. Richer.   Fourth, compared with other emerging sovereign economies, China’s sovereign risk is very low. Recently, as the geopolitical situation has escalated, more and more foreign investors are more inclined to invest in bonds in China.   "21st Century": What is the current social recognition, especially international recognition, of Chinese-funded rating agencies?   Yang Junhao : At present, the international recognition of Chinese-funded rating agencies is constantly increasing. From the perspective of market share, starting from the second half of 2022, with the support of regulatory policies, the business of Chinese-funded overseas rating agencies has grown significantly. In terms of business volume, the number of new customers of Chinese-funded rating agencies has exceeded 200 in 2023, an increase of two times compared with 2022, and the number of existing customers has exceeded 300, an increase of nearly three times compared with 2022.   With the rapid development of China's overseas bond market, CCXAP's business has also achieved significant improvement. As of the end of April this year, our company has more than 200 existing rating entities and more than 30 debt ratings. This also shows the market recognition of Chinese rating agencies.   It is worth mentioning that CCXAP obtained the business qualification from the Hong Kong Mandatory Provident Fund Schemes Authority ("Hong Kong Provident Fund Authority") in March 2023, becoming the first Chinese-funded credit rating agency approved by it. The five rating agencies are all foreign-funded institutions. This represents the recognition of our company by very large investment entities.   The current investment scale of the entire MPF (Hong Kong Mandatory Provident Fund) is approximately HK$1 trillion, of which 20 to 30% is invested in the bond market. With the participation of Chinese rating agencies, I believe that the market areas of Chinese issuers will receive more attention, such as Chinese dollar bonds, and our company will also increase its allocation in this area. I think this is also very helpful for professional investment institutions like MPF to make longer-term development decisions.

  Mao Zhenhua is the founder of China Chengxin Group, the chief economist of China Chengxin International, a professor at the School of Business and Economics of the University of Hong Kong, a member of the expert group of the Chief Executive's Policy Unit of the Hong Kong Special Administrative Region Government, a co-director and professor of the Institute of Economics of Renmin University of China, the dean of the Dong Furong Institute of Economic and Social Development of Wuhan University, and the co-chairman of the China Macroeconomic Forum (CMF).   The following views are compiled from Mao Zhenhua’s speech at the CMF Macroeconomic Hot Issues Seminar (No. 88)   Since the beginning of this year, China's exports have maintained a good growth momentum against the backdrop of an increasingly severe international situation, frequent geopolitical conflicts, and the intensifying Sino-US game. This fully reflects China's strong production capacity, as well as the supply chain advantages, innovation advantages, and comparative cost advantages behind exports. However, from a medium- to long-term perspective, China's foreign trade and external environment will be increasingly affected by changes in the global geopolitical and economic landscape, especially the Sino-US game. I would like to discuss two aspects of this.   1. “De-risking” is not “de-cold war”, but rather a “new cold war”   The goal of the United States in instigating the current game with China is to achieve a "Cold War state". In recent years, the impact of geopolitical evolution has surpassed many conventional economic factors, especially the game between China and the United States has become the dominant force affecting global economic and political stability. In this context, we should first see the basic framework of the US strategy toward China. Looking back at the so-called "US-Soviet Cold War" that lasted for more than 40 years from 1945 to 1991, the United States adopted a long-term confrontation and competition strategy that was neither war nor peace against the former Soviet Union and its allies by establishing an alliance system including politics, military and diplomacy, and finally defeated the former Soviet Union. On the issue of China, trying to replicate past successes is also the basic idea of the current US strategy toward China, which is why I call it the "new Cold War". In 2017, Trump signed an executive memorandum authorizing the Office of the United States Trade Representative to conduct a "301 investigation" against China, taking the lead in initiating a trade conflict. But Trump is not a traditional American establishment. While launching a trade war against China, he also fought a trade war with his military and political allies, and did not form a situation of group confrontation. Biden made major adjustments to Trump's strategy after taking office. First, he continued the traditional American diplomatic thinking and re-established the core alliance pattern of NATO and the European Union, including a few developed countries in the Asia-Pacific region such as Japan and South Korea, trying to isolate China by winning over allies and forming alliances. Second, he expanded the Sino-US trade conflict to other levels such as science and technology, military, and personnel exchanges, trying to achieve decoupling from China. Looking back on this process, it fully reflects the characteristics of the new Cold War: first, do not fight a hot war, second, aim to divide or even isolate each other, and third, comprehensive competition and confrontation in economy, politics, diplomacy, and system. Judging from the current situation, the situation is also evolving towards the "trilogy" of Sino-US game that I predicted before.   From "decoupling" to "de-risking", the new Cold War pattern has basically taken shape. Biden, as an establishment politician, has tried to win over Europe and China to decouple, but China and Europe are each other's second largest trading partners, which means that Europe will bear huge economic costs. During the World Economic Forum Annual Meeting in early 2023, European Commission President von der Leyen first proposed the EU's "de-risking" of China. Biden made concessions to Europe and finally accepted this concept, thus reaching a consensus between the United States and Europe on the China issue. Since then, I have publicly stated many times that the adjustment of the US strategy toward China from "decoupling" to "de-risking" does not mean that the competition and game between China and the United States have eased, but that the new Cold War pattern has basically taken shape, which marks that the United States and its allies have reached a unified understanding and strategy toward China. The "de-risking" framework maintains the exchanges between Europe and the United States and China in general trade, energy, capital and other ordinary fields, but adjusts the content covered by "risks", not only involving the high-tech, military and other fields that we generally think of, but also some new fields. We should note that the content and degree of tightness of these new areas are dynamically adjusted - as long as they are considered not in the interests of Europe and the United States, they will be included in the scope of "risk". Among them, new energy vehicles are a very realistic example. New energy vehicles do not belong to the field of high technology and military, but because China has advantages in technology and cost, and threatens the relevant interests of Europe and the United States, they are included in the content of "risk". The United States and Europe have also reached a consensus on this strategic measure. Therefore, the change from "decoupling" to "de-risking" is a very important change in Sino-US relations, and it is also a new environment that China will face in the long term in the global geopolitical and economic evolution. This is also an important reason why I believe that the new Cold War pattern has been formed.   The prelude of the new Cold War has been opened, but the "iron curtain" has not yet formed, and China still has a certain window of adjustment. On the one hand, China's general goods trade with the United States and European countries and related personnel and capital exchanges can still continue. Although affected by "de-risking", from the foreign trade in the first half of the year, we can still feel China's advantages in the underlying goods and basic goods of the entire world trade, especially the supply chain advantages we have established in recent years. China's exports have remained resilient since the beginning of this year; and the exports of private enterprises are also recovering, which deserves our further attention and thinking in the process of formulating "stable foreign trade" policies in the future. Secondly, under the framework of "de-risking", various countries still have different interests, thus forming further game space. Although the current new Cold War pattern has been formed, it is not a monolithic block. For example, for the export restrictions on China's new energy vehicles, German companies and the German government have been expressing goodwill and opposing Europe's practices such as imposing tariffs. From this perspective, we have a lot to do in geopolitics , and it is necessary for foreign trade-related policies to be closely coordinated with national security and foreign policy. In recent years, China has made many policy adjustments and taken the initiative to ease the tense foreign relations that had formed in the past. In particular, in the first half of this year, China resumed talks with Europe, Australia, New Zealand, Japan, South Korea and other countries, and unilaterally opened visas to some countries, which caused a great response internationally. This demonstrated our flexibility in the field of opening up and foreign relations. At the same time, it will also help break the encirclement of China established by the United States.   From "decoupling" to "de-risking", "security" and "interests" are growing and declining, and are in dynamic balance. The impact of geopolitical evolution on the global economy and trade is fermenting, and companies, especially multinational companies, have to pay more attention to "security". In April this year, I attended the China-US Business Leaders Roundtable held in the United States. The theme of the meeting was "Balance between Security and Economic Interests". At the meeting, American entrepreneurs proposed that in the face of national security, the interests of enterprises, entrepreneurs and investors are not worth talking about, and there is no room for game at all. Therefore, it is very important to establish a national security concept in the economic field and to establish a balance between national security and economic interests. I think it is necessary to summarize the good work done in this regard in recent times and some good results achieved, and use it as a basis to provide a good guide for China's future foreign economic and trade work.   2. Eliminate misconceptions about foreign investment and combine the introduction of foreign investment with enterprises going overseas   The background of foreign direct investment has changed, but its positive significance for the Chinese economy has not changed. Under the background of deglobalization and anti-globalization, some foreign-invested enterprises are currently under geopolitical pressure, especially the "de-sinicization" led by the United States, and their own competitiveness has weakened. The momentum of direct investment in China has slowed down. At the same time, some enterprises have withdrawn and reduced their capital. Looking back, foreign-invested enterprises have played a vital role in China's reform and opening up, the improvement of China's total factor productivity, the improvement of China's product competitiveness, and China's modernization process. We need to correctly understand their historical role. Looking to the future, although history is advancing and the background of foreign investment in China has changed, the positive role played by foreign-invested enterprises has not changed. For example, from the perspective of technology spillover, the introduction and utilization of foreign cutting-edge technologies, whether in terms of time or efficiency, the foreign direct investment method is obviously better than the import or self-development method. Protecting the interests of foreign-invested enterprises in China and achieving a state of "you have me, I have you" is a necessary path to maximize China's interests. China's current policies clearly express this attitude and have done some solid work. Regardless of the final effect, this atmosphere of public opinion itself is a good solution and a defense of the basic principles of free trade.   We cannot associate foreign investment with being unpatriotic, and there is still room for further improvement in the business environment for foreign investment. At present, there are some noises in the society regarding the understanding and attitude towards foreign-funded enterprises, and many views and opinions are not very calm. Some views simply associate working in foreign companies or buying foreign goods with being unpatriotic. In addition, there are some views that mistakenly interpret exports as a favor to other countries, especially China's favor to the United States, and believe that without China's cheap and good products, other countries will have no choice. As a major trading country, China's exports are still an important support for driving economic growth. Exports themselves are based on reciprocity, and it is necessary to strengthen the public's correct understanding of exports. From the perspective of export companies, orders are the source of all competitiveness and the basis for the survival of enterprises. All customers who form demand for products and services should be treated with a friendly attitude. Recently, there have been some attacks on foreigners in some places. Although these are extreme cases, we need to guide public opinion and social trends to further establish and optimize the business environment for foreign-funded enterprises in China.   Correctly understand the background and reasons for enterprises to go overseas, and avoid being labeled as "capital flight". From the perspective of the types of enterprises going overseas, they can be divided into two categories: "passive going overseas" and "active going overseas". For passive going overseas, it is mainly affected by the current US-led decoupling and "de-risking". Under the pressure of the US government, many foreign-funded enterprises have gradually reduced their investment in China and even rebuilt their production capacity in other countries. Among them, some core foreign-funded enterprises that are in a dominant position in the industrial chain require Chinese upstream and downstream enterprises to transfer production capacity, mainly involving enterprises in related fields such as mobile phones and automobiles. In addition, there are many excellent manufacturing enterprises in China that take the initiative to go overseas. By investing and building factories overseas, they can get closer to overseas markets and bypass irrational and unfair trade barriers. At the same time, the destination countries for Chinese enterprises to go overseas are generally selected in countries with relatively low production factors and labor costs, which helps to reduce production and operating costs. Regardless of the type of enterprise going overseas, we need to correctly understand and view it, and we need to make it clear that enterprises going overseas does not mean capital flight. From the development trajectory of the international economy, enterprises going overseas is also an inevitable trend. If we do not correctly view companies going overseas, then we will not be able to correctly understand foreign direct investment, because foreign direct investment is essentially a manifestation of foreign companies investing in China.   It is of great significance for companies to go overseas, which will help consolidate my country's supply chain advantages and stabilize my country's economic growth. Although China's current trade volume with the United States has dropped to third place, behind ASEAN and the EU, our exports to ASEAN and Mexico through re-export trade have increased significantly. This shows that China still has advantages in the supply chain, but it also reflects that Chinese companies are also facing greater potential threats, that is, European and American countries are gradually reducing their dependence on China's supply chain and promoting the so-called "China+" strategy in other countries. , if Chinese companies do not follow up and go overseas in time, the original market share will be slowly filled by companies from other countries. In addition, only Chinese companies that have been active within the global supply chain system can share the dividends of the upgrading and development of the global industrial chain. Going overseas is also a move that can rise to the level of national interests. Take Japan as an example. In the 1980s, Japan experienced a long period of slow and low growth after the bubble economy burst. In the past three decades, Japan’s real per capita GDP growth rate was less than 1% per year. However, Japanese companies have accumulated a lot of wealth through overseas investment and operations. The scale of overseas assets continues to expand, GNP (gross national product) continues to rise, and Japan's global investment income plays an important role in stabilizing corporate development and stabilizing the Japanese economy. It can be said that the current significance of Chinese companies going overseas is greater than usual. I suggest that companies should be encouraged and supported in the field of macro policies to go overseas, and at the same time, correct guidance should be given in terms of public opinion. Relevant scholars should speak out to society objectively and rationally to avoid the spread of wrong thoughts and constantly strive for China's foreign trade and economy. Better external environment.

Highlights   The development of sustainable lending Since the "dual carbon" goal was proposed, my country's green finance has flourished, and sustainable loans, led by green loans and sustainable development-linked loans, have gradually become one of the important green financial tools, providing support for the realization of a resource-saving, environmentally friendly society and the realization of social sustainable development. In recent years, green loans and sustainable development-linked loans have both been in a stage of rapid growth, and their scale is expected to continue to expand in the future, giving full play to the role of financial institutions in optimizing resource allocation and promoting green transformation and development.   Rules and requirements for international green loans and sustainability-linked loans In March 2018, the Loan Market Association and the Asia Pacific Trade Market Association jointly issued the Green Loan Principles, which provided a list of qualified green projects for green loans and set four core elements: use of funds, project evaluation and screening, fund management, and information disclosure. In March 2019, the Asia Pacific Loan Market Association, the Loan Market Association and the Syndicated Loan and Trading Association jointly launched the Sustainable Development Linked Loan Principles, which provide guidance and frameworks for the sustainable development loan practices of lenders, borrowers and third parties, and set five core elements: selection of key performance indicators (KPIs), verification of sustainable development performance targets (SPTs), loan characteristics, and information disclosure and verification.   Differences in rules between domestic green loans and sustainability-linked loans Different from the Green Loan Principles and Sustainable Development Linked Loan Principles that are generally followed internationally, there is currently no unified green loan and sustainable development linked loan rules and standards in China. Different regulatory agencies have only formulated corresponding green loan statistical scopes - the Green Loan Special Statistical System and the Green Financing Statistical System; sustainable development linked loans use the Sustainable Development Linked Loan Principles as an important normative document, focusing on international market practices. Case analysis of domestic green loans and sustainable development-linked loans Brilliance East Asia Automotive Finance Co., Ltd. green syndicated loan;   Rizhao Bank has promoted the implementation of multiple "blue + sustainable development linked" dual-label loans;   COSCO SHIPPING Energy Transportation Co., Ltd.’s RMB1.5 billion ESG-linked medium-term working capital syndicated loan;   Jining Zhengchuang Mineral Resources Development Co., Ltd.'s sustainable development linked bank loan.   Green Loan and Sustainability Linked Loan Development Proposal In recent years, green loans and loans linked to sustainable development have developed rapidly. However, compared with the international market, domestic practices are still relatively rare, and domestic market guidance rules and supporting mechanisms still need to be improved. At the same time, regulatory support for sustainable loans should be increased, the enthusiasm of the local market should be mobilized, policy support and incentives should be strengthened, and more funds should be guided into green and low-carbon fields. In addition, third-party institutions should give full play to their own roles, strengthen the training and review of their own professional qualifications, strengthen risk management and loan information transparency, improve information disclosure mechanisms, and prevent false labeling caused by inaccurate measurement and disclosure or exaggeration of facts.   1. Development of sustainable loans Sustainable finance has emerged along with sustainable development. Effective allocation of funds in modern economic activities has focused social resources on cleaner, greener, healthier, safer and more resilient areas, and has played an important role in promoting the consistency of economic benefits and social values, and the coordination of financial value and non-financial value. Since the concept of sustainable finance was proposed, financial market products with sustainable development as the theme have increased rapidly. Among them, loans, as an important financial tool, have gradually played an important role in the sustainable field. Green loans, sustainable development-linked loans, social responsibility loans, carbon emission reduction loans, transition loans, etc. have relied on their respective product features to provide financial support for sustainable projects or enterprises.   In sustainable finance, my country pays the most attention to environmental topics. Since the "dual carbon" goal was proposed, green finance has flourished, and sustainable loans, led by green loans and sustainable development-linked loans, have gradually become one of the important green financial tools, providing support for the realization of a resource-saving, environmentally friendly society and the realization of social sustainable development. In recent years, green loans and sustainable development-linked loans have been in a stage of rapid growth, and their scale is expected to continue to expand in the future, giving full play to the role of financial institutions in optimizing resource allocation and promoting green transformation and development.   1. Development of Green Loans Green Loans (GL) refer to the form of loans that consider environmental sustainability factors in the loan business of financial institutions and invest funds in green industries such as low-carbon, environmental protection and renewable energy. Internationally, the concept of green loans originated from the world's first policy environmental protection bank established in the Federal Republic of Germany in 1947. Later, with the implementation of internationally influential industry standards such as the Equator Principles, the vague environmental standards in the financing process were clarified and concretized, and green loans gradually became an important economic means to promote corporate energy conservation and emission reduction, adjust industrial structure, and respond to climate change. In March 2018, the Loan Market Association and the Asia-Pacific Trade Market Association jointly issued the Green Loan Principles (hereinafter referred to as "GLP"), which provides a high-standard guiding framework for the development of financial institutions' green loan business. It mainly refers to the Green Bond Principles and formulates a standard framework from four aspects, including fund use, project evaluation and screening, fund management and information disclosure. It lists in detail the types of green projects that meet the standards and makes clear requirements for the management and institutional constraints of loan funds. It can effectively guide financial institutions to issue green loans and make funds flow to green industries. In order to promote the development of green loan products and strengthen process integrity, GLP was revised and updated in February 2021 and February 2023, respectively, to continuously clarify the financial products and classifications that meet the requirements and reflect the results of changing market practices.   In China, the first green loan policy was jointly proposed by the State Environmental Protection Administration, the People's Bank of China and the former China Banking Regulatory Commission on July 30, 2007 in the Opinions on Implementing Environmental Protection Policies and Regulations to Prevent Credit Risks, which required all financial institutions to strengthen the coordination and cooperation between credit management and environmental protection, and to strengthen environmental supervision and management. Subsequently, the former China Banking Regulatory Commission successively formulated the "Green Credit Guidelines" (Yinjianbanfa [2012] No. 4) and the "Green Credit Statistics System" (Yinjianbanfa [2013] No. 185), which determined the framework of China's green credit policy system and required banks to conduct statistics on loans to enterprises with major environmental and safety risks and loans for energy-saving and environmental protection projects and services; in March 2018, the People's Bank of China issued the "Special Statistical System for Green Loans" (Yinfa [2018] No. 10), and revised it in 2019 with reference to the "Green Industry Guidance Catalogue (2019 Edition)" jointly issued by the National Development and Reform Commission and others, and basically adopted the main framework and standards of the "Green Industry Guidance Catalogue (2019 Edition)"; in July 2020, the former China Banking and Insurance Regulatory Commission issued the "Special Statistical System for Green Financing" on the basis of the "Green Credit Statistics System", referring to the overall framework of the "Green Industry Guidance Catalogue (2019 Edition)" and adjusting some sub-projects, expanding the statistical scope to on- and off-balance sheet financing. my country's green credit standards are gradually improving, and in terms of the regulatory system, a policy framework has been formed with standardized top-level design, statistical classification system, assessment and evaluation system and incentive mechanism.   According to statistics from the People's Bank of China, by the end of 2023, the balance of green loans in RMB and foreign currencies in China was 30.08 trillion yuan , a year-on-year increase of 36.5%, 26.4 percentage points higher than the growth rate of all loans, and an increase of 8.48 trillion yuan from the beginning of the year, ranking first in the world. In addition, under the background of the "dual carbon" goal and the policy support of the central bank, China has launched loans specifically for carbon emission reduction projects , which means that funds are specifically used in the field of carbon emission reduction and produce certain carbon emission reduction benefits (see the "Development Status and Suggestions of Carbon Emission Reduction Support Tools" in the 2023 Annual Report of CCXGF for details). By the end of 2023, loans invested in projects with direct and indirect carbon emission reduction benefits were 10.43 trillion yuan and 9.81 trillion yuan , respectively, accounting for 67.3% of green loans in total. Green loans are the earliest, fastest-growing, and most mature products in the development of China's green finance. They are showing a stable growth trend, effectively helping financial institutions to cope with environmental and social risks, enhance international competitiveness, and implement the "dual carbon" strategy. They are a powerful tool for achieving a resource-saving, environmentally friendly society and achieving social sustainable development.   2. Development of Sustainability-Linked Loans Sustainability Linked Loans (SLL) are an innovative green finance concept launched, issued and guided by international market self-regulatory organizations. They aim to promote and support the growth of more business activities that contribute to environmental and social sustainability by linking loan costs to borrowers' sustainable development performance goals in terms of environment, society, corporate governance, etc., with the help of incentive mechanisms, and inject new momentum into the long-term healthy development of the economy and society. Since ING provided Philips with its first EUR 1 billion sustainable development-linked loan in April 2017, the attention paid to this financial instrument has continued to rise. In March 2019, the Asia Pacific Loan Market Association, the Loan Market Association and the Syndicated Loan and Trading Association jointly launched the Sustainability Linked Loan Principles (hereinafter referred to as "SLLP"), which provide guidance and framework for the sustainable development loan practices of lenders, borrowers and third parties, and are important normative documents in the development of sustainable development loans. The above three institutions updated the SLLP in May 2021 and February 2023 respectively in combination with the latest practices, which promoted the rapid development of sustainable development-linked loans.   Sustainability-linked loans are different from general green loans. Similar to sustainability-linked bonds, they have the advantages of not limiting the use of funds and being able to obtain loan condition rewards or penalties based on sustainable development performance. They are applicable to any borrower who is willing to improve the level of sustainable development. Therefore, they are more widely applicable and have developed rapidly since their launch. According to statistics from the Environmental Finance Network , from the issuance of the first sustainable development-linked loan in 2017 to August 2023, a total of 1,820 sustainable development-linked loans were issued worldwide, with a scale of US$1.4 trillion. From the perspective of each year, sustainable development-linked loans started with US$4.7 billion in 2017, and developed rapidly in 2018 and 2019, with a year-on-year increase of 10 times and 3 times respectively, and exceeded the scale of green loans for the first time in 2019. From 2021 to 2022, the annual issuance of sustainable development-linked loans continued to expand, and in 2022, it exceeded US$660 billion at a 2-fold growth rate. The scale and activity showed a year-on-year growth trend in the broad green financial debt market. In 2023, the scale of sustainable development-linked loans issued globally decreased slightly compared to 2022, but it is still popular among borrowers and lenders as an important form of sustainable financing in the loan market.   my country's sustainable development-linked loans started slightly later than the rest of the world, but since the "dual carbon" goal was proposed, my country's green finance has flourished, and sustainable development-linked loans have gradually become an important green financial tool, playing a positive role in supporting the transformation of non-green industries, including high-carbon industries, in economic activities. It has given full play to the role of financial institutions in optimizing resource allocation, encouraging borrowers to invest more in business activities related to sustainable development, and guiding funds to flow into the field of green and sustainable development.   II. Rules and requirements for international green loans and sustainable development-linked loans   1. Requirements of international green loan rules GLP defines green loans as various types of loan instruments that are used to provide partial/full financing or refinancing for new and/or existing qualified green projects. Its four core elements include: fund use, project evaluation and screening, fund management, and information disclosure.   The funds of green loans must be used for green projects that meet the requirements. The GLP clearly recognizes several general project categories that meet the qualifications of green projects (as shown in Table 1). These categories help achieve environmental goals such as mitigating or adapting to climate change, protecting natural resources, protecting biodiversity, and preventing and controlling pollution. In accordance with GLP requirements, all green projects using funds and their clear environmental benefits need to be properly described in the financing documents. Where feasible, borrowers need to evaluate and quantify environmental benefits.   Eligible green project categories (in no particular order) may include, but are not limited to:   Green loan borrowers must clearly communicate the project evaluation and screening process to the lender, including the achievable environmental sustainability goals of green projects, the borrower's compliance process for assessing the green project category to which the project belongs , relevant green standards or exclusion criteria that are officially certified or consistent with market classifications, and the borrower's identification and management of environmental and social risks associated with relevant projects. Borrowers should maintain transparency in fund management. GLP stipulates that funds of green loans should be deposited into special accounts or tracked by borrowers in an appropriate manner. Borrowers are also required to demonstrate the purpose and management of funds in formal internal processes related to green project loans and investment operations to ensure that loan funds are used for green projects. In terms of information disclosure , borrowers need to disclose information related to the use of funds in the form of an annual report, which should include a list of "green projects" to which green loan funds are allocated, a brief description of the projects, the amount of loans allocated, and the expected and actually achieved (if applicable) environmental benefits until all green loans are withdrawn (revolving loans refer to loan maturity), and should be updated proactively and promptly when major changes occur.   (II) Requirements for international sustainable development-linked loans Sustainability-linked loans have no restrictions on loan types, financing entities, and loan purposes. Sustainability-linked loans can be any type of loan financing, such as term loans, revolving loans, or other types of credit. In terms of the borrowing entity, any borrower that meets the basic loan requirements of financial institutions can obtain sustainable development-linked loan financing. In terms of the use of funds, there is no restriction on green projects, and they can be used for general corporate purposes, such as daily production and operation turnover, debt repayment, etc. According to SLLP, sustainable development-linked loans include five core elements: selection of key performance indicators (KPIs), verification of sustainable development performance targets (SPTs), loan characteristics, information disclosure, and verification.   The selection of key performance indicators (KPIs) should be based on the principle of being closely related to the objectives related to the environment, society and governance (ESG) involved in the borrower's business activities, and set indicators based on the borrower's long-term performance. In addition, the indicator setting should be quantitatively calculated and quantified for subsequent verification. Common key performance indicators (KPIs) include, but are not limited to, the following examples:   Sustainable development performance targets (SPTs) are quantitative assessment targets for key performance indicators (KPIs), which are determined through consultation between borrowers and financial institutions. They should be set according to high standards and requirements to motivate borrowers to improve their sustainable development performance during the loan period. At the same time, the time limit for achieving the goals should be clearly defined, and the indicators can be quantified and assessed according to time nodes. In terms of loan characteristics , the financial results of sustainability-linked loans are related to whether the borrower completes the SPT(s). Incentive or punitive measures may be adopted. For example, if the borrower achieves the pre-set SPT, the initial loan interest rate under the relevant loan agreement will be reduced; otherwise, it will remain unchanged or increase. In terms of information disclosure , SLLP requires borrowers to disclose SPTs-related information to participating lending institutions once a year, and encourages borrowers to disclose information through annual reports or corporate social responsibility reports. The disclosure content must include the completion of SPTs in that year, the relevance of SPTs to the main business, and the impact on loan characteristics. In terms of verification , during the term of the loan, SLLP requires the borrower to hire an external organization with relevant professional knowledge to conduct an assessment and certification of the sustainable development performance targets of the key performance indicators and issue a verification report. The verification time is determined by negotiation between the borrower and the lender until the last SPT trigger event of the loan is reached.   3. Comparison of international green and sustainable development-linked loan rules and requirements Compared with green loans, sustainable development loans can be applied to a wider range of industries and projects, have fewer restrictions on funds, are more inclusive, and have stronger incentives for borrowers. The comparison between green loans and sustainable development-linked loans is shown in the following table:     III. Main differences between domestic green loans and sustainable development-linked loans and international principles 1. Analysis of differences in green loans Unlike the Green Loan Principles that are generally followed internationally, there is currently no unified green loan rules and standards in China. Different regulatory agencies only set corresponding green project scopes for the green loans they support, including the Green Industry Guidance Catalogue (2019 Edition) issued by the National Development and Reform Commission and others (updated to the Green and Low-Carbon Transformation Industry Guidance Catalogue in 2024), the People's Bank of China's Green Loan Special Statistics System, and the former China Banking and Insurance Regulatory Commission's Green Financing Statistics System, but there are no specific requirements for fund management and information disclosure.   2. Green categories of domestic green loans In order to implement the "Green Industry Guidance Catalogue (2019 Edition)" issued by the National Development and Reform Commission and other relevant departments in 2019, the People's Bank of China issued the "Notice of the People's Bank of China on Revising the Special Statistical System for Green Loans" in 2019, adjusting the scope of green loans to be consistent with the "Green Industry Guidance Catalogue (2019 Edition)", mainly including six first-level classifications: energy-saving and environmental protection industry, clean production industry, clean energy industry, ecological environment industry, green infrastructure upgrade, and green services, which are subdivided into 30 second-level classifications and 211 third-level classifications.   In 2020, the former China Banking and Insurance Regulatory Commission formulated the "Green Financing Statistical System" based on the "Green Credit Statistical System", expanding the statistical scope of green loans to include green financing related to trade and consumption, and expanding the scope to green loans related to production, construction, operation, trade and consumption. In addition to the above six major areas, the index sector has added green trade financing and green consumption financing, involving the trade of green field products such as advanced environmental protection equipment, new energy and clean energy equipment, green transportation equipment, and the purchase of green buildings and new energy vehicles.   With the development of various green industries and corresponding policy support, green loans have derived many subdivided products in recent years. In order to promote my country's strategy of building a strong maritime nation, blue loans have taken off in recent years, and many banks have begun to get involved in the field of blue finance to support the development of my country's maritime economy. Blue loans are a sub-category of green loans, which refer to projects in which funds are used to support marine protection and sustainable utilization of marine resources. Its certification scope is in addition to the "Green Industry Guidance Catalog (2019 Edition)", "Green Loan Special Statistical System" and " In addition to the "Green Financing Statistical System", the "China Blue Industry Guidance Catalog (Draft for Comments)" drafted by the World Wildlife Fund (WWF) in August 2021 provides a clearer classification reference for blue projects and helps blue Loan identification. In addition, in order to support the national "dual carbon" policy deployment, the People's Bank of China issued the "Notice on Matters Concerning the Establishment of Carbon Emission Reduction Support Tools" in 2021, officially launching the carbon emission reduction support tool to support financial institutions in carbon emission reduction. Projects with significant carbon emission reduction effects in key areas are provided with preferential interest rate loans. The key areas supported include clean energy, energy conservation and environmental protection, and carbon emission reduction technology, with a total of 23 subdivisions, all of which are popular "carbon neutral" "Industrial field.   2. Statistical scope of domestic green loans International green loans have no specific requirements for loan types. The GLP clearly states that green loans can be various types of loan instruments and/or alternative financing methods (such as guarantee lines, guarantee lines or letters of credit), while the scope of domestic green loan statistics varies among different regulatory agencies.   The green loans of the People's Bank of China only count project financing, working capital financing, personal business loans and bill discounts (commercial bills, bank bills). The statistical scope of green credit in the CBIRC is consistent with the "Various Loans" in the CBIRC's "Off-site Supervision Report 1104", that is, the assets formed by the borrower's lending of monetary funds, mainly including loans (including personal loans), trade financing (industry chain and supply chain financing), bill financing, financial leasing, purchase and resale of assets from non-financial institutions, overdrafts, various advances, bank acceptance bills, letters of credit, etc., as well as green bonds of non-financial enterprises invested with their own funds.   (II) Analysis of differences in sustainable development-linked loans With the national goal of "carbon peak and carbon neutrality" in 2020, major domestic banks have actively responded and explored the launch of sustainable development-linked loan products. However, as of now, China has no guiding rules and supporting mechanisms for sustainable development-linked loans. Its evaluation and recognition still use the "Sustainable Development Linked Loan Principles" jointly issued by the Asia Pacific Loan Market Association, the Loan Market Association and the Syndicated Loan and Trading Association as an important normative document, focusing on international market practices.   However, there are certain differences between the KPI selection preferences of China's sustainable development-linked loans and international operations. As an important tool for China's transitional finance, sustainable development-linked loans are aimed at a large number of carbon-intensive and high-environmentally-impacted "brown" industries and enterprises, which will help promote the green and sustainable transformation of the industrial structure. Influenced by industry preferences under the background of "dual carbon", borrowers of China's sustainable development-linked loans usually choose environmental (E) dimension indicators related to clean energy, energy conservation, and pollution emissions. Compared with the KPI areas selected by international sustainable development-linked loans, Chinese companies rarely directly use greenhouse gas emission reduction as sustainable performance in the environmental dimension. In the social (S) dimension, borrowers of China's sustainable development-linked loans fully combine policy dynamics and regional planning. The linked indicators related to "rural revitalization", "common prosperity", and "talent-driven country" highlight China's unique sustainable development path, while key performance indicators related to the social dimension at the international level, such as product quality, gender equality and health, and supply chain management, need to be further explored and expanded in China.   In addition, the penalties for the linkage clauses of domestic sustainable development loans are relatively mild. For example, some sustainable development-linked loans adopt a one-way interest rate linkage mechanism, that is, if the performance target is achieved, the interest rate will be reduced, and if the performance target is not achieved, there will be no interest rate increase penalty. This one-way reward mechanism has almost no substantial impact on the financing cost of the borrower if the borrower fails to achieve the sustainable development performance target, which to a certain extent loses the significance of promoting transformation.   IV. Case analysis of domestic green loans and sustainable development-linked loans   Brilliance East Asia Automotive Finance Co., Ltd. Green Syndicated Loan - Green Loan that Meets Multiple Green StandardsBrilliance East Asia Auto Finance Co., Ltd. (hereinafter referred to as "Brilliance East Asia Auto Finance") is an auto finance company approved by the China Banking Regulatory Commission. Its main business is auto finance business, providing financial services for new energy vehicle brands such as Tesla, Ideal, and Xiaopeng. Brilliance East Asia Auto Finance has been cooperating with major banks to increase the investment in new energy pure electric vehicle projects by applying for green and carbon neutral syndicated loans. In February 2023, the first batch of green and carbon neutral syndicated loans organized by SinoPac Bank, Kasikorn Bank and Bank of East Asia were issued by Brilliance East Asia Auto Finance Co., Ltd., totaling 235 million yuan, and all funds were used to carry out new energy vehicle retail loan business. The loan is green labeled in combination with domestic and international project standards, and the use of funds is in line with the "Guiding Opinions on Promoting Investment and Financing to Address Climate Change", "Special Statistical System for Green Loans", "Statistical System for Green Financing", "Green Industry Guidance Catalogue (2019 Edition)" and "Green Bond Support Project Catalogue (2021 Edition)" issued by five ministries and commissions including GLP, the Ministry of Ecology and Environment, etc., to promote the development of the new energy vehicle industry and expand market influence. Rizhao Bank promotes the implementation of multiple "blue + sustainable development linked" dual-label loans to promote the sustainable development of the blue economyIn 2023, Rizhao Bank Co., Ltd. (hereinafter referred to as "Rizhao Bank") will give full play to the advantages of coastal areas, constantly explore the needs of the marine economy for financial support and services, continue to develop innovative products, and implement a number of "blue + sustainable development linked" double-label loans to enable the green and high-quality development of the local marine economy. On September 26, Rizhao Bank issued a loan of 10 million yuan to Qingdao Yunlu Tebian Intelligent Technology Co., Ltd., which is the first "blue + sustainable development linked" double-label loan in the country. The funds are specifically used for the production of key components such as converters and transformers required for an offshore wind power project in Shandong Province , making full use of offshore wind resources for power generation, which will help to sustainably develop blue ocean resources, accelerate energy transformation in coastal areas, and promote sustainable use of resources; and link the loan interest rate to the company's "10,000 yuan of electricity consumption" to guide the company to reduce electricity consumption and carbon emissions in the operation process through green transformation. COSCO SHIPPING Energy Transportation Co., Ltd. RMB 1.5 billion ESG-linked medium-term working capital syndicated loan - the first ESG-linked syndicated loan in the shipping industryIn September 2023, COSCO SHIPPING Energy Transportation Co., Ltd. (hereinafter referred to as "COSCO SHIPPING Energy"), a subsidiary of China Ocean Shipping Group Co., Ltd., reached an ESG-linked syndicated loan agreement with Bank of China Shanghai Branch and COSCO SHIPPING Group Finance Co., Ltd., marking the first syndicated loan in China's shipping industry linked to ESG indicators, with a term of three years and a total amount of RMB 1.5 billion. Based on its own sustainable development strategic plan, COSCO SHIPPING Energy selected three key performance indicators (KPIs) from the two dimensions of environment (E) and society (S), including the unit turnover emissions of carbon dioxide, nitrogen oxides, and hazardous waste under the environmental dimension; the percentage of employees trained, the rate of work-related deaths, and the number of responsible major and serious production safety accidents under the social dimension. There are many types of safety risks faced in the process of carrying out ship energy transportation business. Therefore, safety management is an important issue in the maritime transportation industry and a factor that cannot be ignored in the development of the shipping industry. Therefore, the two social (S) dimension indicators related to production safety have also become the main innovation points of this loan. As an outstanding enterprise in ESG management in the domestic shipping industry, COSCO SHIPPING Energy will further promote the cooperation between it and financial enterprises through ESG-linked syndicated loan financing, innovate ESG value realization, improve and enhance the company's ESG governance work in a targeted manner, reduce financing costs and thus enhance the company's value. Jining Zhengchuang Mineral Resources Development Co., Ltd. Sustainable Development Linked Bank Loan - Shandong Province's first sustainable development linked loanJining Zhengchuang Mineral Resources Co., Ltd. is a company engaged in mining and environmental protection processing projects. It focuses on the industrial chain of mining and restoration to improve the green requirements of mining areas, and focuses on promoting the business model of "development-oriented governance and environmentally friendly processing" to reduce the negative environmental impact of mining. In January 2023, Hengfeng Bank successfully issued a 500 million yuan medium- and long-term sustainable development-linked loan to Jining Zhengchuang Mineral Resources Co. , Ltd., linking the loan interest rate to the company's preset key performance indicator (KPI) - the area of mine ecological restoration, and preset the sustainable development performance target (SPT) as "the cumulative mine ecological restoration area of not less than 254 mu from 2020 to 2025", vigorously improving the ecological environment of the mining area and regional rural infrastructure.The project fields supported by green loans in China are basically based on the categories of green projects of various domestic regulatory agencies. Some foreign banks usually refer to international standards such as GLP when identifying green projects, paying attention to the commonalities and differences between the scope of domestic and foreign green projects. compatibility to enhance the international influence of green investment behavior. The borrowers of domestic sustainable development-linked loans have significant industry diversification characteristics, most of which are non-green industries, and are not limited to enterprise size. Any borrower who is willing to improve the level of sustainable development is encouraged to obtain sustainable development-linked loan financing. At the same time, key performance indicators (KPIs) are continuously enriched and expanded with practical development, which is conducive to promoting the multi-dimensional sustainable development of enterprises and improving their comprehensive ESG performance. Suggestions on the development of loans linked to green loans and sustainable developmentThe domestic market guidance rules and supporting mechanisms still need to be improved. In recent years, green loans and sustainable development-linked loans have developed rapidly, but compared with the international market, there are no unified rules and standards in China. For green loans, there are certain differences between the People's Bank of China and the former China Banking and Insurance Regulatory Commission in the statistical caliber of green loans. The inconsistency of green loan standards has brought certain difficulties and challenges to commercial banks in evaluating related projects and effectively issuing green loans. Supervisory and management departments should further unify and clarify green loan standards, make good compatibility between green loan standards and internationally accepted standards, strengthen green loan fund management and information disclosure requirements, and achieve coordinated application of international and domestic standards, local and industry standards. For sustainable development-linked loans, domestic regulatory agencies urgently need to refer to relevant international guidance documents, formulate and improve the norms or guidelines for sustainable development-linked loans after the formulation of relevant guidance documents on sustainable development-linked bonds, and study and publish China's practical guidelines for sustainable development-linked loans in combination with China's "dual carbon" goals and the development of sustainable development-linked loans. Regarding the lack of referenceable quantitative sustainability indicators and baselines in the social dimension, relevant departments need to work hard to carry out methodological research on the establishment of sustainable development performance goals, and continuously explore methods for establishing sustainable development goals that are suitable for China's local market conditions and relevant standards, so as to unify ESG measurement standards, accelerate the implementation and application of sustainable development loans in my country, and promote market standardization and professionalization.Increase regulatory support and give full play to the enthusiasm of the local market. China's green loans still have a large room for development. We should further give play to the positive role of green loans in guiding relevant entities to promote green transformation and promote carbon emission reduction , appropriately expand the scope of support for green loans, strengthen policy support and incentives, provide low-cost financial support for more projects with carbon emission reduction effects, and guide more funds to flow into the green and low-carbon fields; at the same time, financial institutions should optimize the green loan approval process, guide more funds to small and medium-sized enterprises that promote low-carbon transformation and green development, and increase the willingness of small and medium-sized enterprises to actively carry out green transformation. In addition, all financial institutions should strengthen the study of the 2024 version of the "Green and Low-Carbon Transformation Industry Guidance Catalog", deeply explore the financing needs of various green and low-carbon transformation fields, and promote the realization of the "dual carbon" goals. For sustainable development-linked loans, expanding the industries involved by borrowers will help achieve comprehensive sustainable development. For enterprises of different industries and sizes, KPIs can be specially designed for them in combination with policy requirements, industry standards, and enterprise characteristics. Continue to explore social performance indicators that are suitable for the comprehensive promotion of rural revitalization and have inclusive significance , strengthen the design guidance of corporate governance performance indicators related to enterprise management and business, and encourage companies to improve the level of ESG comprehensive governance and achieve sustainable development from themselves.Third-party institutions should give full play to their own role and strengthen risk management and loan information transparency. Third-party assessment institutions should strengthen the cultivation and review of their own professional qualifications, conduct in-depth analysis of green loan projects and professional assessment of the environmental and social risks involved, strengthen the quantitative calculation of project environmental benefits, and ensure the fairness and accuracy of green loan assessment results. Due to the imperfect information disclosure and communication mechanism of green loans in China, the problem of information asymmetry is particularly prominent. External institutions have played an important role in this, and professional assessment reports have provided effective support for the issuance of green loans by banks. Sustainable development-linked loans are widely used in various industries, and the industries involved are highly professional and technical. However, banks and borrowers have limited professionalism in the sustainable development-linked goals related to the technology, process and products of various industries. Therefore, third-party professional institutions are required to conduct professional assessments and conduct assessment disclosures. Therefore, more attention should be paid to the indicator setting and external review role of third-party institutions to prevent borrowers from setting inappropriate SPTs or inaccurate or exaggerated SPT monitoring, measurement and disclosure, which leads to false labeling. In this context, borrowers will continue to be encouraged to continuously improve their information disclosure mechanisms in the future, and third-party institutions should do a good job in their own certification and review processes, jointly control loan quality, strengthen information disclosure, and enhance the transparency and credibility of sustainable development-linked loans. This is an irresistible trend.

Li Yongquan Director and Senior Advisor of China Chengxin (Asia Pacific) Credit Rating Co., Ltd.   China's credit rating agency breakthrough   In 2012, Director Li Yongquan assisted China Chengxin International Credit Rating Co., Ltd. (CCXI, headquartered in Beijing) in establishing a credit rating agency (CRA) in Hong Kong, named China Chengxin (Asia Pacific) Credit Rating Co., Ltd. (CCXAP).     After nearly 12 years of hard work, CCXI was recognized as an approved CRA by the Mandatory Provident Fund Schemes Authority (MPFA) of Hong Kong on March 31, 2023, and was recognized as an approved CRA under the Qualifying Debt Instrument Scheme (QDI Scheme) by the Hong Kong Monetary Authority (HKMA) on Wednesday. CCXI is the first Chinese CRA to [go global] through CCXAP and enter the international market with Hong Kong as its base. There are currently five CRAs recognized by MPFA, including CCXAP, Fitch, Moody's, R&I, and S&P. The MPF can use the minimum credit rating requirements set by any one or more of the above CRAs as investments in long-term bonds and short-term debt instruments (hereinafter collectively referred to as debt instruments) in accordance with the MPF guidelines issued by MPFA.   The CRAs approved by HKMA are the same as the five approved by MPFA. Before 1996, Hong Kong institutional investors, such as banks and enterprises, had to pay Hong Kong profits tax on the interest and profits they earned from investing in debt instruments issued in Hong Kong. In 1996, the Hong Kong government launched the QDI program to attract overseas issuers to issue bonds in Hong Kong and better develop the Hong Kong bond market.   QDI Program Under the QDI program, institutional investors holding eligible debt instruments can enjoy a 50% tax reduction or tax exemption. For newly issued eligible debt instruments held after April 1, 2018, interest and profits are all exempted from tax. In addition, under the Green and Sustainable Finance Funding Program, debt instruments rated by an approved CRA recognized by HKMA can be subsidized for issuance costs.   Global CRA Institutional Market The development of Hong Kong's bond market can help stabilize the financial market, allow companies and institutions to raise funds, and provide investors with a variety of investment options. Before the outbreak of the Asian financial crisis, former HKMA President Joseph Yam had already made efforts to promote the development of Hong Kong's bond market. In a speech, he proposed that the development of the debt instrument market requires four conditions, including: interest rate benchmark (Benchmark), underwriter (Intermediary), credit rating (Rating), and demand (Demand). He referred to these four conditions as BIRD (bird). He may not have realized at the time that a bird does not build a nest, but a group of birds need to build a nest to reproduce offspring. If bonds lack a settlement system (Settlement), it is difficult for the bond market to develop effectively. In fact, before he gave his speech, HKMA had already accepted the suggestion of the Hong Kong Capital Market Association (HKCMA) in 1990 to establish the Central Uniting and Clearing System for Debt Instruments (CMU System). Therefore, BIRD should be written as the plural BIRDS.   Undoubtedly, credit rating is an important part of the development of the bond market. Therefore, China, Japan, South Korea, Thailand, Indonesia, Portugal, Russia, Argentina, etc. all have their own local CRAs. International financial centers such as New York, London, Hong Kong, and Singapore all have international CRAs stationed there. Although, in the future, debt instruments are not required to be rated before they can be issued. However, in order to expand the investor base, bond issuers are willing to entrust CRAs with ratings.   Each country's local CRA uses a local rating scale to assess the credit status of its own currency bonds. CRA rates the country's government bonds as AAA, the highest level, and rates other rated entities in order of credit status.   When an issuer "goes out" to an international financial center to issue international debt instruments in foreign or domestic currencies, they are rated by international CRAs using an international rating scale. In the absence of explicit market consensus, the country or international financial organization with the strongest debt repayment capacity, such as the United States and the World Bank, is rated as the highest level of AAA, and the credit status of other rated entities is rated from AAA to default level. An issuer and its debt instruments that receive an AAA rating under the local rating scale may only receive a BBB rating under the international rating scale. Therefore, when investors buy bonds, they must be clear whether the bond's credit rating is international or local.   Does the difference between local ratings and international ratings mean that local ratings are inflated and untrustworthy? Not necessarily. Local debt instruments are issued in the country's currency, and the government has policies or window guidance to prevent debt instrument defaults to a certain extent and protect investors. International bonds that "go global" may lack the above-mentioned special features.     There are currently 9 CRAs licensed by the SFC in Hong Kong, 4 in China, 4 in the US and 1 in Hong Kong, all of which use international rating scales to assess the rated entities (issuers, debt instruments). The three with the longest history, Moody's, S&P and Fitch, have the largest market share in Hong Kong, and CCXAP is already catching up very closely. There are many rating agencies in Europe, and there are 28 credit rating agencies that have obtained licenses or certificates from the European Securities and Markets Authority (ESMA). The large number of rating agencies reflects the active European debt instrument market on the one hand, and the different licensing regulations for CRAs in European countries on the other hand.   The increase in the number of credit ratings in Hong Kong reflects, to a certain extent, that the development of Hong Kong's debt market has risen to a new level. In particular, since 2012, the entry of Chinese CRAs has reflected that more and more Chinese companies and institutions are going to the international market to issue bonds. In addition, when the US Federal Reserve implemented QE, the extremely low US dollar interest rate attracted many mainland companies and local financing platforms to come to Hong Kong to issue US dollar bonds. Investors who are greedy for high interest rates and forget about risks have suffered heavy losses in the domino-like default of Chinese real estate companies' bonds. Even if they are willing to reach a debt restructuring agreement with the issuer, the restructuring will take a long time. After the restructuring, whether the issuer can sell assets at a reasonable price and other risks that the issuer will face in the future may not allow investors to get back the interest and principal they deserve.   Therefore, when investing in debt instruments, it is advisable to buy investment-grade ones; when investing in unrated or low-rated ones, you need to be more aware of your risk tolerance.  

  Yan Yan , Chairman of China Chengxin International Credit Rating Co., Ltd. and Chairman of China Chengxin (Asia Pacific) Credit Rating Co., Ltd.   The internationalization path of Chinese credit rating agencies should not be limited to bond rating business in the capital market. It should help domestic market operators better understand and grasp various overseas financial risks, help overseas market operators better understand the essential connotation of China's new development pattern, and cultivate new advantages for my country to participate in international cooperation and competition under the new situation. It should accelerate research capacity building and enrich and innovate financial service models.   In recent years, my country's high-quality financial development and opening-up have been steadily advancing, fruitful results have been achieved, and its global influence has continued to increase. Credit rating is an important basic institutional arrangement in the financial market and one of the hubs of the international monetary and financial system. In the process of continuous high-level financial opening-up, my country's rating industry must also keep up with the pace of opening-up, accelerate the process of "going out", enhance international voice, and contribute to maintaining the stability and security of my country's economy and finance in an open environment and promoting the smooth development of cross-border investment, financing and economic and trade cooperation. In recent years, with the strong support of national policies and regulatory authorities, my country's rating industry has accumulated certain practical experience in the international development, laying a solid foundation for subsequent exploration of international business layout. In the future, based on the high-level opening-up of finance, China's rating industry needs to improve both internally and externally, strengthen its own "hard power", accelerate the process of internationalization, enhance international competitiveness and voice, and help the overall situation of the country's opening-up.   The high-level opening-up of finance has been steadily expanded.   It is time for the rating industry to “go global”   Promoting high-level financial opening-up is one of the core issues in building a financial power. In recent years, under the leadership of the CPC Central Committee, China's financial opening-up has continued to advance with remarkable achievements, which has also put forward higher requirements for the international development of credit ratings. Especially in the context of an increasingly complex external environment, it is even more necessary to take the initiative in ratings to maintain the stability of China's sovereign ratings and ensure China's continued high-level opening-up.   The high level of financial opening requires Chinese rating agencies to provide international credit rating services to match it   High-level financial opening up to the outside world is an important driving force for the reform and development of my country's financial industry and an inevitable requirement for building a financial power. Under the leadership of the Party Central Committee, China's high-level financial opening up to the outside world has made steady progress, forming a new pattern of comprehensive opening up with a larger scope, wider fields and deeper levels. In October 2023, the Central Financial Work Conference emphasized the need to "strive to promote high-level financial opening up and ensure national financial and economic security." my country's financial market has made remarkable achievements in opening up to the outside world, and its influence in the international financial market has increased significantly. So far, China's capital market has grown into the second largest capital market in the world. As of the end of 2023, the scale of domestic bonds held by overseas institutions and individuals accounted for about 2.4% of the bond market stock, and the cumulative issuance scale of panda bonds was close to 800 billion yuan. Deepening financial opening up to the outside world is the general trend, and credit rating, as an important infrastructure in the financial market, also needs to accelerate "going global" and provide matching international credit rating services. On the one hand, as China's financial market becomes more open, it is necessary for Chinese rating agencies to provide internationally recognized rating results to provide reference for pricing financial products and avoid turbulence in the financial market caused by the loss of pricing power. On the other hand, in the process of financial opening up, , Chinese-funded rating agencies are required to timely communicate changes in bond and entity credit qualifications to market participants through initial rating, regular tracking, irregular tracking and other rating actions, to help global investors correctly understand the domestic financial market, and to provide regulatory authorities with Cross-border risk management provides reference.   The reconstruction of the global financial governance structure requires taking the initiative in rating to safeguard national financial security As the core of the international credit rating system, sovereign ratings not only directly affect the debt-raising capacity of sovereign countries, but also affect the financing costs of a country's financial institutions and enterprises and the stability of the foreign exchange market through the "ceiling effect". Against the background of my country's continued financial opening-up, the reconstruction of the global financial governance structure, the intensification of the game between major powers, and the increasingly complex external environment, it is of great significance to take the initiative in ratings to maintain the country's financial stability and financial security. In December 2023 and April 2024, Moody's and Fitch successively downgraded my country's sovereign rating outlook, which had a certain impact on market confidence. However, from the actual performance of China's economy, foreign rating agencies obviously underestimated the strong resilience of China's economy, the effectiveness of policies and fiscal sustainability, and failed to fully objectively and scientifically evaluate my country's sovereign credit, which may have a negative impact on the international financing of Chinese companies and national financial security. Although from a historical perspective, the impact of the three major international rating agencies' downgrade of China's sovereign rating on China's economy is very limited, but international experience such as the European debt crisis and the Russia-Ukraine conflict shows that frequent downgrades of sovereign ratings during economic downturns can easily trigger debt crises or impact the stability and financial security of the rated countries' financial markets. Therefore, we need Chinese rating agencies to actively voice the "Chinese voice" and guide the international capital market to correctly, comprehensively and objectively view the Chinese economy. In the context of opening up, my country's rating industry needs to continue to promote internationalization and output rating opinions that are more in line with the country's interests, so as to seize the initiative in rating, get rid of the constraints of the three major international rating agencies and other Western rating agencies on my country in the financial field, and better maintain the country's financial stability and financial security.   The national level and regulatory authorities attach great importance to the international development of the rating industry   In recent years, the national level and regulatory authorities have attached great importance to the international development of the rating industry, and have repeatedly encouraged domestic rating agencies to expand their international business in important international conferences and documents. In June 2022, General Secretary Xi Jinping proposed at the 14th BRICS Leaders’ Meeting that “the BRICS countries should expand cross-border payment and credit rating cooperation and improve the level of trade, investment and financing facilitation”, which will help Developing countries represented by the BRICS countries have established credit rating cooperation and exported views that are more in line with the interests of emerging market countries; in the same month, the Business Management Department of the People's Bank of China issued the "Action Plan to Comprehensively Promote the High-Quality Development of Beijing's Credit Information System and Promote the Formation of a New Development Pattern" 》, encourage issuers to hire at least one local rating agency in the registration process of Chinese-funded US dollar bonds, and gradually increase the voice of local rating agencies in the international capital market. Under the guidance of regulatory authorities and relying on the unique advantages of credit rating agencies as capital market infrastructure, Chinese rating agencies have actively carried out international business practices and achieved remarkable results, laying a solid foundation for further international development. Since 2012, mainstream Chinese-funded rating agencies have successively set up subsidiaries or branches in Hong Kong as windows to the international market, actively speaking out in the global capital market. On March 31, 2023, CCXAP was recognized by the Hong Kong Mandatory Provident Fund Schemes Authority as the first Chinese-funded credit rating agency to carry out relevant business. The application scenarios of international bond ratings of Chinese-funded rating agencies have been further expanded, and the application scenarios of Chinese-funded rating agencies have been further expanded. The "going out" strategy of credit rating agencies is of far-reaching significance. At the same time, Chinese-funded rating agencies are actively improving the global rating series, carrying out sovereign rating business, and promoting the reshaping of my country's voice in global governance. On May 25, 2023, China Chengxin International downgraded the sovereign credit rating of the United States from AAA g to AA + g , and continued to be included in the watch list for possible downgrades, which had a huge impact on the international financial market and highlighted the sovereign ratings of Chinese-funded rating agencies. international influence. In addition, Chinese rating agencies have also extensively participated in global financial governance by publishing credit risk reports on countries along the “Belt and Road” and establishing international credit rating alliances with Russia, Pakistan and other countries, increasing the influence of my country’s financial institutions in the global capital market.   International development of the rating industry   Complementary to financial opening up   Under the general trend of open development, the international development of the rating industry and the opening up of finance complement each other. The continuous advancement of financial opening up creates opportunities for Chinese rating agencies to expand the international rating market, and the "going out" of the rating industry will also help further promote the opening up of finance to a higher level.   The accelerated opening-up of the financial sector provides opportunities for the international development of the rating industry   After more than thirty years, with the leap-forward development of China's capital market, China's rating industry has grown rapidly. Currently, there are 15 Chinese-funded rating agencies, which have entrusted more than 8,000 rated bond issuers, and some mainstream rating agencies have begun international business. Explore and have some experience in international rating. With the significant improvement in the level of internationalization of China's financial market, the global influence of RMB assets is increasing day by day. While a large number of overseas investment and financing institutions have entered the domestic capital market, more and more Chinese-funded enterprises have gone overseas for financing, which has contributed to the internationalization of Chinese-funded rating agencies. Development creates broad market space. First, the continued deepening of capital market cooperation and interconnection, encouraging domestic companies to actively utilize foreign capital, and the development of the panda bond market will help expand the market demand for ratings. For example, in March 2024, in order to support high-quality enterprises to utilize foreign debt efficiently and conveniently, the National Development and Reform Commission issued the "Notice on Supporting High-quality Enterprises to Borrow Medium and Long-term Foreign Debts to Promote the High-Quality Development of the Real Economy (Draft for Comment)", which set the international credit rating to Investment grade (BBB - and above) or domestic credit rating AAA is one of the criteria for defining high-quality companies. Secondly, with the widespread development of international investment and financing cooperation, the demand for risk assessment and management is increasing, which will help drive the increase in demand for rating services and the output of rating opinions of Chinese-funded rating agencies. In the future, the rating industry's "going out" will steadily advance along with my country's high-level financial opening-up process.   The internationalization of the rating industry is beneficial to enhancing the international voice of rating and better participation in global governance   Credit rating is an important indicator for measuring credit risk in current international trade and financial rules. Improving my country's international voice in rating will help to participate more deeply in international rule consultation and formulation, international economic and financial policy coordination and other practices, and exert influence in global financial governance that is equivalent to my country's economic strength. At the same time, credit rating is also the most commonly used pricing reference in the financial market, and the pricing power of financial products is an important indicator for measuring a country's voice in the international financial market. The three major international rating agencies have always occupied a dominant position in the overseas capital market and have the pricing power of the overseas capital market. In addition, since the credit ratings given to Chinese companies by the three major international rating agencies in the overseas capital market are generally low, Chinese companies often bear relatively high financing costs. Against the background of the continuous advancement of financial opening up, the international influence and recognition of the rating results of Chinese rating agencies will be enhanced, which will help Chinese companies obtain fair pricing in overseas financing, improve financing efficiency, and make more full use of international financial resources. In addition, improving the voice and influence of ratings will also help avoid the impact of international rating agency rating adjustments on cross-border capital flows and RMB exchange rate fluctuations in my country's capital market, and help achieve the RMB internationalization strategy of seeking progress while maintaining stability.   The internationalization of the rating industry will help improve the efficiency of cross-border investment and financing and promote high-level two-way opening of finance.   The decision-making and behavior of relevant entities in the capital market must be based on information. At present, my country's two-way opening of the capital market has achieved fruitful results, but the poor cross-border information flow has, to a certain extent, restricted the pace of opening up of the capital market. The "going out" of the rating industry will help break the barriers to cross-border credit information flow and promote the capital market to a higher level of opening up. On the one hand, Chinese rating agencies have a better understanding of China's national conditions and risk characteristics, and can more accurately reveal the credit status of Chinese companies, which will help foreign investors better understand domestic market entities, promote fair pricing for domestic issuers' overseas financing, and improve the ability of domestic companies to utilize international resources. At the same time, Chinese rating agencies convey more views to foreign investors, which can help global investors correctly understand the domestic capital market. On the other hand, by expanding overseas rating business, rating agencies actively communicate with foreign companies, investors and rating agencies, and strengthen the understanding and analysis of overseas credit risks, which can provide more channels for domestic investors to understand overseas market risks and subject credit characteristics, and help domestic investment institutions improve their overseas asset allocation capabilities.   Supervision and guidance and internal and external improvement of institutions, Continue to enhance my country's international rating influence and voice   Based on the goal of high-level financial opening-up, my country's credit rating industry still needs to accelerate its pace of international development. On the one hand, this requires the rating agencies themselves to continuously enhance their "hard power", actively plan international development paths, and enhance their international competitiveness; on the other hand, it also requires regulatory authorities to provide standardized guidance and accelerate the cultivation of Chinese credit rating agencies with international influence.   It is a national strategy to enhance the international voice of my country's rating agencies and cultivate influential Chinese rating agencies.   Credit ratings may affect the financial stability and financial security of a country or even the global financial market. Therefore, we should pay more attention to credit ratings at the national level and elevate the international voice of Chinese rating agencies to a national strategy, so as to master a powerful weapon to maintain domestic financial stability in the future when the financial market is more deeply open. At the same time, through policy support and guidance, we should focus on cultivating influential Chinese rating agencies and enhance their international voice. First, we should accelerate the cultivation of leading rating agencies with international competitiveness and strive to accumulate the good reputation of our rating agencies. We can rely on the large domestic market to cultivate effective market demand and encourage credit rating agencies to become bigger and stronger. At the same time, we should strengthen the supervision and management of the credit rating industry, and on this basis encourage internal integration of the industry, accelerate the cultivation of leading rating agencies with industry dominance and international competitiveness, and enhance the credibility of China's rating industry. Second, we should adapt to the needs of the international market, promote more competitive rating agencies to participate in international business, and enhance their international voice. We can further actively promote the rating services of Chinese rating agencies in the international market and promote Chinese rating agencies to "go global". It is recommended that the Chinese government or government-supported institutions, such as the National Development and Reform Commission, the Ministry of Finance, state-owned enterprises, policy banks, China Railway Corporation, etc., actively use the rating results of domestic rating agencies when raising funds in overseas markets, support the accumulation of market data by local institutions, and expand the international visibility of Chinese rating agencies.   Keep up with national strategies and accelerate the international development of the rating industry   The rating industry can "go global" by relying on the national strategy of opening up to the outside world and exploring feasible paths for international development. In the early stage of the development of my country's rating industry "going global", Chinese rating agencies can accumulate international rating experience and resources by deepening the Hong Kong offshore bond market, open up the international financial market, and gradually enhance the influence of rating results, laying the foundation for a wider layout of international business in the future. Relying on the deepening China-ASEAN economic and trade cooperation, the continuously expanding "circle of friends" of the "Belt and Road" initiative, and the increasingly sound BRICS cooperation mechanism, and taking into account the difficulty of business development and the basis for cooperation, the rating industry may expand its international business layout in steps according to the path of "ASEAN countries-'Belt and Road' countries-BRICS countries-European and American countries", and finally achieve a global business layout. In this process, the international cooperation model of rating agencies can be continuously innovated. First, give priority to promoting Chinese rating agencies with rich rating experience and certain market influence to carry out bilateral/multilateral cooperation, and promote Chinese rating agencies to "go global". Second, strengthen bilateral/multilateral rating mutual recognition under the promotion of government and supervision, and gradually cultivate the international influence and voice of Chinese rating agencies. The third is to explore the establishment of a credit rating alliance, strengthen the exchange of rating methods and systems among alliance countries, promote the establishment of a regional credit rating system, and rely on international cooperation to enhance the international influence and competitiveness of Chinese rating agencies.   Establish a rating system that is different from the three major international rating agencies and maintain my country's rating initiative   Considering the importance of sovereign rating stability to maintaining financial and economic stability, it is crucial for Chinese rating agencies to establish a rating system that can represent China and emerging market countries. Based on the existing sovereign rating practice experience, Chinese credit rating agencies can fully combine the systems and national conditions of different countries to establish a sovereign rating system that conforms to the new global financial market development and governance system, improve independence and credibility, and strengthen risk early warning capabilities. At the same time, promote the expansion of the sovereign rating scope of Chinese rating agencies and further improve the recognition and influence of sovereign rating results. In addition to sovereign ratings, Chinese credit rating agencies can also continuously improve the global rating sequence standards that are in line with the international market, provide subject credit ratings from an international perspective, cover more industries, securities, and currencies, and help the financing of partner countries and the realization of my country's major strategic goals.   Improve the "hard power" of rating agencies and enhance the international competitiveness of my country's rating agencies   The most important factor that determines the international development prospects of the rating industry is still the quality of rating services. In the future, rating agencies need to continue to strengthen their own capacity building and enhance their ability to serve domestic and foreign investors. On the one hand, rating agencies need to seize the policy window period, focus on changing rating concepts, optimize rating methods, technologies and systems, gradually increase the differentiation of rating results, and better play the risk disclosure and early warning functions of credit ratings. In addition, rating agencies can also increase technology investment, use digital technology as a means to integrate financial technology into credit risk assessment and rating early warning, and enhance rating early warning capabilities. On the other hand, Chinese credit rating agencies should also increase their efforts to promote business diversification, innovation and transformation development, and better serve the diversified risk assessment needs of domestic and foreign investors. The internationalization path of Chinese credit rating agencies should not be limited to bond rating business in the capital market. It should start from helping domestic market operators better understand and grasp various overseas financial risks, helping overseas market operators better understand the essential connotation of China's new development pattern, and cultivating new advantages for my country to participate in international cooperation and competition under the new situation. It should accelerate research capacity building, enrich and innovate financial service models, gradually form a diversified business structure, better play the basic role of credit in financial risk identification, monitoring, analysis, management, and disposal, and meet the needs of domestic and foreign investors for diversified comprehensive risk management services.