The effect of collateral-based monetary policy on green finance: Evidence from China

Research background: Green finance is crucial to accelerating China’s green transition, and its growth depends largely on the corresponding monetary policy. To increase financial institutions’ support for the green economy, China’s central bank has recognized green bonds as eligible collateral for monetary policy tools since June 1, 2018. Purpose of the article: In this context, we investigate the effect of collateral-based monetary policy (CBMP) on green finance (GF) in China by utilizing a quasi-natural experiment approach. Methods: Using the Propensity Score Matching-Difference in Difference (PSM-DID) method and daily bond trading data, we investigated the impact of CBMP on the cost and availability of green finance. In further analysis, we employed bond issuance data and listed company data to examine the spillover effects of CBMP and its influence on the real economy. Findings & value added: Our results suggest that CBMP, in the secondary market, actively stimulated the growth of GF by reducing green bond spreads and expanding their financing scale. Furthermore, this beneficial outcome is particularly obvious for low-grade green bonds, bonds issued by state-owned enterprises (SOEs), and in regions with stringent environmental regulations and high government green attention. Particularly, we have also found that there exists a spillover effect across markets, i.e., endowing collateral eligibility to green bonds in the secondary market, can reduce bonds’ spreads and increase bonds’ financing scale in the primary market. Finally, we have found that CBMP effectively incentivizes corporate green behavior rather than “greenwashing”. Our findings suggest that China should further optimize CBMP, focus more on non-SOEs green finance difficulties, and strengthen local governments’ green attention and implementation capacity.