Since the early 1990s, local governments throughout China adopted a policy of "pollute now, clean up later," as they pushed for large petrochemical complexes and industrial parks, even in the water scare regions of the north.

Much has been written about China's environmental horrors, but the country has since undergone a green evolution. From viewing environmental protection as an obstacle to economic growth, it is now seeking to profit from the very business of environment.

After frenzied construction of wind, solar and nuclear installations and flooding the markets with green IPOs, China is beginning to explore more sophisticated financial instruments to meet its ambitious energy targets.

Green finance, or G-finance, is the new buzz word among policymakers looking for more mature ways to raise financing for the new energy industry. According to government estimates, there is a financing demand of more than 2 trillion yuan in China's new energy sector in the next 10 years. Also, more than 600 billion yuan is required for environment protection and renewable resources development annually.

Until now, most economies, including China, have resorted to fiscal means to push sustainable development, but it's time to enlarge the basket. The latest in the series of proactive decisions is China's attempt to issue yuan-denominated "green bonds" to support the renewable energy sectors. Although details are yet to be worked out, these could be government, financial or corporate bonds issued through the market.

Chinese policy makers are also combining the ‘green bond' experiment with its strategy to internationalize the yuan. Qualified foreign issuers will probably be allowed to issue the yuan-denominated green bonds, according to reports.

Carbon trading

The government is also jacking up its carbon finance or carbon trading portfolio. China has mostly relied on administrative measures to realise its 20 percent energy intensity reduction target between 2006 and 2010. To that end, the country's top 1,000 energy consumers have signed contracts with the central government to improve their energy efficiency.

But now, it is planning to utilise more market-based means and will begin domestic carbon trading programs during the 12th Five-Year Plan, which starts next year. Last month, the National Development and Reform Commission selected five provinces, Guangdong, Hubei, Liaoning, Shaanxi and Yunnan, as well as eight cities, as the first batch of areas to develop green economies and set up carbon exchange centres.

Carbon trading enables enterprises to buy or sell credits. Those below the emissions cap are able to sell to those who need more. Major carbon exchanges worldwide include European Union Emission Trading Scheme, UK Emissions Trading Group, Chicago Climate Exchange and Australian Climate Exchange.

Until policy makers work out the nitty-gritty of the green bond market and carbon trading, they must tweak and control the conventional green IPO market.

According to US-based Cleantech Group, in 2009, China accounted for almost three quarters of all clean tech IPO proceeds worldwide, well ahead of the US, which had only 26 percent. Clean technology IPOs in China has totalled $2.2 billion so far this year against $2.4 billion for the whole of 2009.

Given China's propensity to rush overboard with every new trend, authorities are now attempting to curtail expansion of green IPOs. Overinvestment in wind and solar power is now becoming a cause for worry, given that demand and transmission infrastructure is yet to be in place.

Significantly, China's second-largest wind turbine manufacturer, Xinjiang Goldwind Science & Technology, postponed its planned $1.2 billion in June. 

The writer is a freelance journalist based in China.