Report and Recommendation of the President to the Board of Directors

Project Number: 51033-001 November 2020

Proposed Loan People’s Republic of China: Air Quality Improvement in the Greater Beijing–Tianjin–Hebei Region—Green Financing Scale up Project Distribution of this document is restricted until it has been approved by the Board of Directors. Following such approval, ADB will disclose the document to the public in accordance with ADB’s Access to Information Policy.

CURRENCY EQUIVALENTS (as of 29 October 2020)

Currency unit – yuan (CNY)

CNY1.00 = $0.1490 or €0.1261 $1.00 = CNY6.7123 or €0.8467

€1.00 = CNY7.9272 or $1.1810

ABBREVIATIONS

μg/m3 − microgram per cubic meter ADB − Asian Development Bank BOB − Bank of Beijing BTH − Beijing−Tianjin−Hebei CAB − clean air bond CO2 − carbon dioxide ESMS − environmental and social management system GDP − gross domestic product GFP − green financing platform GHG − greenhouse gas HFC − hydrofluorocarbon I&G − China National Investment and Guaranty Corporation MSMEs − micro, small, and medium-sized enterprises O3 − ozone PAM − project administration manual PM2.5 − particulate matter less than 2.5 micrometers in diameter PRC − People’s Republic of China SDIC − State Development & Investment Corp., Ltd. YRD − Yangtze River Delta

NOTE

In this report, “€” refers to Euros, and “$” refers to United States dollars.

Vice-President Ahmed M. Saeed, Operations 2 Director General James P. Lynch, East Asia Department (EARD) Director Sujata Gupta, Sustainable Infrastructure Division (EASI), EARD Team leaders Shigeru Yamamura, Principal Portfolio Management Specialist, Office

of the Director General (EAOD), EARD Lei Zhang, Unit Head, Project Administration, EASI, EARD

Deputy team leader Xinjian Liu, Senior Project Officer (Energy), People’s Republic of China Resident Mission, EARD

Team members Ma. Carmen M. Alcantara, Project Analyst, EASI, EARD Biao Huang, Senior Investment Specialist, Private Sector Financial

Institutions Division, Private Sector Operations Department Veronica Mendizabal Joffre, Social Development Specialist (Gender

and Development), EAOD, EARD Katie Heekyung Nam, Counsel, Office of the General Counsel

Jian Zhou, Social Development Specialist (Safeguards), EASI, EARD Yun Zhou, Senior Environment Specialist, EASI, EARD Peer reviewer Yongping Zhai, Chief, Energy Sector Group, Sustainable

Development and Climate Change Department In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS Page

PROJECT AT A GLANCE I. THE PROPOSAL 1 II. THE PROJECT 1

A. Rationale 1 B. Project Description 5 C. Value Added by ADB 6 D. Summary Cost Estimates and Financing Plan 7 E. Implementation Arrangements 7

III. DUE DILIGENCE 8 A. Technical 8 B. Economic and Financial Viability 9 C. Sustainability 9 D. Governance 10 E. Poverty, Social, and Gender 10 F. Safeguards 11 G. Summary of Risk Assessment and Risk Management Plan 12

IV. ASSURANCES 12 V. RECOMMENDATION 12

APPENDIXES 1. Design and Monitoring Framework2. List of Linked Documents

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Project Classification Information Status: Complete

PROJECT AT A GLANCE

Source: Asian Development BankThis document must only be generated in eOps. 05102020153731294182 Generated Date: 15-Oct-2020 15:29:24 PM

1. Basic Data Project Number: 51033-001Project Name Air Quality Improvement in the Greater

Beijing–Tianjin–Hebei Region–Green Financing Scale up Project

Department/Division EARD/EASI

Country China, People's Republic of Executing Agency China National Investment and GuarantyCorporation

Borrower People's Republic of China

Country Economic Indicators

https://www.adb.org/Documents/LinkedDocs/?id=51033-001-CEI

Portfolio at a Glance https://www.adb.org/Documents/LinkedDocs/?id=51033-001-PortAtaGlance

2. Sector Subsector(s) ADB Financing ($ million)Energy Energy efficiency and conservation 85.00

Renewable energy generation - biomass and waste 50.00Finance Finance sector development 15.00

Total 150.00

3. Operational Priorities Climate Change InformationAccelerating progress in gender equalityTackling climate change, building climate and disaster resilience, andenhancing environmental sustainability

GHG reductions (tons per annum) 800,000Climate Change impact on the Project

Medium

ADB FinancingAdaptation ($ million) 0.00Mitigation ($ million) 150.00

CofinancingAdaptation ($ million) 0.00Mitigation ($ million) 0.00

Sustainable Development Goals Gender Equity and MainstreamingSDG 1.5SDG 5.5SDG 7.1, 7.2, 7.3SDG 8.10SDG 9.4SDG 10.2SDG 12.2SDG 13.a

Effective gender mainstreaming (EGM)

Poverty TargetingGeneral Intervention on Poverty

4. Risk Categorization: Low.

5. Safeguard Categorization Environment: FI Involuntary Resettlement: FI Indigenous Peoples: FI.

6. Financing

Modality and Sources Amount ($ million)ADB 150.00 Sovereign Development financing institution (DFI) (Regular Loan): Ordinary capital resources

150.00

Cofinancing 0.00 None 0.00

Counterpart 500.78Subborrowers 217.55

Domestic commercial banks 271.90

China National Investment and Guaranty Corporation 11.33

Total 650.78

Currency of ADB Financing: Euro

I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on a proposed loan to the People’s Republic of China (PRC) for the Air Quality Improvement in the Greater Beijing–Tianjin–Hebei Region—Green Financing Scale up Project. 2. The project will scale up and catalyze domestic financing for sustainable air quality improvement and greenhouse gas (GHG) emissions reduction by supporting clean energy investments; diversifying national green bond instruments; and enhancing financial inclusion for micro, small, and medium-sized enterprises (MSMEs) and women.

II. THE PROJECT A. Rationale 3. The Asian Development Bank (ADB) and the Government of the PRC agreed in 2015 to establish a multiyear lending program during 2015–2020 to mutually reinforce government actions for reducing air pollution in the greater Beijing–Tianjin–Hebei (BTH) region.1 Since 2015, under the multiyear lending program, ADB has approved about $2 billion in loans that have been implemented successfully. In 2015, ADB approved the first policy-based loan in the PRC under the program, which focused on policy reforms and regulatory capacity strengthening to improve air quality in Hebei Province. 2 In 2016, the second loan was approved to establish a green financing platform (GFP) for developing air pollution reduction projects in the region by enabling better access to finance.3 In 2017, the third loan was approved to support the adoption of high-level technologies by major polluting entities across key sectors in the region.4 In 2018, the fourth loan was approved to help Shandong Province adopt more efficient and advanced technologies for heat production and refrigeration by replacing coal with cleaner energy sources such as natural gas, renewable energy, and waste heat recovery.5 In 2019, the fifth loan was approved to accelerate a switch from coal to natural gas and biogas for residential, commercial, and industrial uses to improve air quality in Henan Province.6 The proposed project will be the sixth loan under the air quality improvement program.7

1 The region includes Beijing and Tianjin municipalities; the Inner Mongolia Autonomous Region; and Hebei, Henan,

Liaoning, Shandong, and Shanxi provinces. 2 ADB. 2015. Report and Recommendation of the President to the Board of Directors: Proposed Policy-Based Loan to

the People’s Republic of China for the Beijing–Tianjin–Hebei Air Quality Improvement—Hebei Policy Reforms Program. Manila.

3 ADB. 2016. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the People’s Republic of China for the Air Quality Improvement in the Greater Beijing–Tianjin–Hebei Region—China National Investment and Guaranty Corporation’s Green Financing Platform Project. Manila.

4 ADB. 2017. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the People’s Republic of China for the Air Quality Improvement in the Greater Beijing–Tianjin–Hebei Region—Regional Emission-Reduction and Pollution-Control Facility. Manila.

5 ADB. 2018. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the People’s Republic of China for the Air Quality Improvement in the Greater Beijing–Tianjin–Hebei Region—Shandong Clean Heating and Cooling Project. Manila.

6 ADB. 2019. Report and Recommendation of the President to the Board of Directors: Proposed Results-Based Loan to the People’s Republic of China for the Air Quality Improvement in the Greater Beijing–Tianjin–Hebei Region—Henan Cleaner Fuel Switch Investment Program. Manila.

7 ADB is also supporting small and medium sized local banks and financial institutions in Hebei, Shandong and Shaanxi provinces, including Bank of Xingtai, Shandong Green Development Fund, and Shaanxi Financial Holding Group, to build local capacity and promote green finance.

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4. ADB has extended financial assistance using various lending modalities to (i) strengthen policies and regulatory frameworks, (ii) introduce new technologies, and (iii) support inclusive energy delivery to improve air quality. During 2015–2017, the assistance focused on enhancing policy and regulatory frameworks, and developing green financing platforms to raise domestic funding for sustainable air quality improvement in the region. During 2018–2019, the assistance targeted the highly polluted provinces in the region to support technology leapfrogging and inclusive service delivery of clean heating and fuel supply. The combination of institutional building and targeted approaches has been mutually reinforcing to effectively support air quality improvement in a geographically dispersed area. The policy-based loan approved in 2015 (footnote 2) was rated highly successful.8 The other four loans are under implementation. The following lessons have been learned from the multiyear lending program: (i) strong government commitment to improve air quality is essential, (ii) the executing and implementing agencies require strong technical and management capacities for effective implementation, and (iii) the project design needs to be flexible to accommodate evolving government policies and regulations. ADB’s Energy Sector Group carried out a midterm program evaluation in 2018 for the multiyear lending program, and assessed that it is highly relevant, effective, efficient, and sustainable; the evaluation highlighted the following experiences: (i) close collaboration across ongoing BTH projects and programs through joint workshops to share lessons and experiences, and (ii) flexible lending modalities and project designs to adapt to evolving PRC policies.9 5. Change in air pollution sources. Government actions to accelerate air pollution reduction and ADB’s multiyear lending support have resulted in significant air quality improvement in the greater BTH region. The annual average concentration of particulate matter less than 2.5 micrometers in diameter (PM2.5) in the region decreased by 27%, from 60.3 micrograms per cubic meter (μg/m3) in 2015 to 47.9 μg/m3 in 2019. However, this remains far above the national class I ambient air quality standard and the World Health Organization standard (35.0 μg/m3), and the greater BTH region faces two challenges to improve air quality further: (i) the dominant source of PM2.5 is shifting from primary emission sources (i.e., directly emitted pollutants from coal combustion, vehicle exhaust, biomass burning, and industrial production processes) to secondary pollutants that are formed in the atmosphere through chemical reactions of precursor pollutants and transported over long distances, and are estimated to contribute 44% of PM2.5 pollution in the BTH region10 and (ii) concentration of ground-level ozone (O3), which is a gas formed from precursor pollutants and a major source of smog, increased by 18%, from 117.1 μg/m3 in 2015 to 142.2 μg/m3 in 2019.11 6. Wide area-based approach and government policy. Addressing an increase in secondary pollutants, including O3, in the greater BTH region requires a wider area-based intervention. The Yangtze River Delta (YRD) region, which comprises Anhui, Jiangsu, Zhejiang provinces, and Shanghai Municipality, is the PRC’s second largest economic zone, accounting for 22% of gross domestic product (GDP), and is the area with the second highest air pollution

8 ADB. 2018. Completion Report: Beijing–Tianjin–Hebei Air Quality Improvement—Hebei Policy Reforms Program in

the PRC. Manila. 9 ADB. Evaluation of the Air Quality Improvement in the People’s Republic of China supported by the Asian

Development Bank, 2015–2026. Unpublished. 10 Y. Liu et al. 2019. High-time-resolution source apportionment of PM2.5 in Beijing with multiple models. Atmospheric

Chemistry and Physics. 19. pp. 6595–6609. 11 Ground-level O3 is a major constituent of atmospheric smog and is a GHG. It is formed in the air by photochemical

reaction of solar irradiation and nitrogen oxide, facilitated by volatile organic compounds. O3 exposure impacts human health (lung function) and the growth of crops and trees.

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concentrations in the PRC.12 Air pollutant emissions in the country are highly concentrated in the northeast corridor between Beijing and Shanghai, and air quality in the greater BTH and YRD regions is interlinked through air pollutants transported across the two adjacent regions. In June 2018, the Government of the PRC issued the Three-Year Action Plan for Winning the Blue Sky War, 2018–2020,13 which adds the YRD region as a priority area for wider-area based policy intervention beyond the greater BTH region. It intends to control O3 as well as PM2.5 emissions by accelerating (i) closure of heavily polluting industries, (ii) reductions of surplus production capacity in industries, (iii) a shift to less air polluting transport modes, and (iv) construction of cleaner and less air polluting energy systems. The plan targets reducing emissions by 2020 (from 2015 levels) by more than 15% for nitrogen oxide and more than 10% for volatile organic compounds (both of which are precursors of O3), more than 15% for sulfur dioxide, and more than 18% for PM2.5. 7. Increasing hydrofluorocarbon emissions. In addition to air pollution targets, the government issued a nationally determined contribution under the Paris Agreement committing to reaching peak GHG emissions by 2030. GHG emissions growth in the country has been slowing down, with annual GHG emissions growth during 2013–2018 reaching a plateau of 0.4%. However, emissions of hydrofluorocarbon (HFC), which is one of the most potent GHGs, have grown by about 20% annually in 2010–2019. The PRC is the largest HFC producer in the world, accounting for 70% of global production.14 In addition, HFC emission is highly concentrated in the northeast corridor between Beijing and Shanghai because of the presence of an industrial cluster producing HFC. In the business-as-usual scenario, HFC emission is projected to grow to about 428 million tons of carbon dioxide (CO2) equivalent by 2030 from 182 million tons of CO2 equivalent in 2010. In 2016, the PRC adopted the Kigali Amendment to the Montreal Protocol, committing to reach peak consumption and production of HFC by 2024, with an 80% reduction by 2045. In 2019, the government started implementing the Green and High-Efficiency Cooling Action Plan to achieve its commitment to the Kigali Amendment to the Montreal Protocol. 8. Challenges in sustainable financing for air quality improvement. Public spending on air quality improvement reached CNY744 billion in 2019, whereas an estimated annual investment of CNY1,538 billion is required to meet the national class I air quality standard by 2030. The domestic green bond market is one of the fundraising channels to narrow this funding gap. After the first green bond guideline was issued by the People’s Bank of China in December 2015, the PRC’s green bond market expanded from CNY238 billion issued in 2016 to CNY386 billion in 2019, making the PRC the world’s largest source of green bond issuance.15 Despite being the world’s largest market by size, the types of green bonds, in the view of issuers and tenors, are not well diversified. About 90% of green bonds in 2019 were corporate bonds. The tenor of green bonds is relatively short: about 60% of bonds issued have a maturity of less than 5 years. Developing a range of instruments and tenors is essential to further develop the domestic green bond market to meet growing green financing demand. In addition, there remain gaps between domestic green bond regulations and international standards with regard to green project and asset definitions, tracking and management of proceeds, and external reviews and assurance; about 50% of PRC green bonds issued in 2019 were not aligned with international

12 In the YRD region in 2019, the annual concentration of PM2.5 was 41μg/m3 and that of O3 was 164 μg/m3. 13 Government of the PRC. 2018. Three-Year Action Plan for Winning the Blue Sky War, 2018–2020. Beijing. 14 HFCs are organic compounds comprised of hydrogen, fluorine, and carbon. These are produced synthetically and

primarily used as a refrigerant for cooling and refrigeration. HFCs were developed as alternatives to O3-depleting substances to be phased out under the Montreal Protocol. However, HFCs are potent GHGs with thousands of times the global warming potential of CO2.

15 Climate Bonds Initiative and China Central Depository & Clearing Research Centre. 2020. China Green Bond Market: 2019 Research Report. London.

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standards. Although the gap in standards has been narrowing since 2015, further alignment with international standards is desirable to gain stronger credibility and transparency in the market. 9. Challenges in financial inclusiveness for air quality improvement. MSMEs in the PRC account for about 60% of GDP and 80% of urban employment. Women have a higher representation in MSMEs as managers and employees.16 Despite their substantial contribution to the country’s economy, MSMEs still face limited access to finance and high financing costs because of perceived credit risks and stringent collateral requirements by banks. MSMEs lending accounts for only 22% of total bank loans outstanding, and the risk premium of MSMEs is estimated to be 40% higher than that of large enterprises. Because of limited access to finance and delayed investment in pollution reduction, it is estimated that 70% of air and water pollution is attributed to MSMEs.17 10. Increasing emissions post COVID-19. Air pollutant concentration and GHG emissions in the first quarter (Q1) of 2020 dropped by about 30% compared with Q1 2019 because of the coronavirus disease (COVID-19) lockdowns and associated energy consumption declines. With the lifting of the COVID-19 related restrictions in most part of the PRC in late March 2020, year-on-year emissions bounced back and overshot 2019 emissions by about 5% during April–May 2020 because of the rapid economic rebound.18 Uninterrupted clean energy investment in the post-pandemic scenario, in parallel with economic recovery, is essential to maintain emissions reduction momentum. 11. Proposed solution. The project aims to comprehensively address emerging challenges in air quality improvement and GHG emissions reduction in the greater BTH and YRD regions. It also aims to stimulate post-COVID-19 recovery investment with build-back-better principles by continuously scaling up clean energy technologies and systems applications in the targeted regions, which together account for about 53.4% of total GDP, 53.0% of total primary energy consumption, and 45.9% of the total population in the PRC. Using lessons learned from the multiyear lending program (para. 4), the project adopts a flexible lending modality with particular attention on mobilizing domestic funds and promoting financial inclusiveness for sustainable clean energy investment. It uses the financial intermediation loan modality, which is the best fit to support geographically scattered investments while maximizing ADB’s loan leveraging capacity through revolving the loan funds and mobilizing domestic funds. The project expands the GFP that was established under the second loan (footnote 3) for sustainable investments in air pollutant and GHG emission reduction activities in the expanded regions.19 12. The GFP is directly under the control of China National Investment and Guaranty Corporation (I&G), which is a state-owned financial institution specialized in credit enhancement to support investment for social and economic development. I&G has strengthened its corporate governance since 2015 including professional management, separation of management and operations, mixed ownership, and private sector involvement in areas monopolized by the public

16 Specific statistics are missing, as sex-disaggregated data are not collected on a regular basis. 17 J. Li and X. Zeng. 2018. Circular Economic Opportunities for Greening SMEs: The Chinese Experience. Paper

prepared for the Eighth Regional 3R Forum in Asia and the Pacific. Madhya Pradesh, India. 9–12 April. 18 Centre for Research on Energy and Clean Air. COVID-19 Air Pollution Rebound Tracker (accessed 30 June 2020). 19 The loan of €458 million to the PRC for the I&G’s GFP project was approved on 12 December 2016 from ADB’s

ordinary capital resources. The outputs are as follows: (i) GFP and leveraged commercial financing for pollution reduction projects established, (ii) barriers lowered and financing scaled up for small and medium-sized enterprises and energy service company from the GFP, and (iii) capacity in financial products and to appraise and implement GFPs strengthened.

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sector. I&G has successfully promoted mixed ownership and private sector involvement, and 49% of the I&G stake is not owned by the PRC government, of which about 38% is owned by private financial institutions. The GFP is a first-of-its-kind mechanism dedicated to air pollution reduction in the greater BTH region, and it offers debt financing, credit guarantees, financial leasing, and equity investments. It has already supported 13 subprojects with a total investment of €1,043 million of which ADB has financed €332 million.20 13. Alignment with Strategy 2030 and country partnership strategy. The project is aligned with two operational priorities of ADB’s Strategy 2030: the project will support (i) operational priority 2 (accelerating progress in achieving gender equality) through gender mainstreaming activities; and (ii) operational priority 3 (tackling climate change, building climate and disaster resilience, and enhancing environmental sustainability) by accelerating low GHG emissions development and ensuring environmental sustainability. The project will contribute to Sustainable Development Goal 5 (achieve gender equality), Sustainable Development Goal 7 (ensure access to affordable, reliable, sustainable, and modern energy for all) and Sustainable Development Goal 13 (take urgent action to combat climate change and its impacts). The project also supports the PRC’s nationally determined contribution targeting the following, to be achieved by around 2030: (i) peaking CO2 emission, (ii) lowering CO2 emission per unit GDP by 60%–65% from 2005, and (iii) increasing non-fossil fuel usage to 20% of total energy share. The project is also aligned with the priorities of broadening the response to climate change and strengthening environmental sustainability in ADB’s country partnership strategy for the PRC, 2016–2020.21 B. Project Description 14. The project is aligned with the following impact: air quality and public health in the greater BTH and YRD regions improved (footnote 13). The project will have the following outcome: air pollutants and greenhouse gas emissions reduced.22 15. Output 1: Green financing platform operations expanded. The GFP (para. 12) will scale up its operations by (i) expanding regional coverage to the YRD region to accelerate air pollutant and GHG emissions reduction; and (ii) focusing on cutting-edge technologies in renewable energy, clean transport, industrial energy efficiency, and cooling system retrofits. Initial subprojects identified include fast charging stations to support wider uptake of electric vehicles; high-quality biogas and biomass ethanol production plants for industrial, commercial, and residential energy use; high conversion efficiency and low degradation solar photovoltaic power plants; heat, ventilation, and air-conditioning system renovation for industrial energy efficiency; and a cooling system retrofit using water and ice, which will be the first ADB intervention in the cooling sector in the PRC for HFC reduction. As part of scaling up, the GFP will also support strengthening women’s leadership in the clean energy sector through networking and training for female managers and employees of the subborrowers. 16. Output 2: Credit enhancement scheme developed. The project will establish a credit enhancement scheme in the GFP to diversify green bond instruments with longer maturity. These green bonds will provide a direct funding channel for domestic project sponsors for air quality

20 €332 million in disbursements under the ADB loan comprises €43 million for guarantee loss reserve, €93 million for

financial lease, and €196 million for subloans to subborrowers. 21 ADB. 2016. Country Partnership Strategy: People’s Republic of China, 2016–2020—Transforming Partnership:

People’s Republic of China and Asian Development Bank. Manila. 22 The design and monitoring framework is in Appendix 1.

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improvement. The credit enhancement scheme will extend guarantee and investment instruments to improve the creditworthiness of domestic developers to issue clean air bonds (CABs).23 The scheme also supports the issuers in (i) capacity development for environmental and social management system (ESMS) compliance; (ii) arrangement of credible independent review for assessing the bond framework and use of proceeds for green investments; (iii) bond issuance arrangements, including the authority’s approval, bond structuring, marketing, and pricing; and (iv) credible tracking and monitoring arrangement for use of proceeds and emission reduction. On successful issuance with full subscription in the market, the CABs will be the first air quality improvement-dedicated green bonds in the PRC. 17. Output 3: Access to inclusive finance improved. The project will also further strengthen the GFP’s capacity for financial inclusion in air quality improvement and GHG emissions reduction. To improve access to finance by MSMEs, including energy service corporations, and to meet the government’s policy on strengthening financial services access for MSMEs,24 the project will introduce a fintech-powered online lending platform. This will enable simplified loan application, customer-specific risk-based loan pricing by using real-time big data to obtain comprehensive information for each loan application for precise credit risk assessment, and credit risk monitoring and management. The project will also help mainstream gender into project implementation by increasing female staffing in the GFP and supporting involvement of women in clean energy investment. 18. The project will help catalyze domestic funds for sustainable investment in air quality improvement and GHG emissions reduction. It will offer subloans, financial leasing, and a credit enhancement scheme (para. 16) to leverage domestic funds totaling the equivalent of €424.02 million for the initial subprojects (Table 2). Repaid loan proceeds from the initial subprojects will reflow into the designated account to be further invested in subprojects in additional batches, with an estimated total investment of €1.1 billion. C. Value Added by ADB 19. ADB financing will add substantial value to expand and strengthen GFP capacity to fully catalyze domestic funds for sustainable investment in air quality improvement and GHG emissions reduction toward 2030, while addressing the emerging challenge of increasing O3 concentrations and HFC emissions that impede control of air pollution and GHG emissions in the PRC, by (i) supporting cutting-edge energy technologies to stimulate transformational change in energy use and supply; (ii) developing a credit enhancement scheme to support domestic clean energy developers to mobilize finance from the domestic market through issuance of CABs that are aligned with international standards; and (iii) promoting financial inclusion through fintech-powered lending platform development for MSMEs, and gender mainstreaming in clean energy investments. The project is expected to deliver valuable lessons in scaling up investments for air pollutants and GHG emissions reduction; these lessons would be disseminated through workshops for other ADB developing member countries for replication in future projects.

23 The clean air bond is air quality improvement-dedicated bond that aligns with domestic green bond regulations and

international standards. (Climate Bonds Initiative. 2019. Climate Bonds Standard: Version 3.0. London.) 24 In June 2020, the People’s Bank of China, in conjunction with the China Banking and Insurance Regulatory

Commission, the Ministry of Finance, the National Development and Reform Commission, and other government agencies, issued several guidance notes and notices on enhancing financial services and credit support for MSMEs.

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D. Summary Cost Estimates and Financing Plan 20. The investment cost of the initial subprojects is estimated at €551.03 million (Table 1).

Table 1: Indicative Investment Amounts for Initial Subprojects (€ million)

Item Amount A. Subproject Investment Costa

1. Subprojects supported through subloans 345.05 2. Subprojects supported through financial leasing 42.83 3. Subprojects supported through credit enhancement scheme 141.03

Subtotal (A) 528.91 B. Guarantee Loss Reserve for Credit Enhancement Scheme 12.70 C. Project Management and Capacity Strengthening 9.42

Total (A+B+C) 551.03 a Includes tax and duties estimated to be €58.31 million, of which an estimated €14.37 million will be from ADB loan

proceeds and €43.94 million will be from other financiers. Such amount does not represent an excessive share of the project cost.

Source: Asian Development Bank staff estimates. 21. The government has requested a loan of €127.01 million from ADB’s ordinary capital resources to help finance the project. The loan will have a 15-year term including a grace period of 10 years to seek the rollover of ADB loan proceeds and larger impacts, an annuity repayment at the 10% discount rate option, an annual interest rate determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility, a commitment charge of 0.15% per year, and such other terms and conditions set forth in the draft loan and project agreements. Based on this, the average loan maturity is 12.95 years with no maturity premium payable. 22. The summary financing plan for the initial subprojects is in Table 2. ADB will finance (i) goods, works, and services for qualified subprojects funded by subloans and financial lease; and (ii) investment and guarantee loss reserves to support CAB issuance. Climate mitigation is estimated to cost €541.45 million, and ADB will finance 23.5% of total mitigation cost.

Table 2: Summary Financing Plan for Initial Subprojects Source

Amounta (€ million)

Amount

($ million)

Share of Total (%)

Asian Development Bankb Ordinary capital resources 127.01 150.00 23.05 Domestic commercial banks and financial institutionsc 230.23 271.90 41.78 China National Investment and Guaranty Corporationd 9.58 11.33 1.74 Subborrowerse 184.21 217.55 33.43

Total 551.03 650.78 100.00 a €0.8467 = $1.00 as of 29 October 2020. b Comprises €59.27 million for subloans, €25.40 million for financial lease, €29.64 million for credit enhancement

scheme (investment), and €12.70 million for credit enhancement scheme (guarantee first loss reserve). c The amount is estimated and will be finalized during project implementation. d Includes costs for project management and capacity strengthening. e Includes counterpart contributions to implement qualified subprojects. Source: Asian Development Bank estimates. E. Implementation Arrangements 23. I&G which established the GFP and is responsible for its operation, will be the project’s executing and implementing agency. I&G has demonstrated excellent performance in implementing the earlier Air Quality Improvement GFP project (para. 11). The State Development

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& Investment Corp., Ltd. (SDIC),25 the controlling entity of I&G, will be the oversight body of the project. Bank of Beijing (BOB) will be the entrusted bank to assist I&G with debt financing operation under the project.26 24. The ADB loan proceeds will be onlent from the Ministry of Finance to I&G through SDIC on identical repayment, tenors, and pricing terms as ADB’s loan. SDIC and I&G will bear the foreign exchange risk, and I&G will utilize the ADB loan amount through financing instruments described in Table 1. I&G’s due diligence will consider technical merit, credit quality, and environmental and social impacts based on the subproject selection criteria. 27 The implementation arrangements are summarized in Table 3 and described in detail in the project administration manual (PAM).28

Table 3: Implementation Arrangements Aspects Arrangements Implementation period March 2021–March 2026 Estimated completion date 31 March 2026 Estimated loan closing date 30 September 2026 Management (i) Oversight body State Development & Investment Corp., Ltd. (ii) Executing agency China National Investment and Guaranty Corporation (iii) Key implementing agency China National Investment and Guaranty Corporation (iv) Implementing unit Green financing platform with 30 full-time professional staff Procurement I&G shall ensure that (i) subborrowers of the ADB loan use appropriate procurement

methods that ensure value for money on the basis of acceptable private sector or commercial practices acceptable to ADB and (ii) utilization of proceeds of such loan shall be subject to the eligibility criteria and the integrity requirements set out in the Procurement Regulations for ADB Borrowers (2017, as amended from time to time).

Retroactive financing Retroactive financing will be provided to subprojects approved by ADB for expenses incurred by the subborrowers not more than 12 months prior to the date of the loan agreement. The subprojects must meet the same subproject eligibility criteria set out in the project administration manual. The total amount of retroactive financing will not exceed 20% of the loan amount.

Disbursement The loan proceeds will be disbursed following ADB’s Loan Disbursement Handbook (2017, as amended from time to time), and detailed arrangements agreed between the government and ADB and described in the project administration manual.

ADB = Asian Development Bank, I&G = China National Investment and Guaranty Corporation. Sources: I&G and ADB.

III. DUE DILIGENCE A. Technical 25. Initial subprojects. Technical due diligence was carried out for initial subprojects. These multisector subprojects, which aim to accelerate emissions reduction across multiple sectors in the greater BTH and YRD regions, include a fast electric vehicle charging station with an intelligent management system, high-quality biogas and biomass ethanol production, a solar

25 SDIC is a state-owned financial institution controlled by the state-owned asset supervision and administration

commission under the State Council. It is also a majority shareholder of I&G. 26 BOB is a commercial bank headquartered in Beijing with about 600 branches nationwide. BOB, acting as the agent

of I&G, has been the entrusted bank for the Air Quality Improvement in the I&G’s GFP project (footnote 3) since 2016, administering the debt operation according to the terms and rate agreed with I&G.

27 The subproject selection criteria are in Appendix 3 of the Project Administration Manual (accessible from the list of linked documents in Appendix 2).

28 Project Administration Manual (accessible from the list of linked documents in Appendix 2).

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photovoltaic system with high conversion efficiency and low degradation, heat, ventilation, and air-conditioning system renovation for industrial energy efficiency, and a cooling system retrofit using water and ice with storage. These subprojects are deemed technically feasible and appropriate to achieve the intended energy savings and emissions reduction. 26. Fintech. I&G is deemed to have sufficient capacity and experience to design the fintech application. In 2015, it established Zhejiang Online Financial Asset Trading Center Co. Ltd., which adopted a fintech-based online financial platform, using myriad information from real-time big data, to facilitate business-to-business transactions. Based on the experience gained, the project will expand the fintech application for MSMEs financing in clean energy to develop a flexible but robust platform for credit application, appraisal, and monitoring. The fintech application action plan, which comprises two stages (an interim and final assessment), for large scale adoption is detailed in Appendix 4 of the PAM (footnote 28). B. Economic and Financial Viability 27. Financial analysis of the project indicates an average financial internal rate of return of 11.09%, with a range of 6.35%–13.41% for the seven initial subprojects, all higher than the average weighted average cost of capital of 3.05% and corresponding weighted average cost of capital of each subproject. Sensitivity analysis shows that all subprojects are likely to be sustainable under various adverse scenarios. The economic internal rate of return of the project ranges from 12.69% to 35.72% for the seven initial subprojects, all above the 9.00% economic opportunity cost of capital. Sensitivity analysis shows that the project is likely to be sustainable with economic rates of return above 9.00% under various adverse scenarios.29 C. Sustainability 28. Sustainability of the project relies upon the government’s policy and the selection of quality investments. Commitments to air pollution and GHG emissions reduction are in the Thirteenth Five-Year Plan, 2016–2020 30 and nationally determined contributions of the PRC. Appendix 3 of the PAM (footnote 28) defines applicable subproject selection criteria in technical, financial, and economic viabilities; the project owner’s creditworthiness; and environmental and social safeguard requirements, these criteria guide screening and appraisal of individual transactions. It also excludes fossil fuel fired power and heat generation capacity addition, regardless of energy saving benefit. The project will also support domestic green bond market development by the credit enhancement scheme (output 2) to diversify and grow a funding channel for sustainable clean investment. As the financial intermediary, I&G has demonstrated satisfactory ratings on the criteria of capital, asset quality, earnings, liquidity, and sensitivity to market risk. I&G’s liquidity position became relatively weaker from 2015 to 2019 because of increased leverage, and its long-term financial sustainability may suffer if the trend continues. However, its overall liquidity position was still strong in 2019, with a cash and financial asset–debt ratio of 1.43. Projected financial statements of I&G from 2020–2035 consolidating the incremental impact of the project illustrate that the financial sustainability of I&G will improve.

29 Financial Analysis and Economic Analysis (accessible from the list of linked documents in Appendix 2). 30 Government of the People’s Republic of China. 2016. Thirteenth Five-Year Plan, 2018–2020. Beijing.

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D. Governance 29. The financial management assessment was conducted following ADB’s technical guidance notes for (i) financial due diligence for financial intermediaries and (ii) financial management assessment. The results for SDIC, I&G, and BOB show that adequate financial management systems and procedures are in place to meet ADB requirements. The external audit reports from 2016–2019 for SDIC, I&G, and BOB had unqualified opinions. I&G and BOB fully complied with the regulator’s prudential regulations during 2016-2019. The assessed pre-mitigation financial management risk is moderate. 30. Procurement will follow the ADB Procurement Policy (2017, as amended from time to time) and Procurement Regulations for ADB Borrowers (2017, as amended from time to time) (as applicable to financial intermediation loans), and appropriate procedures will be adopted. The procurement assessment was conducted on the initial potential subprojects. It showed that most of the subborrowers’ procurement practices follow established domestic commercial practices, and procurement procedures are aligned with the PRC’s procurement laws and are acceptable to ADB. To provide guidance on this, a project-specific procurement manual has been prepared and included in Appendix 8 of the PAM (footnote 28). 31. Integrity due diligence was conducted. 31 No significant integrity risks were identified. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the government and I&G. The specific policy requirements and supplementary measures are described in the PAM (footnote 28). E. Poverty, Social, and Gender 32. Social benefit. Improved air quality will directly benefit about 614 million people, including 10.4 million poor people in the greater BTH region and 3.8 million poor people in the YRD region who receive the minimum living guarantee subsidy.32 Initial subprojects are estimated to generate 1,570 job opportunities during construction and 1,048 job opportunities during operation. I&G will promote compliance with the relevant labor laws and occupational health standards by all subborrowers. Subprojects resulting in labor retrenchment and redundancies because of the introduction of new technologies will not be financed. 33. Gender. The project is categorized effective gender mainstreaming following ADB’s guidelines.33 A gender assessment was conducted indicating that despite progress, women in the renewable energy sector remain underrepresented and face barriers such as (i) gender stereotypes that influence hiring practices and individual professional choices, (ii) lack of awareness and information about job opportunities in the sector, and (iii) limited access to professional networks. In addition, the lack of sex-disaggregated data in the renewable energy sector limits the capacity to formulate targeted gender equality policies, including for financing female entrepreneurs. Initiatives to support women in the sector in the PRC include networks and campaigns.34 This is the first time that I&G will be implementing gender equality actions, and its

31 ADB. 2003. Enhancing the Asian Development Bank’s Role in Combating Money Laundering and the Financing of

Terrorism. Manila. 32 Government of the PRC, Ministry of Civil Affairs. Statistical Quarterly Reports. 33 ADB. 2012. Guidelines for Gender Mainstreaming Categories of ADB Projects. Manila. 34 Networks include Women in Renewables Asia, which is headquartered in Shanghai and is Asia’s first network for

women in renewable energy. It aims to bring together women at all levels for networking, mentorships, and coaching as way to promote more women in the sector. Campaigns include the Equal by 30 campaign, which is a public

11

capacity in this area needs to be strengthened. A gender action plan35 has been prepared that includes actions and targets to (i) increase transactions that support female entrepreneurs seeking clean energy investment; (ii) support participating subprojects to tackle gender stereotypes of women in renewable energy by supporting networking opportunities for female leaders of MSMEs and energy service corporations, and training events for female employees and managers; (iii) mainstream gender in the operation of the GFP by increasing female investment managers in the GFP; and (iv) support the collection of sex-disaggregated data from borrowers. Gender indicators are included in the design and monitoring framework, and the budget has been confirmed for the implementation of the gender action plan. F. Safeguards 34. In compliance with ADB’s Safeguard Policy Statement (2009), the project’s safeguard categories are FI for environment, involuntary resettlement, and indigenous peoples.36 An ESMS was developed based on the experience and lessons learned from the Air Quality Improvement GFP project (footnote 3) to provide guidance on (i) screening, categorization, and review of subprojects; (ii) capacity building; (iii) grievance redress; and (iv) monitoring and reporting. I&G will use the ADB program management office with an ESMS unit of four regular staff to conduct environmental and social safeguards due diligence of the proposed subprojects. A series of capacity building and trainings on ADB safeguard policy requirements was provided to I&G staff during the implementation of the GFP project. All 13 of the subprojects approved to date, including one subproject categorized A for environment, have met all the requirements in the ESMS, including screening and categorization, due diligence, compliance monitoring and reporting, grievance redress mechanism, information disclosure, public consultation, and environmental and social audit of existing and associated facilities. I&G has sufficient capacity to implement the project from an environmental and social safeguards perspective. In addition, I&G has signed long-term contracts with national consultants to support the ESMS implementation. 35. The ESMS provides for the inclusion of environment category A subprojects. If any such subprojects are implemented, ADB will review and clear the environmental impact assessments, which will be posted on ADB’s website 120 days prior to approval of the subprojects. Each subproject will undergo due diligence following national regulations, ADB’s Safeguard Policy Statement, and the requirements in the ESMS. Climate risk assessments for the proposed subprojects will be conducted, and the findings will be incorporated in the subproject design. For social safeguards, any subproject that triggers involuntary resettlement impacts or adverse impacts on ethnic minorities will be excluded from financing. Subprojects that result in positive impacts on ethnic minorities (such as subprojects involving enterprises owned and/or managed by ethnic minorities that aim to improve these enterprises' competitiveness and support their contributions to air quality outcomes) will be eligible for financing.37 I&G will be required to submit annual ESMS implementation reports and consolidated environmental and social monitoring reports during project implementation.

commitment by organizations to work toward equal pay, equal leadership, and equal opportunities for women in the clean energy sector by 2030. Equal by 30.

35 Gender Action Plan (accessible from the list of linked documents in Appendix 2). 36 ADB. Safeguard Categories. 37 The project is not likely to have significant impacts (Category A) on ethnic minorities since none of the five key areas

will be adversely affected (customary rights of use and access to land and natural resources; socio-economic status; cultural and communal integrity; health, education, livelihood and social security status; and indigenous knowledge) nor will the ethnic minorities experience change in any of the key areas.

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G. Summary of Risk Assessment and Risk Management Plan 36. Significant risks and mitigating measures are summarized in Table 4 and described in detail in the risk assessment and risk management plan.38 The integrated project benefits and impacts are expected to outweigh the costs.

Table 4: Summary of Risks and Mitigating Measures Risks Mitigation Measures Weak demand for clean energy investment may slow down project implementation

Policies of the Government of PRC and the forthcoming Fourteenth Five-Year Plan, 2021–2025 prioritize the reduction of air pollutants and GHG emissions. The project offers a variety of financial products (subloans, financial leasing, and credit enhancements) to flexibly meet domestic subborrowers’ demand.

Limited investment appetite for clean air bonds due to unfavorable market conditions

The credit enhancement scheme provides comprehensive assistance (including advisory support, investments, and guarantees) to the clean air bond issuers in preparation, issuance, and monitoring to reduce the perceived risks among investors in the domestic green bond market.

Decreased solvency capacity of EA may impact its long-term financial sustainability

Loan covenants include (i) a minimum cash and financial assets–debts ratio of 1.2 and (ii) a maximum total liabilities–total assets ratio of 80%.

EA lacks sufficient capacity to fully control credit risk of large number of MSMEs

EA is developing a fintech-powered online credit appraisal system using real-time big data to strengthen its risk control capability on MSMEs finance. The project will build EA’s credit risk control capacity on MSMEs finance by implementing a fintech application action plan.

EA = executing agency, GHG = greenhouse gas, MSMEs = micro, small, and medium-sized enterprises, PRC = People’s Republic of China. Source: Asian Development Bank.

IV. ASSURANCES 37. The government, SDIC, and I&G have assured ADB that implementation of the project shall conform to all applicable ADB policies, including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, financial management and disbursement as described in detail in the PAM and loan documents. The government has agreed with ADB on certain covenants for the project, which are set forth in the loan and project agreements.

V. RECOMMENDATION 38. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the loan of €127,011,000 to the People’s Republic of China for the Air Quality Improvement in the Greater Beijing–Tianjin–Hebei Region—Green Financing Scale up Project, from ADB’s ordinary capital resources, with interest to be determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility; for a term of 15 years, including a grace period of 10 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft loan and project agreements presented to the Board.

Masatsugu Asakawa President

11 November 2020

38 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).

Appendix 1 13

DESIGN AND MONITORING FRAMEWORK Impacts the Project is Aligned with Air quality and public health in the greater BTH and YRD regions improved (Three-Year Action Plan for Winning the Blue Sky War, 2018–2020) a Results Chain

Performance

Indicators

Data Sources and Reporting

Mechanisms

Risks and

Critical Assumptions Outcome Air pollutants and greenhouse gas emissions reduced

By 2027: a. At least 449 tons of NOx, 67 tons of SO2, and 44 tons of PM emissions avoided annually (2019 baseline: 0) b. At least 0.8 million tons of CO2 equivalent, including HFCs, reduced annually (2019 baseline: 0) (OP 3.1)

a–b. Beijing, Shanghai, and Tianjin municipalities; Anhui, Hebei, Henan, Jiangsu, Liaoning, Shandong, Shanxi, and Zhejiang provinces; and Inner Mongolia Autonomous Region annual yearbooks a–b. Semiannual GFP report to check that the progress is on track

R: Weak demand for clean energy investment may slow down implementation. A: The government commitment on air quality improvement and GHG emissions reduction remains unchanged.

Outputs 1. GFP operations expanded

By 2026: 1a. New domestic financing leveraged by the platform exceeded CNY3.1 billion (2019 baseline: 0) 1b. At least one fast EV charging system demonstrated (2019 baseline: 0) (OP 3.1.3) 1c. At least four cooling systems renovated for HFC emission reduction (2019 baseline: 0) (OP 3.1.3) 1d. At least two renewable energy systems with high conversion efficiency developed in the targeted region (2019 baseline: 0) (OP 3.1.3) 1e. At least two networking events organized for female managers in the renewable energy

1a–1f. Regular reports on GFP implementation; and project completion report

R: The economic slowdown reduces appetite for clean investment. A: Clean energy investment among domestic developers and financial institutions remains strong.

14 Appendix 1

Results Chain

Performance

Indicators

Data Sources and Reporting

Mechanisms

Risks and

Critical Assumptions sector, including ESCOs

and MSMEs (2020 baseline: 0) 1f. At least 50 female employees in subproject companies participate in training or coaching sessions on career management in energy for women (2020 baseline:0) (OP 2.1)

2. Credit enhancement scheme developed

2a. At least CNY1.1 billion of clean air bonds issued (2019 baseline: 0)

2a. Regular reports on GFP implementation; and project completion report

R: Limited investment appetite because of unfavorable market conditions.

3. Access to inclusive finance improved

3a. Fintech-based credit application, appraisal, and monitoring system installed and operational (2019 baseline: not installed and operational) 3b. The percentage of female investment managers in the GFP increased to 50% (2020 baseline: 42%) (OP 2.1) 3c. At least 75% of GFP staff participated in training on gender equality and financial inclusion (2020 baseline: 0) (OP2.1)

3a–3c. Quarterly progress reports on GFP implementation; and project completion report

A: Domestic green market continues to grow.

Key Activities with Milestones 1. Green financing platform operations expanded 1.1 Achieve CNY3.1 billion domestic financing leveraged by the platform (Q1 2026) 1.2 Complete one fast EV charging system demonstration (Q4 2025) 1.3 Complete four cooling system renovations for HFC reduction (Q4 2023) 1.4 Complete two renewable energy system developments with high conversion efficiency (Q4 2021) 1.5 Conduct at least two networking events organized for female managers in the renewable energy

sector (Q4 2025) 1.6 Ensure that at least 50 female employees in subproject companies have participated in training or

coaching sessions on career management for women in energy (Q4 2025) 2. Credit enhancement scheme developed 2.1 Issue at least CNY1.1 billion of clean air bonds (Q4 2026) 3. Access to inclusive finance improved 3.1 Large scale use of fintech application (Q4 2025)

Appendix 1 15

Key Activities with Milestones 3.2 Increase the percentage of female investment managers in the GFP to 50% (Q4 2025) 3.3 Ensure that 75% of GFP staff have participated in training on gender equality and financial inclusion

(Q4 2025) Inputs ADB: €127.01 million (ordinary capital resources loan) Domestic commercial banks and financial institutions: €230.23 million Subborrower funding: €184.21 million I&G: €9.58 million

A = assumption; ADB = Asian Development Bank; BTH = Beijing–Tianjin–Hebei; CO2 = carbon dioxide; ESCO = energy service company; EV = electric vehicle; GFP = green financing platform; GHG = greenhouse gas; HFC = hydrofluorocarbon; I&G = China National Investment and Guaranty Corporation; MSMEs = micro, small, and medium-sized enterprises; NOx = nitrogen oxide; O3 = ozone; OP = operational priority; PM = particulate matter; Q = quarter; R = risk; SO2 = sulfur dioxide; YRD = Yangtze River Delta. a Government of the People’s Republic of China. 2018. Three-Year Action Plan for Winning the Blue Sky War,

2018–2020. Beijing. Contribution to Strategy 2030 Operational Priorities Expected values and methodological details for all OP indicators to which this operation will contribute results are detailed in Contribution to Strategy 2030 Operational Priorities (accessible from the list of linked documents in Appendix 2 of the report and recommendation of the President). Source: ADB.

16 Appendix 2

LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/RRPs/?id=51033-001-3

1. Loan Agreement 2. Project Agreement 3. Sector Assessment (Summary): Energy 4. Project Administration Manual 5. Financial Analysis 6. Economic Analysis 7. Summary Poverty Reduction and Social Strategy 8. Risk Assessment and Risk Management Plan 9. Contribution to Strategy 2030 Operational Priorities 10. Climate Change Assessment 11. Gender Action Plan 12. Financial Intermediary: Environmental and Social Management System Arrangement

Supplementary Documents

13. Financial Management Assessment 14. Procurement Risk Assessment and Management for Representative Subprojects 15. Innovation Features (Credit Enhancement Scheme and Clean Air Bond) 16. Capacity Development and Knowledge Dissemination