Green credit and its obstacles: Evidence from China's green credit guidelines

How effective are green credit policies in guiding credit flows? We find a significant penalty effect of China's 2012 "Green Credit Guidelines" (GCG) on firms in pollution intensive industries. The GCG achieves cross-industry credit allocation by steering bank loans away from pollution intensive industries. Nonetheless, further analyses suggest special interests associated with political connections, local aspirations for economic growth, and banking business preferences stifle this effect. Strong environmental management at the firm level does not improve firms' access to bank credit regardless of their industries, suggesting GCG fails to attain cross-firm credit reallocation within industries. Additional analysis shows that pollution intensive firms strengthen their environmental management when they are bank dependent. When segregating overall bank credit into short-term and long-term, we find the credit penalty effect is more substantial for short-term credit, and the obstacle effects are somewhat mixed. Our evidence also suggests that pollution intensive firms substitute bank debt with debt supplied by non-bank lenders who are arguably under less compliance pressure, and GCG do not affect pollution intensive firms' real investments. Overall, we highlight the tension between environmental policies' intended consequence and the special interests embedded in the political and economic institutions typical of a large developing economy.