Smart investors are recognizing that China intends to lead the United States and other countries in the race to develop green technologies as part of its ambitious new strategy for economic growth.

China’s 13th Five-Year Plan, for the period from 2016-2020, is guided by five principles: innovation, coordination, greening, opening up and sharing. When Vice-Premier, Zhang Gaoli, described these principles earlier this year to a group of overseas business and academic leaders at the China Development Forum, he spent longest on ‘greening’, providing a clear indication of the importance being placed on green development for China’s future growth.

In a conversation that followed, Chinese Premier, Li Keqiang, told Mark Fields, Chief Executive of Ford Motor Company, that sales of gasoline-powered cars are likely to be overtaken within the next two decades in China by those of ‘new energy vehicles’. Both the emphasis and the exchange are indicative of China’s plans for a clean economy, shifting away from carbon-intensive industries, like iron and steel, towards services, while seeking to maintain a robust 6.5% GDP growth rate - the envy of many developed countries.

The old growth model based on manufacturing exports lifted millions of Chinese out of poverty and made China an economic superpower. But it also brought challenges including a coal-dominated energy mix that was damaging to people’s health. Some recent estimates placed damage to health from poor air quality, much of which is associated with burning fossil fuels, at around 10% of China’s GDP.

Now, however, China’s policy makers are going to show the world decisively that climate action and economic growth go hand-in-hand. The 13th plan intends to move the country up the economic value chain towards consumption patterns that are less resource-intensive. The plan also makes explicit reference to managing the structural transition for workers in sectors such as coal, steel and iron, where production will be reduced to eliminate over-capacity.

So what does a green China mean for its own economic growth and for the world?

First, the climate agenda has taken firm root with major positive shifts already underway. China will likely over-deliver on the commitments for 2020, which were made at the United Nations climate change summit in Cancún, Mexico, in December 2010. Researchers estimate that China is already on track to exceed its target of a 40-45% reduction in carbon intensity from 2005 levels by 2020 and the reduction could be as high as 50%. Next year will also see the world’s largest emissions trading scheme being implemented across China, when the 7 pilot trading systems currently in place expand to a national level. And recent research suggests that China’s overall emissions will peak well before the year 2030 as indicated as part of its national pledge in the run-up to the United Nations climate change summit in Paris last December.

Second, reaching the renewable energy targets that China declared in the run-up to Paris translates into a rapid increase in clean energy investment. China’s renewable energy investment in 2015 was US$110 billion: a 17% increase from the year before and nearly double the US renewable investment level. China has installed more wind capacity – 145 GW – than that in the United States, Germany, and India combined. Utilization is also rising: as part of the total primary energy consumption, the share of non-fossil fuels has also increased from roughly 8% in 2010 to 12% in 2015. Recent data suggests that these investments, as well as successful efforts to reduce coal use, may have helped carbon dioxide emissions slow, or even fall, last year. Indeed, China’s coal consumption seems to have reached its peak in 2014.

And third, China is developing new and innovative financing mechanisms to drive the low-carbon transition and help reach its new development goals. Worldwide, the adoption of fossil fuel alternatives, even when cost-competitive, are often hindered by the larger up-front investments they require and by high costs of financing, particularly in emerging and developing economies. But China has been overcoming some of these challenges by using well-structured, low-cost debt to finance renewable energy projects. These have been built by state-owned enterprises and financed by the China Development Bank.

There is still a long way to go and the private sector could – and should – play a key role. More private finance will need to be attracted to support green investments - financing that delivers energy savings, builds clean transportation or reduces pollution – with a potentially important role for a national green bonds market.

The necessary market framework is already being built. In December, the People’s Bank established a green bond market, making China the first country to publish guidelines on the issuance of green bonds. The market opened to strong private interest in January 2016. The Shanghai Pudong Development Bank Company raised US$3.1 billion, with the bank paying 3% annual interest on its three-year bonds, a lower rate than the central bank benchmark for similarly-structured commercial bonds.

China’s green bonds market is expected to grow to US$230 billion within the next 5 years. That is already an impressive total but short of the US$450 billion annually of clean energy investment needed for the next five years. The good news is that interest in green bonds is spreading beyond Chinese financial firms. Chinese carmarker BAIC Motor Corporation has reportedly applied for a US$740 million green bond this year to fund production lines for energy-saving cars. Dirty production is now perceived as risky as the world moves towards low-carbon growth, making green bonds an especially attractive option.

Growth from green investing could also prove a boon for China. Ma Jun, Chief Economist at the People’s Bank of China, estimates that with sufficient financing, demanding for green investment could grow 10-15% per year. Realizing that potential could mean that 2016 shapes up to be a bellwether year for financing better growth.

China has already made green growth and its financing a key element for their ongoing presidency of the G20. The first meeting of the G20’s Green Finance Study Group was held in Beijing in January this year; in April, at meeting of G20 finance ministers and central bank governors, the group was commissioned to come up with specific options for developing green banking and scaling-up the green bond market among other actions.

China is driving for sustainable growth, increases in living standards and reductions in poverty that can last, both at home and as a global leader. And where China goes today, many other countries can quickly and successfully follow.

Introduction of the author:

Nicholas Stern is I.G. Patel Professor of Economics and Government at the London School of Economics and Political Science and Co-Chair of the Global Commission on the Economy and Climate.