People’s Republic of China: Financial Sector Assessment Program-Technical Note on Climate Risk Analysis

This Technical Note presents climate risk analysis as part of financial sector assessment program (FSAP) in China. Transition risk analysis showed heterogeneous impacts across different economic sectors and highlighted the importance of considering indirect effects of transition policies on other segments of the banking sector. The physical risk analysis demonstrated that climate change risk in China can induce significant increase in the probability of economic and financial tail risks relative to historical distribution. At present, IMF’s climate risk analysis, such as in this FSAP, is primarily aimed at illustrating potential pressure points for the financial system due to physical climate shocks and the transition to a low carbon economy and raise awareness of the risk and adaptation needs in the financial sector. The authorities should improve and harmonize data collection to enable a more comprehensive and granular analysis of transition and physical risks. Authorities should enhance their analytical capacity to maximize the use of wide range of climate related data for conducting regular climate-related risk analysis. In addition, they should initiate and strengthen collaboration/coordination with other climate-relevant government entities, research agencies, and private sector in China. Given the complex climate and financial system, stronger capacity and human capital development efforts are essential to derive any actionable policy on climate-related risks for the financial system.