Does designed financial regulation policy work efficiently in pollution control? Evidence from manufacturing sector in China.

Green production and pollution control matter a great deal for resource conservation and sustainable growth. Today, Chinese firms are facing the challenge of upgrading the modes of production of industries with high energy consumption and high pollution to align with green initiatives. Financial systems can be designed to intervene in modes of production to control firms' pollution emissions, but the degree of impact and design mechanism are not clearly understood up to now. Thus, evaluating the policy impact of such transactions related to firm production is indeed an important contribution to existing knowledge about these topics. Using novel firm-level data with pollution and financial variables, we exploit the causal effect of bank loans on firms' abatement performance by using a natural experimental of a green loan policy shock in China. The results show that green loan policy has the positive effect of pollution abatement by state-owned and private-owned firms. This paper also investigates how green loan policy may promote green production through strengthening financial constraint and decreasing fixed and intangible investments. Furthermore, we find that political ties transfer financial burdens from firms with strong political ties to firms with weak political ties. In closing, we articulate the implications of our study of a green financing system for sustainable growth and cleaner production. Image 1 • Green loan policy significantly decreases high polluting manufacturing firms' pollution emission. • Green loan policy significantly facilitates high polluting manufacturing firms' pollution abatement. • Green loan policy performs well in state-owned and private owned firms, but not for foreign firms. • The policy increases the financial constraints and substitutes the fixed and intangible investments. • Political tie transits financial burden to those firms with less political tie. [ABSTRACT FROM AUTHOR]