The policy mix of green finance in China: an evolutionary and multilevel perspective

ABSTRACT Against the background of climate change, green finance has received worldwide attention in recent years, as policymakers bring the ‘green’ idea into financial sectors and encourage investments in green projects. From an evolutionary and multilevel perspective, this study conducts a comprehensive review of the policy mix of green finance in China. Our analysis emphasizes the dimensions of time and scale of a policy mix that are important elements to understanding the evolution process. We identify a transition process in green finance policies in China with changes in both policy objectives and policy instruments. China has gradually shifted its policy focus from direct public intervention and investment to the construction of a green finance market. From the multilevel perspective, the dynamic vertical interactions between different levels of government have played an important role in this transition. Key policy insights Time and scale are important dimensions of a green finance policy mix, as policy strategies and instruments evolve over time; policies are also designed and implemented at different scales – with direction, learning and guidance from national to local (provincial) and eventually, with time, vice versa. China’s green finance policy mix is undergoing a transitional process, characterized by a shift from direct public intervention and investment to the construction of a green finance market. This involves placing greater emphasis on attracting private investment and financing, and moving away from top-down intervention towards a market-based, polycentric approach with greater engagement and interaction with the private sector. The dynamic vertical interactions between different levels of government have played an important role in the transition toward a more market-based approach. For instance, we find that local experimentation of green finance policies explores different development models for the local financial system against diverse local contexts, and these have, in turn, both influenced policy design of the central government and in some instances diffused to other jurisdictions.


Introduction
In the face of climate change and ecological degradation, low-carbon transition offers a promising pathway towards a sustainable and low-carbon future. Many countries have embarked on changing demand and supply patterns into an environmentally friendly system (Capellán-Pérez et al., 2018;Le Billon et al., 2021). Though green finance (or sustainable finance), and investing guided by environmental, social and governance (ESG) principles, are receiving more attention today, the question of how to finance green projects remains largely unanswered (OECD, 2021). According to innovation theory, financial institutions and private investors often lack interest in green investment in the early stages of technological innovation, deterred by low return rates and by the perception of associated risks (Noh, 2019). The COVID-19 pandemic and the energy crisis sparked by the war in Ukraine have presented both challenges and opportunities to the low-carbon transition in many countries, including China. While there has been a shift in priority from energy transition to energy security and economic rebound, leading to increased investment in fossil fuels (Gosens & Jotzo, 2020;Li et al., 2021;Taghizadeh-Hesary et al., 2021), the energy crisis has also provided an opportunity to accelerate the green transition. 1 In fact, data indicates that transition investment has matched fossil fuel investment for the first time in 2022. 2 Green finance is a practical option to attract private capital; it does so by creating vehicles through the development of good policies, appropriate regulation, and financial frameworks (Azhgaliyeva et al., 2018;Wüstenhagen & Menichetti, 2012).
Public policies play an essential role in financing green projects because of the public characteristics and externalities of green investments (Bhandary et al., 2021;David, 2017;Gramkow & Anger-Kraavi, 2017). Green finance policy encompasses a variety of policy goals and instruments that change over time. Likewise, these policies are designed and implemented at different scales. The complexity highlights the necessity of a strong policy mix, one that combines several policy instruments and focuses more on systemic arrangements, as a comprehensive approach in this field (Reichardt & Rogge, 2016).
In this study, we adopt an evolutionary (time) and multilevel (scale) perspective to analyse the evolution of China's green finance policy mix. China's ambitious low-carbon transitions are taking place at various scales, and its green finance market is rapidly developing and maturing. As reported by the Climate Bonds Initiative (CBI), China has become the world's second-largest green bond market since 2020, 3 attracting growing attention as a significant contributor to global green investment and the clean energy transition. This is highlighted in various studies, including Climate Policy's special issue on Green Finance in Asia. 4 Nevertheless, low-carbon transition entails a high rate of investment in infrastructure (Hall et al., 2017). In China, the significant funding gap between available fiscal resources and expanding green investment demand is a major challenge, with public funds covering only about 15% of estimated demand (Peng et al., 2018). For China to achieve its commitments of carbon peak by 2030 and carbon neutrality by 2060, it is necessary to explore new financial instruments and policies that can attract private financing for low-carbon and environment protection sectors (Hall et al., 2017). Green finance policy has great potential to elevate the private sector's share of investment to fill the green financing gap by increasing the rate of return (Sachs et al., 2019). Thus, it has received increasing attention in both academic and policy circles (Zhang et al., 2019).
In recent years, China has been advancing steadily towards developing a green financial system that functions across the country and at different levels of government. All levels of the Chinese government have introduced a package of policies to 'green' the financial system. Despite progress, the absence of market-based green finance mechanisms hinders the acquisition of private capital in China. Unlike western countries with relatively mature market mechanisms for incentivizing green financing, China relies more on governmental administration and financial regulation to guide financial institutions. Reform focusing on establishing market mechanisms has become the latest trend in green finance in China, bringing new goals and challenges to green finance policy design. Thus, investigating how green finance policies evolve in China's multilevel governance system can bring important insights into the dynamic interactions between the components of the green finance policy mix (Matti et al., 2017).
This analysis focuses on the dimensions of time and scale (Scordato et al., 2018) of China's green finance policy mix. We identify a transition process of the policy mix with changes in both policy objectives and policy instruments. Looking across time, China has gradually shifted its policy focus from direct intervention and investment to the development of a green finance market. Looking at the dimension of scale, China has transitioned its green finance policy mix from a top-down driven process to a one with interactions across multiple levels of governance (referred to here as multi-level interactions).
The remainder of this paper is structured as follows. Section 2 provides background on the development of green finance in China and reviews the literature on policy mix, with a particular focus on the dimensions of time and scale. Section 3 introduces the method and data of the research. Section 4 traces the evolution of China's green finance policy mix in five-year increments and presents the policy change process from the dimension of time and scale. Section 5 explains the identified temporal and vertical patterns of China's green finance policy mix and Section 6 concludes.
Broadly speaking, 'green finance' refers to channelling public and private green investment through a green financial system supported by green finance policies (Eyraud et al., 2011;Welling, 2017;Zadek & Flynn, 2013). The People's Bank of China (PBOC) (2016) defines green finance as 'financial services provided for economic activities that are supportive of environment improvement, climate change mitigation, and more efficient resource utilization.' Due to different political systems and financial markets, the policy design and taxonomies of green finance may vary from country to country. For instance, nuclear energy is included in green finance in China and in the European Union but excluded in Korea and Bangladesh. The term 'green finance' is closely associated with related concepts, such as sustainable finance. Though it is difficult to draw a line between them in practice, as institutional investors usually take ESG impacts into account simultaneously when identifying appropriate investments (European Commission, 2017), strictly, we understand green finance as a subset of sustainable finance. Green finance places more emphasis on the environmental pillar of ESG criteria, as a response to increasing concerns about climate change, pollution, and energy issues.
Green finance in China emerged in 2006 and is primarily policy-driven due to the heavy government involvement in the financial system, which is dominated by state-owned banks under the control of the Chinese government (Ren et al., 2020;Xu & Gui, 2019). Currently, the Chinese banking system is composed of China's central bank (PBOC), three policy banks, six state-owned banks, 12 joint-stock commercial banks, and many city commercial banks, rural commercial banks, and rural credit unions. The Chinese government and state-owned shareholders own policy banks and the majority interest in all the other banks. Therefore, Chinese banks operate under the control of the Chinese government and undertake a variety of policy functions. In the case of green finance policy, the PBOC and the China Banking Regulatory Commission (CBRC) are the main supervisory entities of financial institutions. Their policies regulate all aspects of financial activities and allocate financial resources (Lu & Yao, 2009). Despite a shift in the financial structure towards a more market-based structure (Ji et al., 2019), state-owned banks still dominate the Chinese financial system and play the main role in the practice of green finance .
China has made noticeable achievements in green financial policymaking, practices, and products. The Guidance on the Construction of a Green Financial System, for instance, outlines the basic framework for China's green financial system and represents a top-level policy design for green finance (Gilbert & Zhao, 2017). In 2017, the designation of eight green finance pilot zones marked a more radical implementation of green finance at the local level. Despite noteworthy progress, considerable challenges remain that hinder the expansion of green finance in China. For example, as the main actor in the Chinese financial system, banks are not motivated to invest in green projects because of their reluctance to take risks; moreover, underdeveloped financial markets and the lack of venture capital limit the funding sources for green projects (Sachs et al., 2019). For instance, the investment in renewable energy from financial institutions highly relies on the fiscal and pricing policies from the government and is vulnerable to changes in national policies on clean energy subsidies, meanwhile governmental funds to support green transition are limited. The design and development of the green finance policy mix are expected to confront these challenges.
This article aims to investigate the evolution of the green finance policy mix in China. The investigation of the policy mix with respect to multiple policy goals and instruments, processes of policy formulation, and the evolution of instrument selection is gaining ground in policy science research over time (Howlett & Rayner, 2013;Kern et al., 2017). Time and scale are two important dimensions of a policy mix, as policy strategies and instruments change over time, and policies are designed and implemented at different scales (Flanagan et al., 2011;Milhorance et al., 2020;Scordato et al., 2018).
The temporal changes of policy mixes follow different paradigms (Capano & Howlett, 2020) and are often unravelled through the analysis of the shift in policy focus and instrument (Knill et al., 2012). Scholars have identified several common mechanisms of policy mix development (Wellstead et al., 2016). 'Policy patching' occurs when new policy goals or instruments are added to the existing regime. The layering of elements may lead to incoherence amongst the goals, and inconsistency of instruments (Rayner et al., 2017). 'Policy stretching' occurs when policy elements are extended to cover areas they were not intended to. Policy stretching may cause inconsistency between the old and the new policy instruments or pose risks of incongruence between the old instruments and new goals (Howlett & Rayner, 2007). 'Patching' or 'stretching' a policy are common measures in China and many other countries. These mechanisms also can be identified in the evolution of green finance policy. Though some scholars argue that policy patching and stretching may bring sub-optimal outcomes (Howlett & Rayner, 2007), they are also possible to create effective policy mixes by cautious design.
The vertical interactions between instruments and actions at different levels of governance are also important in policy mix analysis (Colenbrander et al., 2018;Flanagan et al., 2011). Policy instruments enacted at one governance level would exert influences on policymaking of other governance levels (Bressers & O'Toole, 2005). The outcomes of policy implementation at the local level would also trigger policy responses from higher-level governments. Particularly relevant to this vertical dimension of the policy mix is the multilevel political structure of China (Huang, 2019). In China, policy goals are generally set by the central government, but implementation experiments are introduced at the regional or local level (Schreurs, 2017). Rather than passively receiving policies, in many cases, subnational governments would reshape and tailor policies according to specific local contexts. To implement the green finance policy, China has launched eight green finance pilots. Pilot areas serve as an ideal arena for analysing the verticality of the policy mix for green finance, particularly how overarching policy objectives are aligned with local contexts.
Investigating how policy mixes evolve over time and across different levels of government is a promising research direction for policy studies, particularly for understanding green finance policymaking in China (Ongaro et al., 2019). Nevertheless, while existing literature has analysed individual instruments within a single governance level, little attention has been paid to the interactions between components of a policy mix over time and across different governance levels. In the following section, we analyse the evolution of the green finance policy mix, and how different instruments interact, in China, from the two dimensions of time and scale.

Research methodology and data
In this study, we use document analysis to trace the development of China's green finance policy mix. We first conduct a systematic review of the national and provincial policy documents to uncover the evolution and characteristics of the green finance policy mix in China. Data were extracted from the 'PKULAW' (www. pkulaw.cn) and 'BAILUZHIKU' (www.bailuzhiku.com) databases, both of which incorporate China's national and local policy documents. In the end, we downloaded 418 relevant policy documents (127 national documents and 291 provincial documents), including notices, guides, announcements, plans, and government work reports, all published between 2006 and 2020. Appendix 1 elaborates on the coding framework, and Appendix 2 lists the most relevant policy documents. We cite the related policies in this study using the corresponding coding numbers. Both Appendices can be found in the Supplementary Materials (SM).
In the literature, policy instruments are generally categorized as either technology-push versus demand-pull, or regulatory versus economic instruments (Bernstein, 1993;Di Stefano et al., 2012;Xu & Su, 2016). In the analysis, we follow Vedung et al. (1998) and Park (2015) and categorize policy instruments using a tri-fold or threepart classificatory scheme that includes command and control, market-based, and information instruments.
Command and control policy instruments are regulatory instruments implemented by governments to influence targets through authoritative means (Park, 2015). Market-based instruments are also referred to as economic instruments; they are designed based on the market failure theory, using prices, market-based rights, and economic incentives to influence actors' strategic choices (Filoche, 2017). Information instruments target people and influence behaviour through knowledge transfer, communication, and persuasion (Park, 2015). Appendix 3 presents a detailed classification of the typology of policy instruments (see SM).
While our threefold typology for coding policy instruments is based on conventional typologies in the literature, the approach is not without limitations. The primary limitation is that the typology we use is uniquely focused on our subject of green finance, which means it might neglect some other significant distinctions of the policy instruments. Therefore, alternative typologies may reveal different patterns of policy instruments and lead to additional insights and results. However, these limitations also provide opportunities for more nuanced exploration in further research. Figure 1 shows the temporal distribution of green finance policies at the national and provincial levels. As can be seen, green finance policymaking at the provincial level significantly lags behind the central level, as centrallevel policy documents began to emerge in 2006 and provincial documents not until 2011. The number of issued policies changes in provincial policies showed a similar trend to those at the central level in the early stages but later started to exhibit different patterns.

Evolution and periodic policy characteristics
Since 2016, the number of green finance policies at the provincial level has surged. This development is likely to be driven by the Guidance on the Construction of a Green Financial System (policy document N38 5 ), which was released by the central government in August 2016. Because in the early stages, subnational governments lacked the experience and capacity to explore green finance, they relied mainly on policy guidance from the central government (see, e.g. provincial document P10, P19, P31-33). However, as policies, instruments, and technologies matured, subnational governments gained more experience, so they no longer simply followed the guidance of central policies but instead developed more detailed or diverse policies adapted to local contexts.
Periodically, the evolution of the green finance policy mix parallels China's FYPs, which guide the country's economic and social development. By setting environmental and energy goals, FYPs help to accelerate the demand for green investment. Studies have shown that a transparent and stable governmental strategy may positively influence investors' risk-return perceptions (Falcone & Sica, 2019;Guild, 2020). In this regard, In this article, policy documents are coded as two categories. We use 'Nx' to code national policies, where listed policy documents can be found in Appendix 2, Table 1; we use 'Px' to code provincial policies, where listed documents can be found in Appendix 2, Table 2.
FYPs that endorse emission reduction and low-carbon transition can act as a political stimulus for private investments (Zhou et al., 2020). In light of this, we divide the development of green finance policy between 2006 and 2020 into three phases following the periods covered in successive FYPs: 11th FYP (200612th FYP (201112th FYP ( -2015; and 13th FYP (2016-2020). Table 1 presents the policy mix evolution and reviews policy objectives and instruments for green finance in China according to these three phases.
Vertically, as the central government plays the main role in designing top-level policies to guide subnational policy design and implementation, green finance policies at the provincial level highly align with those at the central level. On the other hand, local experimentation of green finance explores different development models against different circumstances, hence offering diverse practical samples for promoting green finance across the country and in turn, influencing policy design at the central level.

Phase 1: 11th FYP (2006-2010)
Since the 11th FYP, China started to place greater emphasis on environmental protection, with a shift in policy direction that sought to integrate financial sectors into environmental protection and use financial instruments to restructure the economy. In 2006, the issuance of the first green credit product for energy conservation and emission reduction indicated the emergence of green finance in China (Papapanou, 2020). Policy objectives in this period were quite focused and targeted, as the main aim of the green finance policy mix was to reduce pollution and energy intensity by financial means (see, e.g. N7). Policy mixes for green finance during this period lacked a comprehensive framework, and the primary policy objective revolved around the promotion of the green credit system (see, e.g. N3, N5). During this period, China implemented policies supporting the green credit system (see, e.g. N10; P1), which became the primary financial channel for green investment in the country . These policies call on banks to approve loans by considering compliance with environmental regulations and by introducing Equator Principles 6 into green credit. The focus was on clean technologies in highly polluting and energy-consuming industries, with support for (cleaner) coal power. Information sharing between the former State Environmental Protection Administration (SEPA) and financial sectors was another key measure, with corporate environmental violations incorporated into the corporate credit system and shared with financial institutions to evaluate investment risks. This measure significantly reduced the likelihood of loans for polluting enterprises (see, e.g. N2). The policy mixes during this period also mentioned green insurance and green security but did not offer specific guidance for policy implementation (see e.g. N8).
The government also favoured command and control instruments in this period; specifically, it used supervision and regulation to guide bank credit and to give loan support to green projects. We identify supervision in environmental pollution liability insurance and mandatory environmental audits. In addition to command and control instruments, the government introduces a few economic incentives, such as loan pricing and government funds, mainly to support research and development of green technology. During this time, economic instruments relied heavily on direct governmental investment instead of private capital. Information instruments were supplementary to command and control approaches.
Looking vertically at lower levels of governance, at this stage we do not find any policy that refers to green finance at the provincial level. The 11th FYP was a period of exploration and introduction of green finance policy at the central or national level of governance. The concept of green finance is not introduced at subnational levels of government until later.

Phase 2: 12th FYP (2011-2015)
During the 12th FYP, the political priority of energy conservation and emission reduction significantly increased the demand for green investment. In 2012, building an 'ecological civilization' is considered one of China's national priorities, necessitating robust financial infrastructure. Consequently, renewable energy development became an important arena in green finance (see, e.g. N16; N31). In this period, green finance policy aims to introduce more innovative financial instruments based on a market mechanism and to build a more pluralistic green finance system; it is based on green credits, green bonds, and green insurance.
We observe a few significant developments in policy instruments in this period. First, China initially builds a practical green credit system, the focus of which transitioned from (cleaner) coal power to renewable energy (see, e.g. N17). Since 2013, the loan balance of green credit for renewable energy projects continued to increase, especially for solar and wind capacity investments (Li et al., 2021). Second, green bonds are introduced as a new financing channel (Kidney & Oliver, 2014). The Chinese government supported green bond issuance by lowering restrictions on issuers and by raising incentives, such as investment subsidies for purchasers, government guarantee schemes, and bond interest discounts (see, e.g. N32). Third, China's carbon trading market developed rapidly from 2013, as commercial banks moved into the fledgling carbon markets, helping clients hedge carbon-trading risks and financing new investments using carbon certificates as collateral (Munnings et al., 2016).
During the 12th FYP, the green finance policy mix in China also became more pluralistic. As for policy instruments, economic incentives played an important role in supporting green investment. A set of financial 6 The Equator Principles were formulated in 2003 based on sustainability standards from the International Finance Corporation (IFC). It serves as voluntary guidelines for financial institutions to identify, assess and manage environmental and social risks when financing projects.
incentives, including investment subsidies, green credit guarantee schemes, and fiscally subsidized interest rates, were used to attract green investment through multiple channels. Further, the establishment of special funds became common practice to increase profitability and decrease the risk of green investments, specifically private sector investment (see, e.g. N13).
Vertically, following policy guidance from the central government (e.g. N4, N7), some subnational governments began to engage with green finance policy practices. In 2011, to achieve targets for energy-saving and carbon reduction assigned by the State Council, Beijing Municipal Government proposed green finance approaches, encouraging financial institutions to establish green credit mechanisms and to set up funds to support emerging green industries (e.g. P3). In following years, other regions replicated this practice to extend green credit and to develop environmental pollution liability insurance, including in Hebei and Gansu (e.g. P4, P6). Moreover, the Chinese central government designed a pilot CO 2 Emissions Trading System (ETS) in 2011 and launched seven pilots at sub-national level in 2013 (Li & Taeihagh, 2020). The emergence and development of green finance at the subnational level occurs during the 12th FYP period, where we notice that subnational governments largely follow suit of the central government, not only in policy design but also in the implementation of green finance policy.

Phase 3: 13th FYP (2016-2020)
Promoting green finance to facilitate the development of a low-carbon and green economy is one of the major foci of the 13 th FYP. In 2016, the Chinese government promulgates the Guidance on the Construction of a Green Financial System (N38). Green finance thus enters a new stage of systematic development, with a policy mix that focuses on framework establishment, financial products innovation, and market construction. In this period, progress is made in the development and implementation of green finance standards in constructing a framework to expand green credit; to evaluate green banking; to securitize green loans; to expand and improve performance of the pilot CO 2 ETS; and to implement the Green Development Fund (GD Fund).
Building on existing green credit policy, governments at the provincial level encouraged financial institutions to issue more green loans through mechanisms such as interest subsidies, on-lending, and loan guarantees, while preventing the extension of loans to highly polluting industries through regulatory and information means (see, e.g. N54). To balance the development of diverse financial channels, the central government established a more comprehensive policy mix for green bonds and the market-based GD Fund for leveraging private capital. To motivate banks in green finance, the CBRC developed a green banking evaluation system (see, e.g. N68). Moreover, the development of new financial technologies ('fintech'), such as blockchain and big data, made green investment more efficient in this period.
During 2016-2020, the policy mixes for green finance in China were significantly influenced by market factors. A primary focus was on developing innovative green financial products and establishing a financial market mechanism (see, e.g. N32; N60), which was supported by various economic incentives like discount interest, re-loans, macro-prudential assessments, and government guarantee schemes (see, e.g. N38). The GD Fund became an important instrument, with both central and provincial governments adopting a Public-Private Partnership (PPP) to leverage private capital with limited use of government funding. Though less dominant, command and control instruments, such as stricter credit constraints on polluters, continued to play an important role in addition to market-based instruments.
Additionally, we observe vertical development of the green finance policy mixes ranging from the carbon trading market to the local demonstration and uptake of green finance mechanisms. The carbon trading market in China was expanded nationwide, building on the experience gained from sub-national carbon trading pilots. This process demonstrated the interaction between central policies and local experimentation. Furthermore, in June 2017, the State Council approved the establishment of eight 'National Pilot Zones for Green Finance Reform and Innovation' to explore innovative development pathways in unique local contexts and to offer practical means of diffusing, locally-tailored green finance policy across the country. So far, these pilot zones have made considerable progress in the design and implementation of green products and services, in the specification of supporting policies, and in market construction for green finance. Some innovations have diffused to other provinces and, in turn, informed the policy design at the central level. For example, environmental equity like carbon emission allowance as an innovative financing tool, which was first initiated in Guangdong, has now diffused nationwide. 7

Analysis of the policy change from the temporal dimension
We identified a temporal transition process of China's green finance policy mix. Over the years, green finance policy objectives have been quite coherent, from broader environmental protection and energy conservation (see, e.g. N5, N7) to more specific carbon emission reduction, energy efficiency (see, e.g. N14-15) and green development (see, e.g. N33, N49). The instruments in place have evolved from command and control tools to a more complex instrument mix, to include market-based and information instruments (see Table 1). Specifically, China has gradually shifted its policy approach from direct government intervention and investment to the construction of a green finance market that builds upon a market-oriented mechanism and market-based financial products.
China's initial approach to green finance policy relied mainly on government intervention, supervision and administrative measures. But in later stages, through the use of various financial products, such as green credit and green bonds, economic incentives became more important instruments for supporting green finance. Those economic incentives include subsidies, tax incentives, grants, long-term loans, green development funds, etc. Lately, green finance policy has developed into a comprehensive policy mix stressing both command and control and market-based policy instruments in the context of market reform, where a key objective is to establish a systematic and practical green financial system framework; this framework consists of a combination of policies, incentives, and disincentives, and a regulatory structure, aiming to mobilize private capital markets to support green projects. Increasingly, market mechanisms are being used in combination with regulatory measures to promote green investment and green growth.
The establishment of the GD Fund shows a significant process of 'policy patching' used to address gaps in the existing green finance policy framework. 'Policy patching' is the addition of new policy goals or instruments to an existing regime (Rayner et al., 2017). The Chinese government officially established a National GD Fund in 2020 (Qu & Tian, 2020). It originated from the Clean Development Mechanism Fund (CDM Fund) and the Renewable Energy Development Fund (RED Fund). The CDM Fund was established in 2007 to support the development of low-carbon industries, while the RED Fund, established in 2011, provided electricity tariff subsidies for renewable energy (Lewis, 2010;Mo, 2018). Unlike its predecessors, the GD Fund serves the new objective of building a market-oriented green finance system. It aims to diversify investment channels for environmental protection and use market mechanisms to support green development. The GD Fund adopts leverage-based mechanisms, and through professional management, it shifts the government's focus toward a public finance system that generates a leverage effect to attract private investment. Additionally, the GD Fund helps multiple stakeholders share the risk of investing in green projects and provides stakeholders with diversified asset distribution channels. The establishment of the GD Fund indicates that the government prefers to add new instruments to the old ones to serve new objectives, based on an assessment of what is missing; this is what we refer to as policy patching.
The introduction of CO 2 ETS onto administrative penalty presents a 'policy stretching' process. 'Policy stretching' occurs when policy elements are extended to cover areas they were not intended to (Howlett & Rayner, 2007). The environmental administrative penalty is a long-standing administrative tool in China, originating from the 'Measures on Administrative Penalties for Environmental Protection' promulgated in 1999. Currently, the most common penalty is administrative fines on companies that exceed their emissions quota. China began piloting CO 2 ETS in seven cities in 2013 (see, e.g. N15) and launched the national carbon emissions trading market in 2021. Although the environmental administrative penalties and ETS both follow the principle of quantifying environmental costs and 'the polluters pay,' they differ in specific policy targets. The purpose of administrative environmental penalties is to control the total amount of pollutant emissions. China's ETS is 7 Environmental Equity Financing Instrument (financial industry standard) officially launched (cfstc.org). essentially a tradable performance standard (TPS): it targets reductions in the CO 2 intensity of economic activity rather than total CO 2 emissions (Karplus, 2021). In other words, the ETS extended the instrument functions of administrative penalties, thus our reference to policy stretching.

Analysis of the policy change from the vertical dimension
We also identified a vertical pattern in China's green finance policy mix evolution from a largely top-down, national process to multi-level interactions. In the early stages of green finance policy development, China's policymaking was 'top-down' in nature. The practice of green finance at the subnational level significantly lagged behind the central level policy design and implementation. The central government played the main role in policy design and guided local governments on how to develop and implement relevant policies (e.g. N7, N17, N38). Subnational governments mainly followed central-level guidelines, and no distinctive local instruments emerged in the earliest period of green finance in China (e.g. P31, P33, P36). With time, local experimentation occurred, and subnational governments no longer passively implemented central policies but took more proactive actions to stimulate local innovation (see, e.g. P52). These innovations, in return, influenced green finance policy design of the central government and other jurisdictions.
The success of CO 2 ETS is a good example of vertical or bottom up innovation influencing central policy. In 2013 and 2014, China established seven pilots for CO 2 ETS (Li & Taeihagh, 2020). These pilots have effectively reduced carbon emissions in the pilot regions and have provided rich experience on which to base the construction of a national carbon market. As of the end of May 2019, a total of 310 million tons of CO 2 had been traded in the pilot carbon markets (Hong, 2020). In 2017, the National Development and Reform Commission (NDRC) issued the National Carbon Emission Trading Market Construction Plan (Power Industry), and in July 2021, following the same trading mechanism as those used in the pilot areas, the national carbon emissions trading market was officially launched. This approach 'from point to surface' shows the interactions between central and local governments: the central government designs the policy goal, but rather than releasing a policy package directly, it allows and encourages local policy innovations that absorb and adapt the ideas into local contexts for implementation.
The design of green finance pilots follows a similar approach. China has currently launched eight pilot zones for green finance reform. Each pilot zone was assigned specific tasks that were rooted in local contexts to address place-specific challenges (Table 2). For instance, for more developed areas, such as the provinces of Zhejiang and Guangdong, a key focus was the structural transformation of the local economy, while for more underdeveloped regions, such as Guizhou and Xinjiang, special attention was paid to greener and more efficient utilization of local resources. As an example, Xinjiang is emphasizing the development of innovative green agricultural credit products as well as index insurance for wind power and photovoltaic power generation due to its abundant renewable energy resources and strong agricultural sector.
Given the different tasks, the policy design varied among regions. For example, two regions prioritized the energy sector in green finance development. Guangzhou had a more comprehensive and pluralistic approach to green finance development, with policies covering different dimensions such as institutional infrastructure, green finance products, and services. In comparison, Changji focused on targeted sectors such as agriculture and renewable energy, seeking innovative measures to efficiently boost production factors. The policy tools selected by local governments were also closely related to local governance capacities. In Guangzhou, economic instruments such as subsidies and awards were frequently used by the municipal government to incentivize the engagement of enterprises in green finance development. By comparison, economic incentives were rare in Changji, and the local government played a more enabling and mediating role between enterprises and financial institutions.
As can be seen, the central government authorizes and guides local experimentation, but local governments differentiate policy innovations to adapt to unique local and regional contexts. These dynamic vertical interactions are rooted in complex central-local relations in China. China has a multilevel political structure under a decentralized authoritarian regime (Landry, 2008). As environmental rights often conflict with short-term economic growth in China, the central government typically plays the primary role in the policy design for sustainability. This is evident in the early policy design of green finance at the national level (e.g. N7, N17, N38) and the similar policy contents at the provincial level (e.g. P3, P11, P12, P13).
However, local governments in China are not only responsible for implementing central policies, but also have the authority to create local policies. With the decentralization reform in China, which shifted centrallocal relations to federalist principles, local governments have some discretion in policy implementation and innovation (Zheng, 2006). Some of these local innovations can be recognized and adopted by the central government to further refine policy design. One such example is the adoption of green bonds and carbon emission rights as collateral for bank loans in Guangdong Province. In 2014, the first successful carbon allowance collateralized finance was implemented in Guangzhou, with Huadian New Energy Company obtaining a mortgage of RMB 5 million using carbon emission allowances allocated by Guangdong Province. 8 This policy innovation has now been adopted by the PBOC and is being implemented in many other provinces across China. In 2021, the PBOC released the Environmental Equity Financing Instrument, which clarifies the implementation process of environmental equity financing instruments and provides guidance for its nationwide implementation. 9

Green finance policy in the new stage
Despite changes in policy over time and across different levels of government, China's green finance policy is characterized by notable government intervention in financial activities, and public actors are the main driving force behind green finance development. This approach contrasts with that of developed countries, where green finance is typically spearheaded by financial institutions and operated under a market-based mechanism. For example, in 1992, a group of commercial banks, including Deutsche Bank, HSBC Holdings, Royal Bank of Canada brought attention to the environment and sustainable development in the banking sector (Jeucken, 2010). Similarly, the now widely used Equator Principles were initially proposed by a number of private banks (Xu & Li, 2020). In developed countries, investor communities, non-profit associations, and a wide Explore effective ways for green finance to support the transformation and upgrading of the industrial structure . Explore effective ways for green finance to promote the optimization of regional economic structure Quzhou Ganjiang New District Jiangxi . Explore effective ways for financial support to promote the development of an ecological economy . Build a green financial organization system . Explore innovative credit products and financing modes in the fields of energy conservation and emission reduction, and clean energy . Explore the policy effects of financial support for the development of green finance Guangzhou Guangdong . Explore a new development model compatible with green financial reform and economic growth . Encourage the establishment of new energy automobile finance companies and actively carry out the innovation of financial products for new energy automobiles Guian New District Guizhou . Explore effective ways for green finance to guide the economic transformation and development of underdeveloped areas in Western China . Explore innovative green agricultural credit products, focusing on supporting agricultural industry projects such as modern urban agriculture, organic ecological agriculture, rural water conservancy project construction, and agricultural sewage treatment Hami Xinjiang . Combine the development of green finance with local endowments such as agriculture, clean energy resources, and energy-related, high-end manufacturing industries . Explore innovative green agricultural credit products such as innovative wind power, (photovoltaic) power generation index insurance, the first set of insurance packages for major technical equipment, etc.

Changji Prefecture Karamay
Source: Authors based on programme data, policy documents, and government websites. array of civil society actors are drivers of green finance development. Nevertheless, in many developing countries (e.g. Brazil and India), the development of green finance is highly policy-driven and features a topdown design. This is particularly true in China, where banks, particularly state-owned banks, serve as an agent of central policy, and the influence of the private sector and civil society is thus less significant (Huang, 2022). China's green finance policy has recently endeavoured to foster the engagement of non-state actors in green finance activities (e.g. N55-56, N64). More non-state stakeholders, such as listed companies, institutional investors, and insurance companies, alongside traditional financial institutions, seize the opportunity to actively participate in green finance services and green financial products innovation (Green Finance Committee, 2021). The impetus for this expansion of participation is the escalating demand for green investments, brought about by China's commitment to reach carbon peak by 2030 and carbon neutrality by 2060. Following the commitment, we can observe augmented support for green finance policies, with the introduction of targeted policies by the central government and the People's Bank of China, such as the national emissions trading system, fiscal incentives, tax breaks for low-carbon activities, and disclosure of carbon reduction for loans (PBOC, 2021;State Council, 2021). Thus, the changes in green finance policies can be seen as a response to the nation's development strategies in the new stage.
As the pace of development of green finance continues to accelerate in China, the country's efforts to seek international collaboration are also evident in its green finance policies. In 2022, the NDRC issued the 'Opinions on Promoting Green Development of "One Belt, One Road",' which proposed to align domestic and international green financial standards through international cooperation and to promote the orderly two-way opening of the green financial market. The latest edition of the Catalogue of Green Bond Support Projects in 2021 incorporates the widely accepted 'Do No Significant Harm' principle to improve the alignment of China's domestic green bond standards with international standards. The aforementioned policies aim to not only enable Chinese capital to enter foreign countries but also to entice international green investment into China. Consequently, the push for international green financial cooperation has necessitated further development of green financial policies in China beyond green standards. Further investigation is necessary to determine how the incorporation of these new factors may impact future changes in China's green finance policy.

Conclusion
'Green finance' represents a 'green' shift in the financial system to promote low-carbon transitions. The development of green finance needs to be guided by public policies through a combination of regulations, economic incentives, and market-based mechanisms. This study provides a detailed interpretation of the development of China's green finance policy mix from both temporal and multilevel governance perspectives. It speaks to the literature on green finance policy by emphasizing time and scale (or level of governance) as important elements in policy evolution.
The comprehensive document analysis conducted here reveals that the central government's FYPs have a dominant role in guiding policymaking in China. The development of green finance policies is closely aligned with the objectives of the FYPs, as they are designed to complement and fulfil them. We identify a temporal transitional process in China's green finance policy mix, characterized by a shift from direct public intervention and investment towards the construction of a green finance market. This involves placing greater emphasis on attracting private investment and financing and moving away from top-down intervention towards a marketbased, polycentric approach with greater engagement and interaction with the private sector, including developing more market-based financial products (e.g. ETS, green bond) and motivating the participation of varied actors (e.g. insurance companies, angel investors, and venture capital). Moreover, the dynamic vertical interactions between different levels of government have also played an important role in this transition. For instance, local experimentation of green finance policies explores different development models for the local financial system against diverse local contexts, and these have, in turn, both influenced policy design of the central government and in some instances diffused to other jurisdictions.
In the past years, in response to rising demand for green finance stemming from strengthened climate and environmental governance, the Chinese government carried out significant efforts to develop green finance, including at a system level. The COVID-19 pandemic highlighted the importance of using green finance to enhance green investments to achieve climate-related goals, in parallel to responding to the global economic crisis, calling for more attention to new policy approaches. Despite noticeable progress made in green finance development in China, substantial challenges lie ahead, which include, but are not limited to, the integration of green standards, the re-translation of local experiences into central policy design and implementation, the need for active participation of non-state stakeholders, and the overall fostering of a market-based financial system.

Disclosure statement
No potential conflict of interest was reported by the author(s).