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On August 7th, 2024, the Suzhou ESG Financial Matching Platform and ESG Industry Innovation Party Building Community, sponsored by Suzhou Industrial Park, was successfully held in the park. Multiple measures were taken at the event to empower and enhance green sustainable development. Zhang Yingjie, Vice President of CCX Green Finance, was invited to attend and announced the launch of the "Financial Institution Green Carbon Pass Platform 4.0".      During the event, the Suzhou ESG Financial Matching Platform was officially launched. As an innovative measure to promote the development and practical application of the ESG industry, the platform is committed to building a bridge connecting financial institutions and enterprises, deepening the information barrier between enterprises and financial institutions, and promoting the integration of green finance and ESG practices. After the platform is launched, financial institutions can provide green finance services to enterprises through the platform, targeting and accurately irrigating the green industry in the park with financial "living water", providing comprehensive green finance solutions for enterprise development, and helping enterprises with green technology innovation, green project implementation, and green transformation and upgrading.   Zhang Yingjie, Vice President of CCX Green Finance, announced the launch of the "Financial Institution Green Carbon Pass Platform 4.0". The system is designed to provide a universal platform for green credit business of financial institutions and carbon emission, carbon reduction, and carbon inclusiveness. The Financial Institution Green Carbon Pass Platform is mainly divided into six modules, including green credit identification, environmental benefit calculation, carbon emission measurement tools, green credit statistics, environmental information disclosure, and ESG risk management.     Zhang Yingjie explained that CCX Green Finance has developed identification methods that comply with the current green credit identification standards after many years of providing green banking services to domestic banks. The modules are simple, effective, and accurate, and the identification methods include loan industry law and loan purpose keyword law. It can help customer managers who lack knowledge of green industries to complete green loan identification and classification through simple keyword searches or recommendations, further improving the accuracy of green loan labeling and the work efficiency of customer managers.   The ESG risk management module is divided into ESG risk ratings for listed and bond-issuing companies and ESG risk ratings for small and medium-sized enterprises. Among them, the ESG risk rating for listed and bond-issuing companies is based on more than 7 million pieces of underlying data accumulated by CCX Green Finance over 4 years. It extracts 21 primary indicators, 55+ secondary indicators, 180+ tertiary indicators, and 700+ fourth-level indicators based on the characteristics of the industry, and constructs 57 ESG rating models with industry characteristics to rate tens of thousands of listed and bond-issuing companies, and generate rating reports online. The ESG risk rating for small and medium-sized enterprises integrates and processes data from financial institutions' enterprise databases, loan-related data, external data, and research data, and calls the rating model to evaluate risks, helping banks to assess the credit risks of their customers from the perspectives of the environment, society, and corporate governance, and monitor their sustainable repayment capacity.     After the meeting, Zhang Yingjie had in-depth discussions with relevant officials of Suzhou Industrial Park and led a visit to the park, gaining a deeper understanding of Suzhou Industrial Park's investment and level of importance in the ESG field.   As one of the earliest third-party service organizations to participate in the construction of domestic green finance and sustainable systems, CCX Green Finance relies on its professional advantages in the credit service field, has been deeply involved in the green finance field for many years, and specializes in ESG investment and consulting, green finance consulting, and green bond rating services.  

Overseas economic downturn risks emerge, with both "grabbing exports" and "grabbing imports" coexisting -- Analysis of July 2024 Import and Export Data     ●    Weaker external demand led to a slight slowdown in export growth, while "grabbing imports" and a low base drove import growth from negative to positive. In July, exports amounted to $300.56 billion, a year-on-year increase of 7%, down 1.6 percentage points from the previous month's growth rate, lower than the market's expected 9.5%; a month-on-month decrease of -2.37%, the lowest since the same period in 2001. The slowdown in export growth may have been affected by the marginal weakening of the global economy and weaker external demand. In July, the global manufacturing PMI was 49.7%, falling below the boom-bust line for the first time this year, with significant declines in developed countries' economic outlook, with the US and Japanese manufacturing PMI falling by 1.7 and 0.9 percentage points to 46.8% and 49.1%, respectively, and the European manufacturing outlook remaining low. In addition, in July, the unexpected increase in the US non-farm unemployment rate triggered the Sam rule, and the Bank of Japan's 15 basis point policy rate hike caused economic fluctuations, highlighting the risks of overseas economic downturn. Looking at the new export order index of the PMI in July, although it rose slightly by 0.2 percentage points from the previous month, it has been below the boom-bust line (48.5%) for three consecutive months, reflecting signs of weaker external demand. However, overall, due to sustained strong external demand and the continuing semiconductor cycle recovery, China's export volume in the first seven months of the year increased by 4% year-on-year in US dollars, a significant increase of 8.67 percentage points from the end of last year. Breaking down the relationship between quantity and price, the main reason for the increase in export growth from January to July was the support of quantity. Looking at the quantity and value of key export commodities, this year's export quantity growth rate of automobiles, home appliances, mobile phones, agricultural products, as well as bulk commodities such as steel and rare earths, has been significantly faster than the growth rate of export amounts, and some commodities have shown the phenomenon of an increase in export quantity growth rate and a decrease in export amount growth rate. As for imports, due to the low base last year and the "grabbing imports" drive, the import amount denominated in US dollars turned positive in July, with a year-on-year increase of 7.2%, far exceeding the market's expected 3.5%. Under the weak export and strong import situation, China's trade surplus in July fell to $84.65 billion. Looking ahead, with the global manufacturing outlook contracting and external demand weakening, exports may face some pressure, but considering that the semiconductor upcycle is still ongoing and "grabbing exports" may continue until the announcement of the US election results, the export growth rate for the whole year is still expected to remain above 3%.   ●    Exports to European and American countries continue to improve, while export growth to ASEAN has marginally slowed down. From a country perspective, ASEAN is still China's largest trading partner, with cumulative exports from January to July increasing by 10.8% year-on-year. However, in July, exports to ASEAN increased by 12.16% year-on-year, down 2.86 percentage points from the previous value, showing a marginal slowdown in growth. Due to the impact of the US-EU trade dispute, Chinese companies have shown some "grabbing exports" behavior. In July, exports to the US and the EU increased by 8.1% and 8% year-on-year, respectively, up 1.5 and 3.92 percentage points from the previous month, and have been rising for four consecutive months. In June, exports to Mexico increased by 22.39% year-on-year, up 11.11 percentage points from the previous value. In terms of export amount proportion, China's export proportion to the EU and the US increased from 14.55% and 13.67% in March to 14.74% and 14.30% in July, respectively. The proportion of exports to Russia, Mexico, and other countries increased slightly, from 2.98% and 2.54% in April to 3.07% and 2.59% in July, respectively. However, the export proportion to Russia has fallen from 3.24% in the same period last year and 3.28% at the end of last year. The proportion of exports to emerging markets such as ASEAN and Vietnam has passively declined, with the proportion of exports to ASEAN falling from 16.91% in April to 16.54% in July and the proportion of exports to Vietnam falling from 4.63% in April to 4.54%.   ●    Exports of electromechanical products and high-tech products maintain a relatively fast growth rate, while the growth rate of labor-intensive products has slowed down. From the perspective of export products, from January to July, exports of electromechanical products increased by 5.6% year-on-year, up 0.7 percentage points from the previous value, and were the main driving force behind China's rapid export growth. Among them, automatic data processing equipment and its parts and integrated circuits increased by 8.7% and 22.5% year-on-year from January to July, respectively, up 1.8 and 0.9 percentage points from the previous month, possibly due to the strong demand for chips driven by the rapid rise of artificial intelligence this year. Shipbuilding and automobile exports increased by 79.7% and 18.1% year-on-year, respectively, down 5.5 and 0.8 percentage points from the previous month, but still maintaining a high growth rate. Due to the low base last year, exports of high-tech products increased by 4.3% year-on-year from January to July, up 1.2 percentage points from the previous month. The driving force of the "New Three Products" on exports has weakened, and the export amounts of lithium batteries and electric cars, which had rapid export growth last year, have both declined to varying degrees from the end of last year. From January to June, they increased by -15% and 22.3% year-on-year, respectively, a significant decrease of 42.8 and 51.1 percentage points from the end of last year. The export amount of solar cells decreased by 29.5% year-on-year in the first half of the year. The proportion of "New Three Products" in exports also decreased from 4.45% at the end of last year to 4.01% at the end of June. The year-on-year growth rate (in RMB) of labor-intensive goods declined, increasing by 5.1% year-on-year, down 1.5 percentage points from the previous month, with furniture, clothing, plastics, and bags and other labor-intensive products increasing by 11.9%, -0.8%, 7.2%, and -1.1% year-on-year, respectively, down 2.9, 0.8, 1.1, and 1.9 percentage points from the previous month. The growth rate of industrial raw materials and intermediate goods such as rare earths, steel, and finished oil was relatively low, with export amount growth rates of -40.7%, -8.4%, and -3.8% from January to July, respectively, possibly affected by the lower prices of related commodities.   ●    Driven by the import of electromechanical products and high-tech products, import growth has significantly increased. From January to July, the import amount was $1.49 trillion, a year-on-year increase of 2.8%, up 0.8 percentage points from the previous value. In terms of products, due to the decline in commodity prices such as coal, natural gas, soybeans, and grain, the import amounts of coal, natural gas, soybeans, and grain decreased by -6.0%, 0%, -18.4%, and -15.5% year-on-year from January to July. From January to July, the import amounts of high-tech products and electromechanical products increased by 11.9% and 8% year-on-year, respectively, up 1.1 and 1.2 percentage points from the previous value, maintaining a high growth rate. High-tech products and electromechanical products exports were also the main driving force behind the marginal improvement in import growth in July, with a year-on-year pull of 5.8 and 5.1 percentage points, respectively, possibly due to concerns about restrictions on the import of related products such as semiconductors after the US election.   ●    In July, the trend of strong exports and weak imports reversed. In the short term, "grabbing exports" and the semiconductor cycle recovery may still provide support for exports, and "grabbing imports" may further improve imports. The overall trend of foreign trade data in July was a slowdown in exports and an increase in imports. Looking ahead, in the short term, "grabbing exports" and the semiconductor cycle recovery can still provide favorable support in the third quarter. As the US election results approach in the second half of the year, right-wing forces in Europe have risen, and there is significant uncertainty about China's policy, "grabbing exports" may continue. In addition, considering that the semiconductor upcycle usually lasts 1-3 years, it is expected to continue to provide support for China's high-tech manufacturing and export industries such as integrated circuits. However, the trend of global manufacturing contraction and weaker external demand has already emerged, and the political bureau meeting in July pointed out that the adverse effects of changes in the external environment have increased. External demand may face the spillover impact of geopolitical instability, and uncertainty remains about whether the export growth trend can continue in the future. As for imports, the import of electromechanical and high-tech products may continue to strengthen under the "grabbing imports" situation, providing support for imports in the third quarter. The acceleration of the issuance of national bonds and special bonds and the formation of physical workloads will also drive demand for related commodities. However, the basic pattern of weak domestic demand may be difficult to reverse in the short term, limiting the extent of import improvement.    

On May 27, 2024, the Ministry of Finance issued the "Corporate Sustainability Disclosure Guidelines - Basic Guidelines (Draft for Comments)" (hereinafter referred to as the "Basic Guidelines" Draft for Comments) and solicited public opinions, marking the beginning of the construction of a unified national sustainable disclosure standards system, which will guide and regulate corporate behavior and promote the comprehensive and sustainable development of the economy and society.   Drafting Background At present, environmental, social and governance (ESG) issues have become an indispensable part of corporate operations, investment decisions and regulatory policies around the world. At present, some regions and enterprises in my country have started sustainable information disclosure practices, but there is still a lack of unified standards internally. At the same time, relevant international standards have been introduced one after another. The dual pressures from both inside and outside have prompted my country to speed up the formulation of unified and comparable sustainable disclosure standards to adapt to international trends and strengthen China's positive role in global sustainable development governance.   The Ministry of Finance, together with relevant departments, organized experts to conduct a three-month assessment of the applicability of international standards in China, and carried out a series of research projects, exchanges and discussions. Adhering to the overall idea of "actively learning from, focusing on China, absorbing all, and highlighting characteristics", the draft of the Basic Standards for discussion and comments was formed. The draft of the Basic Standards for comments aims to propose a unified national sustainable disclosure standard that reflects the beneficial experience of international standards, conforms to China's national conditions and can highlight Chinese characteristics.   Main content The "Corporate Sustainability Disclosure Standards - Basic Standards (Draft for Comments)" released this time is based on the general requirements for disclosure of sustainable financial information (hereinafter referred to as "S1"), and proposes the framework of a unified national sustainable disclosure standard system. The unified national sustainable disclosure standard system consists of basic standards, specific standards and application guidelines. In terms of content, the draft for comments on the "Basic Standards" is generally consistent with the international standard S1 in terms of information quality characteristics, disclosure elements and related disclosure requirements; it makes provisions based on China's actual situation in terms of purpose, scope of application , disclosure objectives, materiality standards, format structure and some technical requirements.   The draft for soliciting opinions on the Basic Guidelines consists of six chapters and 33 articles. The main contents are as follows:     Key points     Green Gold Summary   (I) The draft of the Basic Standards has initially established the framework of a unified national sustainable disclosure standards system. In terms of the disclosure standards, the draft for comments on the Basic Standards, based on the conclusion of the previous assessment of the applicability of international standards in China, and considering that S1 is a general disclosure requirement, only provides for the disclosure of sustainable information in principle. This institutional arrangement is conducive to the formulation and implementation of specific standards, and is also conducive to the convergence of China's sustainable disclosure standards with international standards. The national unified sustainable disclosure standards system consists of basic standards, specific standards and application guidelines:     The basic guidelines regulate the basic concepts, principles, methods, objectives and general requirements for corporate sustainable information disclosure, and govern the formulation of specific guidelines and application guidelines.   The specific guidelines put forward specific requirements for the disclosure of information on sustainable themes in the environment, society and governance of enterprises. Environmental themes include climate, pollution, water and marine resources, biodiversity and ecosystems, resource utilization and circular economy, etc. Social themes include protection of rights and interests of employees, consumers and end users, community resources and relationship management, customer relationship management, supplier relationship management, rural revitalization, social contribution, etc. Governance themes include business behavior, etc.   Application guides include industry application guides and standard application guides. Industry application guides provide guidance on the application of basic standards and specific standards for specific industries, so as to guide enterprises in specific industries to identify and disclose important sustainable information. Standard application guides explain, refine and provide examples for basic standards and specific standards, and make operational provisions for key and difficult issues. In addition, in order to solve problems that arise in the process of enterprises implementing sustainable disclosure standards, standard implementation questions and answers are provided when necessary to improve the comparability and transparency of sustainable information and promote the application of sustainable disclosure standards.   (II) The draft of the Basic Standards puts forward clear planning objectives for the establishment of a sustainable disclosure standards system. The overall goal is that by 2027, China's basic sustainable disclosure standards and climate-related disclosure standards will be issued. By 2030, the country's unified sustainable disclosure standards system will be basically established. In view of the long construction cycle of the standards system, relevant departments can first formulate disclosure guidelines and regulatory systems for specific industries or fields according to actual needs, and gradually adjust and improve them in the future. In the future, China's corporate sustainable information disclosure system will move towards integration and standardization, provide strong support for China to establish a comprehensive and systematic ESG system, and help improve the international competitiveness and market influence of Chinese companies.   (III) The draft of the Basic Guidelines has established an information disclosure framework that complies with international trends and is in line with China's national conditions. In terms of following international trends, the draft of the Basic Standards integrates the internationally accepted four-element framework of "governance, strategy, risk and opportunity management, indicators and targets" to provide a clear structure for corporate sustainable information disclosure. In addition, the draft of the Basic Principles also continues the "dual importance principle" emphasized in the international and domestic sustainable development disclosure guidelines of the Shanghai, Shenzhen and North Stock Exchanges, requiring companies to assess whether sustainable risks and opportunities have important current or expected financial impacts on the company and whether corporate activities have important impacts on the economy, society and the environment in combination with the requirements of the specific applicable corporate sustainable disclosure standards.   In terms of adapting to China's national conditions, the draft of the Basic Standards also maintains a certain degree of flexibility and practicality, allowing companies to make appropriate disclosures based on their own resources and capabilities on the premise of complying with basic requirements, thereby reducing the disclosure burden and additional costs of companies; in terms of specific standards, the social issues clearly propose sustainable issues with more Chinese characteristics, such as "rural revitalization" and "social contribution", to make good international connections, reflect Chinese characteristics, and further facilitate the convergence of China's sustainable disclosure standards with the ISSB standards.   (IV) The draft of the Basic Guidelines pays more attention to the needs of diverse information users. In terms of paying attention to the needs of diversified information users, the draft of the Basic Standards clearly aims to meet the needs of diversified information users for sustainable information disclosure. It not only meets the needs of investors and creditors targeted by international standards, but also covers a wider range of information needs for the government, its relevant departments and other stakeholders.   (V) The draft Basic Guidelines require enterprises to standardize sustainable information data management and improve the quality of information disclosure. In terms of information collection and management, the draft of the Basic Guidelines requires companies to standardize systems for data collection, verification, analysis, utilization and reporting related to sustainable information disclosure. By promoting companies to establish and improve data management systems and indicator systems suitable for their own management and development, the transparency and effectiveness of companies in sustainable information disclosure will be further improved, thereby ensuring the quality of information disclosure.   (VI) When implementing the draft Basic Guidelines, my country's national conditions will be taken into consideration, and a strategy of classified implementation and gradual advancement will be adopted. In formulating implementation strategies, the draft for comments of the Basic Standards comprehensively considers the development stage and disclosure capabilities of Chinese enterprises, and clearly points out that a "one-size-fits-all" mandatory implementation requirement will not be adopted in the implementation strategy. In the future, a strategy of distinguishing priorities, piloting first, and advancing step by step will be adopted, expanding from listed companies to non-listed companies, from large enterprises to small and medium-sized enterprises, from qualitative requirements to quantitative requirements, and from voluntary disclosure to mandatory disclosure.   Especially in the initial stage after the release of the draft "Basic Guidelines" for comments, priority will be given to the actual voluntary implementation of enterprises. After all conditions are relatively mature, the Ministry of Finance will work with relevant departments to make targeted arrangements on the scope of implementation, mitigation measures, applicability of relevant clauses, and specific connection provisions.

In May 2024, the European Financial Reporting Advisory Group (EFRAG) released three documents: "Guidelines for the Implementation of Materiality Assessment", "Guidelines for the Implementation of the Value Chain", and "List of ESRS Data Points". EFRAG aims to support enterprises and other stakeholders in implementing ESRS by issuing implementation guidelines, helping enterprises to focus on the standard content related to them, and explaining the reporting requirements through frequently asked questions. Among them, the "Guidelines for the Implementation of the Value Chain" (hereinafter referred to as the "Guidelines") defines the boundaries of the value chain in the sustainable development report, explains the participation of the value chain in materiality assessment to policies, actions and goals, and outlines the disclosure requirements for the impact of each dimension of ESRS on the value chain.   1. Definition of value chain In the Guidelines, the value chain is defined as the various activities, resources and relationships related to a company's business activities and its external operating environment. The activities, resources and relationships refer to: the personnel involved in the company's own operations, namely human capital; supply, marketing and distribution channels, procurement of materials and services, sales and delivery of products and services; the financing, geographic, geopolitical and regulatory environment of the company's operations, etc.   In addition, the Guidelines define business relationships as relationships between a company and its business partners, entities in the value chain, and entities directly related to its business operations, products, or services. Business relationships are not limited to contractual relationships, but also include indirect business relationships outside the first layer of the company's value chain and equity-invested companies. Whether a company has influence, risks, and opportunities on an investment company is not affected by its shareholding ratio and control ability; however, the company's shareholding ratio affects its ability to obtain information on equity-invested companies.   The following decision diagram summarizes the content that needs to be paid attention to in ESRS E1 "Climate Change" greenhouse gas emissions and ESRS E2 "Pollutants", and this approach is also applicable to the disclosure of information on important sites in ESRS E4 "Biodiversity and Ecosystems".   Figure 2 Value Chain Environmental Dimension Information Disclosure Decision Diagram   2. Importance of the value chain The material impact of the value chain refers to the impact caused or contributed to by the company's operations, products or services. Value chain participants that are not related to the company's operations, products and services are not considered to be material impacts. Material impacts are not limited by neighboring or contractual relationships, but are generated by processes at various stages in the value chain and are mainly related to business activities. In addition to the material impacts, risks and opportunities generated by its own upstream and downstream value chains, companies should provide personalized entity information based on their own circumstances to further reflect the material impacts, risks and opportunities.   3. Materiality Assessment: Obtaining the Materiality, Impact, Risks and Opportunities of the Value Chain Companies should design a reasonable assessment process based on the specific circumstances and comprehensively consider the results of the materiality assessment and the content that needs to be disclosed. Considering that no process is suitable for all companies' economic activities, locations, business relationships or value chains, ESRS does not stipulate how companies should conduct materiality assessments or how to design the process, but provides several aspects that companies should consider when designing a materiality assessment process: Assess the company’s involvement in the value chainCompanies need to distinguish between direct and indirect business relationships to determine the type of impact on the value chain. A company's direct business relationships may have a value chain impact. For example, the company's procurement and payment policies and practices may violate labor standards, or even purchase from suppliers with labor rights violations. Indirect business relationships can also have a value chain impact. If a company purchases products or services produced by suppliers with negative information, it may indirectly lead to significant systemic impacts. Materiality Assessment:Step A: Understand the environment in which your company operates(a) Companies need to understand the business actors, size, industry or nature of activities, geographic locations and processes involved in their value chain; (b) The company's strategy affects its business model, which affects all aspects of its operations and its upstream and downstream value chains. Companies need to understand how their strategy and business model are linked to impacts, risks and opportunities; (c) Companies can identify which parts of the value chain are in high-risk areas by tracking the actors in their value chain activities. In particular, if a company does not have reliable information about the geographic location of its value chain, it can assess the significant global value chain impacts, risks and opportunities related to the materials, products and services it uses or produces.Step B: Identify actual and potential impacts, risks and opportunities; Step C: Assess and determine significant impacts, risks and opportunitiesIdentifying and assessing the impact of the value chain is challenging for companies. Companies should collect reliable data from value chain participants. If reliable data cannot be collected after making reasonable efforts, they may use secondary data as appropriate. Secondary data includes public reports and research, data from local or national official agencies, newspaper articles, databases, etc. Companies can use secondary data to estimate significant impacts, risks and opportunities. Assessment of the importance of environmental dimensions: When companies conduct importance assessments on environmental dimensions, they can introduce the “life cycle” concept to conduct product life cycle assessments. The Value Chain Implementation Guide provides the following two feasible paths:   (a) Companies may consider using an environmental footprint approach to measure and communicate the life cycle environmental performance of their products; (b) Companies may rely on primary, secondary or simulated data collection or other relevant approaches to assess significant impacts, dependencies, risks and opportunities.   4. Disclosure of value chain information involved in the materiality assessment process From a disclosure perspective, companies need to disclose the materiality assessment process and materiality assessment results. The Guidelines also require companies to disclose the extent and scope of coverage of the upstream and downstream value chains as the basis for preparing sustainable development reports.   Disclose the links between market position, strategy, business model and value chainTo help companies understand where significant impacts, risks and opportunities may occur in the value chain, companies should describe the value chain as follows:(a) The main characteristics of the company's upstream and downstream value chains; (b) The company's position in the value chain; (c) A description of the relationship between the main business participants and the company, including suppliers, distributors, consumers and end customers. The specific situation of the company's value chain is reflected by judging the key participants, taking into account the impact and financial importance.Companies should use sustainability due diligence processes to assess impacts along their value chain wherever possible and identify potential “tipping points” by cross-referencing material origins with social and environmental risk databases. Disclosure of value chain considerations in materiality assessmentThe company should describe the materiality assessment process that includes the value chain, as well as the information provided by due diligence, outlining the company's process for identifying, evaluating, prioritizing and monitoring risks and opportunities that may have financial impacts through its own operations or business relationships. The disclosure can be structured as follows:(a) Types of value chain relationships considered in the materiality assessment; (b) Methodology used by the company; (c) Sustainability issues identified.For significant impacts, the company should focus on areas where impacts may occur or are potential, reflecting areas where negative impacts are already severe or may be severe; for risks and opportunities, the materiality assessment process should consider other factors in the value chain that can generate risks and opportunities, including dependence on natural and social resources.During the materiality assessment process, the company should first determine the key sustainability issues for different types of business relationships and value chain links; secondly, identify areas with higher risks of adverse impacts and rank the key sustainability issues based on stakeholder involvement and the severity of the impact. Disclosure of materiality assessment method and its assumptionsThe company should provide information on the methods and assumptions used in the materiality assessment, taking into account the value chain, including the thresholds for determining materiality, and describe the limitations of the materiality assessment procedure with respect to the value chain. Disclosure of the results of the materiality assessmentWhen a company provides information on significant impacts, risks and opportunities or policies, actions or targets, it should focus on disclosing the following:(a) The areas in which significant impacts, risks and opportunities are concentrated in the company’s business model, its own operations and its upstream and downstream value chains;(b) describe the company's involvement in the activities or business relationships and determine whether its activities or business relationships involve significant influence;(c) the current and expected impacts of material influences, risks and opportunities on its business model, value chain, strategy and decision-making, how the company expects to respond to those impacts, and the changes it has made to address them;(d) When key points of strategic and material impact on the value chain are identified, the Guidelines require disclosure of discussions of the company’s management or governance bodies on those impacts;(e) the information disclosed should be consistent with the information taken into account in the materiality assessment along the value chain;(f) The information disclosed should enable people to understand the company’s significant impacts on itself and the external environment, risks and opportunities, as well as the potential impact on the company’s future.At the same time, quantitative information can serve as a useful supplement to qualitative information. Companies disclosing quantitative information can help stakeholders understand the severity of the impact and track the effectiveness of subsequent management actions. 5. Disclosure of policies, actions or targets including value chain information Companies should disclose information related to value chain participants when they have an influence on the formulation of policies, actions or targets. For example:   (a) Policies developed by value chain participants to prevent and control pollution; (b) the company’s anti-bribery and anti-corruption policies and training for value chain participants; (c) the company’s actions and resource commitments related to pollution and its targets to reduce pollution generated by suppliers; (d) clauses in the company’s contracts with value chain participants on respect for fundamental human rights; (e) the company’s audits of high-risk suppliers; (f) the company’s selection criteria for new suppliers, such as the existence of an effective grievance mechanism or measures to protect human rights and freedoms; and (g) the suppliers’ own targets for sustainable material use.   To comply, companies can disclose why they have not yet developed targets, policies and actions related to sustainability matters, and can report when they expect to develop such policies and take actions. In addition, ESRS4 Biodiversity and Ecosystems contains specific requirements for corporate value chain information disclosure:   (a) Set transition plans and targets for biodiversity and ecosystems in corporate strategies and business models; (b) Disclose the process for identifying and assessing significant biodiversity and ecosystem-related impacts, risks, dependencies and opportunities, and setting targets related to biodiversity and ecosystems.   6. Disclosure of indicators including value chain information Companies not only need to disclose indicators covering their own business, but also need to measure and determine whether to disclose indicators related to the value chain. The ESRS lists the following indicators that need to disclose information related to the value chain:   (a) Scope 1, 2, 3 and total GHG emissions; (b) Support for GHG removal and GHG mitigation projects through the purchase of carbon credits ; (c) When companies disclose the materials used in the production of products and services, it is generally only related to their own operations, but they also need to determine whether to provide additional value chain information on an entity-specific basis; (d) Companies should describe the use of resources in the upstream value chain. Although specific value chain information indicators are not specified, the impact of the upstream value chain is covered by the company's procurement information.   Note: Companies may also disclose their land use based on a life cycle assessment if they have determined that they have significant impacts on land use, or on the extent and condition of surrounding ecosystems. The Guidelines provide additional special instructions on the social dimension: employees, consumers and end users are all included in the value chain; at the same time, community impact includes not only the social impact caused by the company, but also the impact caused by value chain participants. Based on the results of the materiality assessment, the company should determine whether it needs to provide additional value chain information indicators from its own perspective or integrate value chain data into its indicators so that stakeholders can understand the impact of the company's actions or track the effectiveness of the company's initiatives. For example:   (a) When companies are involved in upstream value chain activities that have a greater dependence on and impact on the environment, reporting indicators should include supplier impact data; (b) the proportion of workers covered by social security programs in high-risk industry value chains; (c) the percentage reduction in health and safety accidents compared to the previous period.   7. Conclusion The "Value Chain Implementation Guidelines" are of great significance to understanding the CSRD and ESRS frameworks, and provide companies with a complete set of systematic methods to understand and report on their sustainability performance in the value chain. The release of the "Value Chain Implementation Guidelines" will not only help improve the transparency and consistency of corporate sustainable development information disclosure, but also guide companies to better manage their sustainable development factors in the value chain; companies can use this to more comprehensively understand the impact of their operations and upstream and downstream value chains on ESG factors, and formulate more effective sustainable development strategies, goals and action plans, thereby promoting green and low-carbon transformation and the realization of sustainable development goals.

On May 31, 2024, the European Financial Reporting Advisory Group (EFRAG) published the first implementation guidelines to assist in the application of the EU Sustainability Reporting Standards (ESRS), providing guidance for the disclosure of sustainable development information required by the Corporate Sustainability Reporting Directive (CSRD).   This article aims to enhance companies' understanding of the dual materiality concept and the application of the materiality assessment process through an in-depth interpretation of the first of the first batch of implementation guidelines, the Materiality Assessment Implementation Guidance (MAIG), so as to improve their cognition and practical ability on sustainable issues.   The meaning and explanation of dual importance   01The meaning of dual importance Double Materiality (also translated as double materiality) includes impact materiality and financial materiality.   Impact significance refers to the actual or potential, positive or negative, significant impact of sustainability issues on people and the environment in the short, medium or long term, covering the company's own operations and the upstream and downstream value chains (generated through products and services or business relationships);   Financial materiality refers to the actual or expected significant financial impact of the risks and opportunities brought about by sustainability issues on the company, including significant impact on the company's development, financial status, financial performance, cash flow, financing availability, capital cost, etc. in the short/medium/long term.   02 Development of dual importance The concept of dual materiality was first proposed by the European Union in 2017 in the Guidelines on non-financial reporting: Supplement on reporting climate-related information, which requires companies to disclose information related to sustainable development that affects financial performance, as well as information on the impact of corporate production and operations on people and the environment. ESRS follows the principle of dual materiality in this guideline and proposes more detailed and standardized information disclosure requirements for important ESG issues. In addition, ESRS also requires companies to verify the ESG information they disclose and be responsible for the authenticity of the content.   As an application guide for ESRS, the "Guide to Implementation of Materiality Assessment" explains the operation methods and practical cases of dual materiality in more detail, which helps companies better understand the connotation of dual materiality in ESRS. For ESG issues that are confirmed to be of dual materiality after assessment, companies need to further disclose the impacts, risks and opportunities (IROs, hereinafter referred to as "IROs") brought about by the issue, which is also the key content of the EU sustainability statement.   03 Explanation of “Importance” Impact materiality and financial materiality are closely related and interdependent. Risks or opportunities may arise from a company's strategic changes, investments, and management decisions on its impact on people and the environment. Important risks and opportunities often arise from the company's external impacts and its dependence on nature, human resources, etc. (for example, a law firm may lose employees due to higher salaries offered by local peers under the same circumstances, resulting in a decrease in the firm's income), and most important impacts will generate important risks or opportunities over time (for example, an oil and gas company may fail to reach an agreement with local residents on land extraction and use and resident relocation, causing local residents to launch protests and stop extraction production, resulting in actual economic losses due to delayed delivery or abandoned extraction projects).   In addition, if an enterprise omits, misreports or conceals information on risks or opportunities in its sustainable development report and affects the decision-making behavior of users of financial reports, then these risks and opportunities will be considered financially material. The sources of financially material risks or opportunities are not limited to the parent and subsidiary companies within the scope of the enterprise's consolidated financial statements, but extend to related companies in the entire upstream and downstream value chain, including suppliers, customers and partners.   Figure 1 Important sources of risks and opportunities   The time frame covered by financial materiality often exceeds the time frame defined by a company's single financial reporting cycle and management's explanation. When evaluating the financial materiality of an ESG topic, companies should consider the cumulative changes that may occur in financial effects such as revenue and costs over a longer period of time. Similarly, the probability of occurrence of risks or opportunities related to these topics may also change cumulatively over time. Companies' assessments of financial materiality should not be limited to the scope of traditional financial accounting indicators, but should expand their focus to financial impacts related to reliance on natural and social resources, which are often not fully reflected in current accounting recognition standards. Companies' proactive consideration of such financial impacts will help to more comprehensively assess financial materiality.   Materiality Assessment Process The "Guidelines for the Implementation of Materiality Assessment" provides a basic step reference for the materiality assessment process (see Figure 2). Enterprises can make adjustments based on actual conditions to compensate for differences in the industry, country, organizational structure, business operations, and upstream and downstream value chains in which the enterprise is located. Enterprises should establish materiality assessment standards and materiality comparison thresholds that are in line with their own characteristics.   Figure 2 Example of materiality assessment process   The materiality assessment process consists of four steps:   Step A: Understand the background information of the company and its main stakeholders Corporate background information includes corporate economic activities, products/services, and geographic locations where business is conducted. Analyzing corporate business plans, strategies, financial statements, and other information provided to investors, as well as upstream and downstream value chains, types and attributes of business relationships can help companies understand IROs; understanding corporate-specific IROs can be obtained by analyzing corporate-related laws and regulations, regulatory background, and sources of public information such as media, peer analysis, current industry benchmarks, and scientific research reports.   The main stakeholders of an enterprise refer to the entities affected by the business development and upstream and downstream value chains of the enterprise. The situation and demands of the main stakeholders are understood by analyzing the existing stakeholder communication mechanisms (such as dialogue, investor relations, business management, sales and procurement), and the stakeholders are sorted out in accordance with the business activities/relationships, products or services of the enterprise (the corresponding relationship of stakeholders in step A may need to be revised after step B).   Step B: Identify current/potential IROs related to ESG factors   Figure 3 ESRS 1 Appendix A AR 16 List   ESRS 1 Appendix A AR 16 list clearly divides the three-level classification of ESG topics (Topic/Sub-topic/Sub-sub-topics). Enterprises can refer to this list to sort out ESG factors to ensure that there are no omissions. At the same time, they should also consider enterprise-specific ESG factors other than the appendix list. At present, the EU has not yet issued industry ESRS standards, so industry-specific ESG factors can be disclosed according to enterprise-specific ESG factors. Enterprises can use other disclosure frameworks and standards to identify their own unique ESG factors, such as IFRS "International Financial Reporting Standard S2-Climate-related Disclosures" Industry Implementation Guide, GRI "Sustainability Reporting Standards-Industry Standards" , etc. In addition, enterprises can also refer to the "ESRS Data Point List" issued by the European Financial Reporting Advisory Group (EFRAG) to identify ESG factors and important IROs in more detail, although the purpose of the list is to provide data structure support for the digital management of sustainable development reports, rather than for corporate ESG information collection and verification.   Implement the identification methods recommended by the guidelines   Method 1: Companies can first sort out and identify potential ESG factors according to the ESRS 1 Appendix A AR 16 list, and then supplement the company's unique ESG factors according to internal processes (such as due diligence, risk management, and complaint mechanisms) or external processes (such as stakeholder communication and the methods mentioned in step A) to improve them, and finally form a list of corporate ESG factors.   Method 2: Enterprises can directly establish a list of IROs related to their own business model and upstream and downstream value chains in accordance with the reporting process of the GRI Sustainability Reporting Standards and their own internal processes (such as due diligence and risk management), and then check and integrate the three-level ESG themes in the ESRS 1 Appendix A AR 16 list to avoid omissions, and finally form a list of corporate ESG factors. In addition, it is recommended that enterprises refer to the ESRS Data Point List to assist in identifying ESG factors, especially enterprises that disclose sustainability reports for the first time.   Step C: Evaluate and identify significant IROs related to ESG factors   The materiality assessment process starts with the impact of the enterprise on people and the environment, assessing whether these impacts pose risks or opportunities to the enterprise, and then assessing the risks and opportunities caused by the enterprise's resource dependence (for example, the enterprise relies on people and natural resources to conduct its business but the enterprise has no impact on them).   When conducting assessments, companies need to consider the correlation between impact materiality and financial materiality and carry out appropriate and reasonable assessment processes. For example, whether impact materiality assessment and financial materiality assessment should be divided into two independent processes, in principle, it is recommended to integrate the two processes to avoid missing important IROs. The ESRS ESG Theme Standard (i.e., ESRS 1 Appendix A AR 16 Checklist) can provide companies with directions and angles for identifying ESG factors (see Figure 4).   Figure 4 Dual importance assessment   Implement the assessment methods recommended by the guideline   1) Assess the importance of impact The impacts of corporate ESG factors are divided into positive/negative, currently occurring/likely to occur, and the "materiality" judgment value applicable to the company is determined according to the type of impact (see Figure 5). If the severity of a certain impact has a recognized scientific basis, the company can determine that the impact is "material" without further analysis. Communication with stakeholders who are mainly affected can help companies understand the transmission path of the impact, assess the severity of the impact and the possibility of occurrence. Internal communication between companies and functional departments and employees, and communication with report users and relevant experts can help evaluate , verify and ensure the integrity of the materiality assessment results. The "Guidelines for the Implementation of Materiality Assessment" provides a schematic diagram of the judgment process for determining the materiality of impacts for reference by companies (see Figure 5).   Figure 5: Assessment of impact importance   Figure 6 Judging whether the impact is significant   The severity of the negative impact requires the determination of three factors: level, scope, and whether it is remediable. Level refers to the severity of the impact, such as the degree of infringement on the acquisition of basic necessities of life, the degree of infringement on the freedom of education and the freedom to make a living; scope refers to the affected area, such as the number of people affected and the degree of environmental damage; whether the impact is remediable, such as whether the affected people can regain their rights through return or compensation, or whether the ability to repair the environment is limited and cannot be restored to the time before the impact occurred. Any factor may cause the impact to become serious, and the three factors interact with each other. Whether it is remediable will increase the severity as the level of the impact increases. Conversely, the increase in the level of the impact or the expansion of the scope will make it difficult to remedy. Enterprises can use due diligence procedures or risk management procedures to obtain materiality thresholds, analyze the severity of negative impacts and risk priorities, and determine which impacts are important. Enterprises should give priority to supporting evidence that can draw more objective conclusions and set materiality thresholds based on these evidences.   2) Assessing financial materiality   Significant opportunities and risks are usually generated by impacts, dependencies and other factors (such as climate risk exposure and regulatory changes to address systemic risks). Assessing whether opportunities and risks are significant requires the use of reasonable quantitative or qualitative thresholds (such as financial status, financial performance, cash flow, financing availability, capital costs and other financial impacts). The full text of ESRS discusses risks and opportunities as a whole combination when explaining the reporting disclosure requirements. However, it is worth noting that in certain specific situations, ESG factors only trigger a single aspect of risk or opportunity, rather than necessarily both at the same time.   Figure 7 Assessing financial materiality   When evaluating the opportunities and risks brought by ESG factors, companies need to consider the possibility of opportunities and risks, and the possible financial impact in the short, medium and long term. Companies need to establish objective thresholds for possibility, financial impact and the nature of financial impact, and then judge the possible important opportunities and risks identified in step B one by one; they also need to evaluate whether the impact of ESG factors identified in step B has produced important financial impacts; if the risk management established within the company covers sustainable development risks, the possibility of opportunities and risks and the corresponding financial impact can be further evaluated. Communication with functional departments within the company, corporate investors, and other financial partners (such as banks) can help evaluate, verify, and ensure the integrity of the materiality assessment results.   Enterprises can set an absolute or relative value of the monetary limit (such as the percentage change of a certain indicator in the financial report, such as the income, cost, total assets or net assets), which is close to the importance threshold used to evaluate a certain indicator when preparing financial reports. If an ESG factor is financially important but the financial impact it causes cannot be accurately measured when the report is issued, the enterprise can refer more to qualitative factors and factors of the probability of occurrence to determine the importance threshold. In addition, the qualitative assessment of the importance threshold also includes the following situations: Enterprises may have reputation risks that investors are concerned about because they are engaged in multiple industries or have unique business models. Although the financial impact on cash flow cannot be quantified, reputation risks will cause changes in financing costs and financing methods, which will also be deemed to be financially important.   3) Integrate the evaluation results   The company integrates the results of the assessment process from step A to step C to form a list of important IROs to prepare for the disclosure of the sustainable development report. Analyze the important three-level (theme-sub-theme-sub-theme) ESG issues to ensure that they are all converted into IROs. The individual impacts, risks, and opportunities assessed by the company based on appropriate materiality thresholds and methods need to be appropriately integrated in accordance with the relevant requirements for report disclosure, and the results of the integration must be confirmed with the company's management, in order to fully reflect the company's important IROs.   Step D: Disclose the evaluation process and results of important IROs in accordance with ESRS requirements   ESRS 2 is the disclosure requirement for the EU CSRD sustainable development report, which is divided into the following four parts: basis for report preparation, governance, strategy, and management of impacts, risks and opportunities (see Figure 8).   Figure 8 ESRS 2 content   Among them, there are three disclosure requirements involving dual importance (the bold part in Figure 8), namely, the disclosure of the identification process and evaluation process of important IROs (IRO-1), the relationship between important IROs and corporate strategy and business model (SBM-3), and the explanation of the disclosure of important IROs, including the selection criteria and the importance assessment threshold (IRO-2). ESRS requires companies to disclose the importance assessment method used, the assumptions adopted, the focus and original information of the assessment process, as well as the judgment methods of quantitative/qualitative thresholds, reference standards, etc. ESRS 1 Appendix D provides the ESRS sustainable development reporting framework, while Appendix F provides specific cases for companies to understand how to disclose (see Figure 9).   Figure 9 ESRS 1 Appendix F   Other key points of the Implementation Guide   In addition to explaining how the EU ESRS defines importance, how the importance assessment process is carried out, and how to use other standards and frameworks, the "Guidelines for the Implementation of Importance Assessment" also answers common questions that companies may ask. In addition, the EFRAG website has set up a special ESRS Q&A platform to help collect and answer technical questions raised by stakeholders that have not yet been answered. On July 25, the EFRAG website published the latest version of the explanation of technical issues, and currently has a total of 93 explanations. Other key points raised in the frequently asked questions of the "Implementation Guidelines" are summarized as follows:   01Impact Importance Points [Impacts caused by related activities and business relationships] The related activities of enterprises have an impact on stakeholders. "Related activities" include various forms. The impact caused by the operation and products/services of the enterprise should be the sole responsibility of the enterprise, such as employees working in a dangerous environment without safety measures; the impact caused by the participation of the enterprise, the enterprise's single action and no longer participating cannot reduce the impact, such as multiple factories polluting the local air environment, but the harmful gas emissions of a single factory are all below the harmful limit; the impact caused by the business relationship of the enterprise, the business relationship is not limited to contractual relationships and partners, but also includes the entire upstream and downstream value chain of first-tier suppliers and beyond, such as suppliers outsourcing the embroidery process of textiles to child labor. The negative impact caused by the business relationship of the enterprise is not necessarily "unimportant", but depends on the severity of the impact.   [Impacts cannot be offset by positive or negative impacts] ① Positive and negative impacts cannot be offset and need to be evaluated separately. They cannot be integrated due to the different nature and types of impacts; ② The time ranges corresponding to the impacts are different (for example, in the case of the same type of nature, the actual negative impacts of the current period cannot be offset by the positive impacts of the next few years), and the impacts of their own operations and the impacts of the upstream and downstream value chains cannot be offset; ③ Compensation/offsetting and netting are different concepts, but compensation/offsetting is not included in the impact significance assessment. There are some specific requirements for compensation/offsetting in the thematic ESRS. Please refer to the specific requirements of "ESRS E1 Climate Change" and "ESRS E4 Biodiversity and Ecosystems" for the disclosure of carbon credits and biodiversity credits for important topics.   02 Key points of financial importance [Comparison of similarities and differences between financial materiality and financial reporting materiality] The materiality information in financial reports is different from the financial materiality information in sustainability reports, but the goal of information disclosure is the same. Decision makers who provide or may provide resources to the company in the future determine whether the information is financially material. The scope of financial materiality in sustainability reports is to further expand the scope of "material information" in corporate financial reports. The "European Union Sustainability Reporting Standards (ESRS)" and the "Financial Reporting Standards" have no difference in the concept of "materiality", but the definition of "materiality" information in the standards is different, and the threshold of financial materiality can refer to the recognition standards of accounting elements such as assets and income in financial reports.   Figure 10 Comparison of disclosures in financial reports and sustainable development reports   [Financial materiality is more proactive] Risks and opportunities that have not yet been identified as material in the financial report may be evaluated as material and displayed in the sustainable development report. This is because the recognition of resources/opportunities and risks is earlier than the recognition of assets and liabilities in the financial report.   [Risk Information] Potential future events may lead to the disclosure of expected risks and opportunities in the current sustainable development report, but financial reports generally only record risks that have occurred in the past period. Therefore, prospective information (such as expected financial impact) may be disclosed as important information in the sustainable development report.   [Relationship between financial materiality and financial impact in financial reports] The financial materiality (financial impact) of a sustainability report is not limited to the content disclosed in the financial report. According to the definition of financial impact in Annex 2 of the European Sustainability Reporting Standards (ESRS), it is divided into short-term financial impact (specified and confirmed in the financial report) and expected financial impact (not meeting the confirmation criteria and not included in the current financial report). The financial impact of certain ESG factors in the sustainability report has exceeded the information required to be confirmed and measured in the financial report and the notes to the financial statements.   03Other points [Continuity of materiality assessment] The Corporate Sustainability Reporting Directive (CSRD) requires companies to publish sustainability reports every year. Companies can continue to use previous materiality assessment conclusions if they determine that there are no major organizational and operational changes and no changes in external factors (external factor changes refer to the generation of new or revised old IROs or the impact on certain disclosed information). Major changes include mergers and acquisitions, business/industry changes, major changes in the supply chain, the establishment of major new business relationships, the opening/closing of business lines or business areas, and changes in the definition of severity.   【Materiality Assessment and Information Integration of Group Companies】 ① If the group (parent company) is the disclosing party, it can adopt two methods or a combination of the two methods to conduct the materiality assessment process, from top to bottom ( assessment at the group level , communication with subsidiaries to obtain useful information) and from bottom to top (assessment at the subsidiary level, and aggregation of assessment results at the group level), and reasonably set the materiality threshold of IROs on a cross-industry/business basis to ensure the consistency of the methods used. ② If the group (parent company) is the disclosing party, it can appropriately integrate information based on relevant facts and circumstances on the premise that the content of important IROs is not confused. Enterprises should use separate integration standards for all IROs to reflect important information truthfully, fairly and accurately. For example, if the important IROs of different business regions/assets have a strong correlation with the business region/asset, enterprises should not integrate according to a higher-level integration dimension such as country to prevent enterprises from concealing important information or misleading report users in their judgment of materiality.   [Application order of important IROs] If an enterprise identifies a large number of IROs, it can prioritize them from the perspective of corporate management. From the perspective of report disclosure, the enterprise needs to disclose all important IROs, especially if the enterprise has not yet established a sound system, goals, and action plans to deal with these IROs.   [Data retention and subsequent application] The Corporate Sustainability Reporting Directive (CSRD) requires companies to conduct sustainability report attestation. Companies should retain information on the materiality assessment process of IROs to facilitate inquiries and use by attestation agencies and internal corporate management.   Comparison of relevant standards on ESG information disclosure   From the perspective of standards and criteria for ESG information disclosure, the dual materiality principle has been clearly adopted in the EU and my country (including Hong Kong). In contrast, the United States has not yet issued official sustainable development reporting standards. Its exchanges encourage flexibility in corporate assessments in terms of sustainable development reporting and allow companies to voluntarily disclose ESG information they deem important. The U.S. Securities and Exchange Commission (SEC) has always emphasized the disclosure of "important" information that investors are concerned about from a financial perspective in order to protect the rights and interests of investors. It only involves a small amount of ESG content. For example, the "Rules for Strengthening and Regulating Disclosure of Climate-Related Information to Investors" issued in March 2024 clearly stated the content that listed companies should disclose on climate change issues, which is a milestone.   Figure 11 Comparison of materiality principles adopted by multiple ESG information disclosure standards   summary At present, although my country's three major exchanges and the Ministry of Finance have proposed the use of the "dual materiality" principle in the disclosure of sustainable development information, detailed operational rules have not yet been issued. The "Guidelines for the Implementation of Materiality Assessment" can provide valuable reference and guidance for Chinese companies in implementing this principle, helping them to better understand and apply it.   The "Corporate Sustainable Disclosure Standards - Basic Standards (Draft for Comments)" issued by my country's Ministry of Finance mentioned that the complete "Corporate Sustainable Disclosure Standards" will consist of basic standards, specific standards and application guidelines. Among them, the specific standards are similar to the "EU Sustainability Reporting Standards (ESRS)", which will include information disclosure requirements for sustainable topics in the environment, society and governance of enterprises; unlike the EU, industry information disclosure requirements will serve as the industry application guidelines of the Ministry of Finance, and the standard application guidelines are similar to the three "Implementation Guidelines" issued by EFRAG, which will explain, refine and provide examples for the basic standards and specific standards, and make operational provisions for key and difficult issues. In response to problems encountered by enterprises in the implementation of sustainable disclosure standards, the Ministry of Finance will provide Q&A on the implementation of the standards when necessary, and it is expected to jointly provide guidance for the release of sustainable development reports by listed companies on the three major exchanges.   The disclosure requirements of the EU ESRS standard and the first batch of EFRAG implementation guidelines are more detailed and practical than the Non-Financial Reporting Directive (NFRD), providing a normative reference for EU companies to use dual materiality as the ESG information disclosure principle, laying a solid foundation for the implementation of CSRD. At the same time, the implementation guidelines also provide ideas for ESG supervision and information disclosure in other countries and regions, and provide an effective reference for companies to optimize ESG management.

On May 31, 2024, the European Financial Reporting Advisory Group (EFRAG) released the first batch of implementation guidelines to assist the application of the European Sustainability Reporting Standards (ESRS), including the Materiality Assessment Implementation Guide (MAIG), the Value Chain Implementation Guide (VCIG), and the ESRS Data Point Checklist, a total of three items. The implementation guidelines provide detailed guidance for companies required by the Corporate Sustainability Reporting Directive (CSRD) to disclose sustainable development information for the 2024 fiscal year, to ensure that companies improve their understanding of the requirements of the European Sustainability Reporting Standards (ESRS), conduct disclosure work more effectively, and promote the transparency and consistency of sustainable development information disclosure.     Background and development of ESG information disclosure in the EU Since the release of the European Green Deal in 2019, the EU has gradually built a detailed sustainable finance policy system to "achieve the 2030 Sustainable Development Plan and the 2050 Carbon Neutrality Vision", guiding a large amount of funds to flow into sustainable fields and industrial activities, and promoting the transformation of member states' economies towards a greener, low-carbon and sustainable direction. ESG information disclosure policy is an important part of the EU's sustainable finance policy system, currently mainly based on the EU Sustainable Finance Taxonomy Act, the Corporate Sustainability Reporting Directive (CSRD) and the Sustainable Finance Disclosure Regulation (SFDR).     Development and application of ESRS The European Sustainability Reporting Standards (ESRS) took a long time from proposal to final adoption. Before the Corporate Sustainability Reporting Directive (CSRD), the EU's regulatory requirements for ESG-related information disclosure were based on the Non-Financial Reporting Directive (NFRD) adopted in 2014. As the name of the directive suggests, reports a few years ago only required the disclosure of non-financial information, including environmental matters, social and employee-related matters, compliance with human rights, anti-corruption and anti-bribery matters, and board diversity, and the companies required to disclose were only about 11,700 large listed companies in the EU.   In 2020, the EU conducted a survey on the use of the Non-Financial Reporting Directive (NFRD) standards and found that investors and social organizations felt that the level of detail in the disclosed information was still insufficient to meet their needs, and there was no set of unified standards for comparison, lacking credibility and relevance. As a result, the European Commission proposed to revise the reporting directive and to authorize the European Financial Reporting Advisory Group (EFRAG) to develop a complete set of ESG disclosure standards in conjunction with the ESG reporting directive, namely the first 12 European Sustainability Reporting Standards (ESRS) adopted in July 2023.     NFRD, CSRD and ESRS Timeline Starting from 2024, in compliance with the EU Corporate Sustainability Reporting Directive (CSRD), nearly 50,000 companies registered in the EU or non-EU regions will disclose sustainability reports in stages according to the European Sustainability Reporting Standards (ESRS) based on company size, number of employees, etc.   Purpose and core content of the implementation guide In order to help companies better understand and apply the European Sustainability Reporting Standards (ESRS), the European Financial Reporting Advisory Group (EFRAG) released three draft implementation guidelines in December 2023, solicited market feedback from December 22, 2023 to February 2, 2024, and released the official version of the implementation guidelines at the end of May this year. It is worth noting that the three implementation guidelines themselves are not authorized regulatory documents.     EFRAG continues to promote sustainable development information disclosure   The European Financial Reporting Advisory Group (EFRAG) is a private association established in 2001 with the support of the European Commission to serve the public interest. In 2022, the European Union's Corporate Sustainability Reporting Directive (CSRD) gave EFRAG new responsibilities, and EFRAG expanded its mission to provide technical advice on the draft sustainability reporting standards issued by the EU or on draft amendments to the standards.   The work of the European Financial Reporting Advisory Group (EFRAG) is mainly divided into two pillars. The first is the financial reporting pillar, which influences the development of the International Financial Reporting Standards (IFRS) from a European perspective and provides the European Commission with recommendations on the endorsement of the International Financial Reporting Standards (IFRS) (amendments); the second is the sustainable development reporting pillar, which prepares the draft EU sustainable development reporting standards and related amendments for the European Commission.   In terms of sustainable development reporting, the European Financial Reporting Advisory Group (EFRAG) has set up a project working group to develop the draft of the EU Sustainability Reporting Standards (ESRS), which is responsible for collecting and responding to feedback on the draft and providing relevant training resources. In December 2023, the EU Sustainability Reporting Standards (ESRS) were officially published in the EU Gazette and became EU law. The European Financial Reporting Advisory Group (EFRAG) has established a question-and-answer platform for the EU Sustainability Reporting Standards (ESRS), and its current focus is to assist in the practical application of the reporting standards.   In 2024, the European Financial Reporting Advisory Group (EFRAG) will continue to advance the EU's work on sustainability reporting:   In January, the first edition of the "Sustainability Reporting Standards for Listed SMEs (ESRS LSME)" and the "Voluntary Sustainability Reporting Standards for Non-listed SMEs (ESRS VSME)" were released, and comments were solicited before May. At the same time, some SMEs will test the disclosure reports in accordance with the requirements of the standards, and the enterprise partners such as banks, investors, and purchasers will evaluate whether they meet their sustainable development information needs;   In February, the first draft of the ESRS XBRL digital taxonomy and the draft of the digital taxonomy for Chapter 8 of Regulation (EU) 2020/852 were released for public comments for two months, namely, to carry out the digitization of sustainable development reports, mark the data points disclosed in sustainable development reports with XBRL (eXtensible Business Reporting Language), achieve machine-readable, and improve the accuracy and efficiency of the disclosed information transmission;   The preparation of industry-specific reporting standards has been initiated, but the initial version of the industry-specific standards has not yet been released.     summary The EU is the region with the most complete legislation and related guidelines for sustainable finance in the world. With the release and implementation of the Corporate Sustainability Reporting Directive (CSRD), the disclosure of sustainable development information by EU companies will enter a more complete stage. ESG (sustainable development) information disclosure is the next step after establishing a classification of green and sustainable economic activities. It will also be a routine step for integrating sustainable development into financial markets and corporate management in the future. Market exchanges and cooperation need to be based on information disclosure. The release of the implementation guidelines will provide comprehensive guidance and practical support for companies to apply the European Sustainability Reporting Standards (ESRS), and effectively help the EU Corporate Sustainability Reporting Directive (CSRD) to be steadily implemented. In 2024, with the release of more sustainable information disclosure details and specific industry standards around the world, and the joint efforts of market participants such as regulators, companies, financial institutions, and investors, the ESG market is expected to reach a higher level.

On March 15, 2024, the European Council adopted the Corporate Sustainability Due Diligence Directive (CSDDD, referred to as the "Directive"). According to the EU legislative procedure, the European Parliament is expected to review the newly revised bill again in April. The Directive may complete the legislative process in the first half of 2024. After the legislation is passed, EU member states must transform the requirements of the Directive into their national laws.   In order to clearly identify and prevent climate risks and human rights risks, standardize corporate information disclosure, and ensure sustainable development, the European Commission and the European Parliament reviewed and revised the CSDDD Act. The Act clarifies the scope of application of enterprises, due diligence processes, adverse impact identification and measures, as well as regulatory penalties and civil liabilities that may be faced for violations of the Act.   The passage of the Directive will not only mean that EU companies that meet certain standards and third-country companies with EU revenues will be required to disclose sustainable development due diligence reports, but will also cause financial costs and management pressure on Chinese companies with EU suppliers or customers. In the long run, as the European Commission continues to improve the Sustainable Development Act and pays more attention to sustainable development, the scope of application of the Directive may be further expanded in the future.   1. Legislative ProcessIn 2022, in order to standardize the sustainable development due diligence requirements of EU countries and respond to potential sustainable development risks, the European Commission proposed the establishment of the Corporate Sustainability Due Diligence Directive (CSDDD); in June 2023, the European Commission completed the revision of the bill, and in December 2023, the European Commission and the European Parliament completed the revision of the draft and reached an agreement.In February 2024, the draft Directive was submitted to the EU Council for review. Due to objections from Germany, France and other countries, it was ultimately not adopted by the Committee of Permanent Representatives of the EU Council. After further revisions, the draft Directive was adopted by the EU Council on March 15. According to the EU legislative procedure, the European Parliament is expected to review the newly revised bill again in April, and the Directive may complete the legislative process in the first half of 2024. 2. Scope of application of CSDDD Scope of impactThe latest revision of the Directive has raised the applicable threshold for companies that need to disclose their sustainability due diligence, narrowed the scope of the Directive, and extended the transition period. For EU companies and third-country companies operating in the EU, the CSDDD imposes restrictions on the average number of employees and net income.Transitional arrangementsThe revised draft also stipulates a transition timetable for implementation. The transition time requirements for different types of enterprises are as follows: Key actions for high-impact industriesIn order to reflect the key actions taken by international organizations to address adverse impacts on the environment and human rights, the draft Directive lists three categories of high-impact industries with reference to the OECD Due Diligence Guidance for Responsible Business Conduct:Manufacturing and wholesale trade of textiles, leather, footwear and related products;Agriculture, forestry, fishery, food manufacturing and wholesale trade;Mining of mineral resources, manufacturing of metals and non-financial products, and wholesale trade.The draft directive stipulates that if an EU company does not meet the above-mentioned average number of employees and net operating income thresholds, but its average number of employees exceeds 250 and its net operating income in the previous fiscal year exceeds 40 million euros, at least 50% of its operating income comes from high-impact industries.The EU Council deleted the judgment condition on the revenue proportion of high-impact industries in the revised CSDDD. However, the EU may still include more high-risk industry companies if necessary.Overall, the early legislation of CSDDD mainly targeted manufacturing companies with long supply chains. The revised bill applies to about 5,500 companies, which is about 2/3 less than the draft before the revision. The restriction thresholds based on the number of employees and net operating income have led to the concentration of applicable companies in financial institutions, service companies and leading companies in various industries. It is expected that the scope of companies actually affected by the regulation will be more limited.   3. Due Diligence Scope Definition The scope of CSDDD due diligence is based on the enterprise’s value chain. The value chain refers to the direct or indirect business relationship activities established between an enterprise and its upstream and downstream partners, covering the entire life cycle of product production, use and disposal or service provision, especially at the level of raw material procurement, manufacturing or product or waste treatment. Upstream: includes direct/indirect business cooperation in designing, extracting, manufacturing, transporting, storing, and providing raw materials, products, product components or services required for the company to carry out its activities.   Downstream: Includes retailers distributing products, transporting and storing products, disassembling products, recycling, composting or landfilling, and direct/indirect business partners who use or receive the company's products, product parts or services.   For financial institutions, the scope of due diligence only covers the upstream activities of financial institutions, but not the downstream activities (that is, it does not include the investment and lending business of financial institutions). However, the European Commission plans to evaluate in the future whether to formulate special due diligence requirements based on the characteristics of the financial industry.   At the meeting in March 2024, the EU Council suggested further clarifying the scope of partners, no longer using the concept of establishing a cooperative relationship, and shifting from the concept of "value chain" to the narrower concept of "supply chain", which only includes limited partners. This adjustment will exempt many companies from being investigated as subjects of investigation in the supply chain of the main sustainable investigation subject, and reduce the financial costs of investigation and potential competitive pressure for many companies (especially small and medium-sized enterprises).   Chinese companies with a certain scale of business in the EU need to pay attention to the due diligence management requirements of the Directive and be clear whether the Directive is applicable to them. They should also review the business size of their EU customers to confirm whether the Directive is applicable to them, and at the same time conduct compliance checks on their own companies to prevent being excluded from the supply chain by EU customers.   4. Due Diligence Process and Climate Change Mitigation Transition Plan Due Diligence ProcessSustainable development due diligence is a systematic mechanism that focuses on sustainability factors and effectively identifies, manages and discloses them. Based on the six-step due diligence method proposed in the OECD Due Diligence Guidance for Responsible Business Conduct, CSDDD has established a complete process for sustainable due diligence, including:Incorporate human rights and environmental due diligence into corporate policies;Identify actual or potential adverse human rights or environmental impacts;Prevent, mitigate and terminate potential adverse human rights or environmental impacts;Establishing a complaints (appeals) procedure;Monitoring the effectiveness of due diligence policies and measures;Public disclosure of due diligence status. Transformation Plan for Climate Change MitigationCompanies should disclose a transformation plan to mitigate climate change, which aims to ensure that the company’s business model and strategy are consistent with the transition to a sustainable economy, limiting global warming to 1.5°C and achieving climate neutrality by 2050. The plan should include the following:Time-bound targets related to climate change;Describe the decarbonization levers and actions planned to achieve climate change goals;an explanation and quantification of the investments and funding supporting the program;Describe the roles of the administrative, management and oversight bodies with respect to the programme.If a company has already disclosed its transformation plan in accordance with the EU Corporate Sustainability Reporting Directive (CSRD), it does not need to disclose its transformation plan again in accordance with the CSDDD.   5. Identification of adverse impacts during due diligence and measures to be taken Identification of adverse impactsAdverse impact is divided into adverse environmental impact and adverse human rights impact in the Directive. Adverse environmental impact refers to the adverse impact on the environment caused by violation of international environmental conventions, and adverse human rights impact refers to the adverse impact on protected objects caused by violation of human rights conventions.The identification of adverse impacts should be based on quantitative and qualitative information, and the human rights and environmental context should be assessed regularly in a dynamic manner. The assessment cycle should be based on the business activity or cooperation cycle. Before new business cooperation or major business decisions, companies should assess the changes in business cooperation or business decisions on the environment at least once a year. In addition, financial institutions only assess the possible adverse impacts of providing loans, credit or other financial services at the beginning of the contract. Solutions to adverse impactsIn response to the identified adverse impacts, the company can take the following actions:① Develop a corrective plan, clearly define the action time and qualitative and quantitative indicators for measuring improvement.② Seek contractual guarantees from business partners to ensure that partners comply with the code of conduct. The company may seek corresponding contractual guarantees from its partners and should take appropriate measures to verify the partners' compliance and provide preventive action plans when necessary.③ Invest in preventing adverse impacts and provide targeted support to small and medium-sized enterprises in cooperation. The company can provide financing support to small and medium-sized partners through direct financing, low-interest loans, continuous procurement guarantees and financing assistance, or provide technical guidance in the form of training and management system upgrades to help partners implement codes of conduct or preventive action plans and improve the company's ability to address adverse impacts.④ In the event that the above measures cannot resolve the potential adverse impact, the company is obliged to avoid establishing new or extending existing relationships with the partner. If there is a reasonable expectation, the company may temporarily suspend the business relationship with the partner while minimizing the adverse impact; or terminate the business relationship related to the relevant activities in the event of severe adverse impact.Overall, as product suppliers and purchasers of many EU companies, Chinese companies may be investigated in the supply chain of the sustainable investigation subject even if their scale is not within the scope of the Directive and they are exempt from the obligation of sustainable due diligence. If Chinese companies do not comply with the law and relevant conventions on human rights protection and environmental protection, there may be a greater risk of losing suppliers or customers in the future, which will affect the scale of my country's import and export trade and the operating performance of companies involved in overseas business. 6. Legal Liability to Enterprises Regulatory penaltiesBased on the sustainable development due diligence results released by companies, the EU will establish a special law enforcement agency to initiate inspections and investigations and impose penalties on non-compliant companies. The penalties include administrative penalties and fines, with the maximum amount of fines being up to 5% of the company's global operating income. Civil LiabilityIn terms of civil liability, the EU Council has amended Article 22 of the new Directive. If the environmental or liability damage is caused solely by partners in the company's supply chain, the company should not be held liable. This adjustment effectively avoids the risk of excessive compensation by the company. 7. Impact on Chinese Enterprises For Chinese companies, regardless of whether the net operating income in the EU meets the requirements of the CSDDD, they need to review their own business models to ensure that business adjustments meet the requirements of the CSDDD, including the establishment of a sustainable due diligence system that can identify, prevent and deal with environmental and human rights risks in system design, and ensure the smooth implementation of the system and disclose the implementation status through third-party audits and the release of public reports. Companies need to sort out and integrate the original labor and personnel management systems, supplier management systems, production safety systems, environmental protection-related systems, etc., and eliminate those that are not in compliance with laws and human rights and environmental protection-related conventions to ensure that they do not violate relevant regulations and continuously optimize the compliance management system.   In the face of the challenges of CSDDD, Chinese companies not only need to strengthen risk management and prevention, establish a sound risk management mechanism, identify potential risks, and take effective measures to prevent and control them, but also work more closely with business partners in the value chain and ensure that partners have reliable resources for information sharing. By establishing a comprehensive due diligence process and working with business partners, companies can successfully adapt to new requirements and continue to achieve sustainable growth. At the same time, companies also need to strengthen communication and cooperation with governments, industry associations and other institutions to jointly respond to possible sustainable development risks and challenges.

  China Chengxin International recently issued an announcement, maintaining the AAA g corporate credit rating of the Hong Kong Special Administrative Region of the People's Republic of China (hereinafter referred to as the "Hong Kong SAR") with a stable rating outlook; and assessing the AAA g corporate credit rating of the Macao Special Administrative Region of the People's Republic of China (hereinafter referred to as the "Macao SAR") with a stable rating outlook.   China Chengxin International believes that since 2023, the economies of Hong Kong and Macao have rebounded under the recovery of service trade and domestic demand, and the medium- and long-term development potential is still large under the promotion of the integration of the Greater Bay Area and the development of economic diversification. At present, both Hong Kong and Macao have sufficient fiscal space to cope with external shocks, sufficient fiscal reserves, and Macao has no existing government debt. The status of the Hong Kong Special Administrative Region as an international financial center provides guarantees for its external financing capacity and liquidity, and the Macao Special Administrative Region has maintained a strong external solvency with the support of prosperous service exports. At the same time, a sound institutional foundation supports strong institutional strength. In the future, we still need to continue to pay attention to the impact of the Hong Kong Special Administrative Region's status as a financial center under the deterioration of the external environment, as well as the high dependence of Macao's single economic structure on the gaming industry.   -------     The unique economic status of the Hong Kong SAR supports strong economic resilience. In recent years, against the background of repeated epidemics and deteriorating external environment, Hong Kong's status as a global financial center has been challenged, and economic volatility has increased significantly. The economy will recover in 2023. , but internal and external pressures are still high. Since 2023, as economic activities have gradually returned to normal, the Hong Kong SAR economy has experienced rapid recovery. In the first half of 2023, the annualized growth rate will be 2.2% year-on-year, and the unemployment rate will drop to 2.8%, close to full employment. In the third quarter of 2023, due to further improvements in internal demand and services trade, Hong Kong's GDP increased by 4.1% year-on-year. However, factors such as the weak external environment and continued high interest rates have limited the rebound of local consumption to a certain extent. The growth rate in the third quarter Milder than expected. In the short term, under the influence of slowing global growth and high interest rates, the uncertainty faced by Hong Kong's economy is still high. It is expected that the Hong Kong SAR's economic growth will be around 3.5% in 2023, and may slow down to less than 3% in 2024. In the context of continued great power competition and fragmentation of global camps, Hong Kong's status as an international trade and financial center faces certain challenges. Problems such as weak economic growth, weakening of traditional advantages, and loss of labor force may restrict Hong Kong's economic and social development prospects, and Hong Kong's economy is facing repositioning. However, as an international financial, shipping, trade center and international aviation hub city, Hong Kong has a highly internationalized and legalized business environment and a global business network. It has significant advantages in financing, taxation, innovation and other aspects. In the medium and long term, The development potential is still great.   The Hong Kong SAR Government has strong financial strength, and its fiscal reserves and very low interest burden give it sufficient fiscal space. In 2023, as the economy recovers, the fiscal deficit will decline, and the debt ratio will rise, but it will still be at a very low level. For a long time, the Hong Kong government has followed the prudent fiscal principle of "living within one's means" and pursued a simple and low tax system. In 2023, as the economy recovers, the fiscal deficit ratio is expected to drop to around 4%, but stamp duty and land sales revenue will remain relatively low. Thanks to the fiscal surplus achieved for many years before the epidemic, the Hong Kong government has sufficient fiscal reserves, which provides the SAR government with sufficient fiscal space. In 2022, the SAR government's fiscal reserves remained at around 25% of GDP. At the same time, the SAR government's debt burden is very low. Fiscal support measures have caused the SAR government's debt ratio to rise to around 13% in 2023, but it still remains at a very low level. With the gradual recovery of the economy, it is expected that the Hong Kong government's debt ratio will decline in the medium term. In addition, the Hong Kong SAR has a very low cost of funds, and the interest burden has been maintained at a level close to 0 all year round. In the long run, we need to pay attention to the impact of structural problems such as population aging on government fiscal revenue and expenditure and fiscal reserves.   The Hong Kong Special Administrative Region has strong external solvency, and its current account has been in surplus for a long time. Its status as an international financial center provides guarantees for its external financing capacity and liquidity. Since 2022, Hong Kong's current account surplus has narrowed due to the decline in exports, and net FDI inflows provide support for its strong solvency. The Hong Kong Special Administrative Region's current account and net FDI have maintained a surplus for a long time. In 2023, although the customs clearance between Hong Kong and the Mainland has reduced restrictions on cross-border land freight, the current account surplus has narrowed due to weaker external demand. Hong Kong is the world's major destination and source of foreign direct investment, and net FDI inflows provide support for the balance of payments. At the same time, thanks to its status as an international financial center, the Hong Kong Special Administrative Region has smooth external financing channels and can raise funds in the international market at a very low cost. In addition, the Hong Kong government has huge foreign exchange reserves and international investment positions. As of the end of 2022, NIIP accounted for more than 480% of GDP. Overall, sufficient fiscal and foreign exchange buffers, effective financial supervision, flexible economy and prudent fiscal framework provide sufficient guarantees for liquidity.   Administrative Region has a sound legal system and a highly efficient government, but we need to be vigilant about the possibility of a decoupling between the West and the Hong Kong Special Administrative Region. The Hong Kong Special Administrative Region has a sound legal system and a sound fiscal system, and a highly efficient government. It enjoys obvious institutional advantages in the fields of economy, trade and finance. The full implementation of the National Security Law and the implementation of the new policy agenda play an important role in stabilizing the political and social situation in Hong Kong. But at the same time, against the backdrop of great power competition, rising global geopolitical risks and frequent local disputes, Hong Kong's status as an international trade and financial center faces challenges, and we need to be vigilant about the possibility of a complete decoupling between the West and Hong Kong.   -------     The Macao SAR is a small open economy with a small economic scale and a high per capita income level. Due to its single economic structure and high dependence on the gaming industry, its economic volatility is very high under external shocks. Since 2023, the complete elimination of regulatory restrictions and the recovery of travel demand have driven a substantial increase in the Macao SAR's service exports, coupled with government policy support, leading to a rapid recovery of the SAR's economy. Before the epidemic, the total value added of the gaming and gaming intermediary industries accounted for more than 50% of the total value added of the entire industry, and it has long been a pillar industry in the Macao SAR. In the first three quarters of 2023, Macao's GDP grew by 77.7% year-on-year in real terms. Based on the cautious assumption that full-year gaming revenue will recover to around 70% of 2019, the actual GDP growth rate of the Macao SAR is expected to reach 78% in 2023. The government's support for the development of diversified industries is an important driving force for the growth of public and private investment expenditures in the Macao SAR in the next few years. In the medium and long term, the diversification of Macao's economic structure is expected to gradually increase.   The fiscal strength of the Macao SAR is very strong. The government has maintained a fiscal surplus for a long time, has no existing government debt, and has a large amount of fiscal reserves that can provide sufficient fiscal buffers in the face of external shocks. From 2020 to 2022, affected by external shocks, the government used fiscal reserves to supplement the fiscal gap. Since 2023, supported by the strong economic recovery, the fiscal situation has eased significantly, and the fiscal situation will continue to improve as the economy resumes growth. Revenue related to the gaming industry accounts for about 80% of the government's fiscal revenue. Thanks to the booming gaming industry, high tax rates and prudent government management, the SAR government has maintained a fiscal surplus since 2002. At the end of 2022, the SAR's fiscal reserves were MOP557.97 billion, about 3.15 times the SAR's nominal GDP in 2022. As of the end of November 2023, the SAR government's fiscal surplus was MOP12.309 billion. The Macao SAR is the only region among the countries and regions currently rated that has no existing debt. According to the SAR’s fiscal budget, Macau will achieve a fiscal surplus of approximately MOP 1.2 billion in 2024 without using fiscal reserves, and its fiscal situation will be further restored.   The Macao SAR has strong external solvency capabilities. Supported by prosperous service exports, its current account has maintained a large surplus for a long time, FDI has maintained a net inflow, and its foreign exchange reserves are sufficient. Although affected by external shocks, the balance of payments surplus narrowed significantly from 2020 to 2022, but with the recovery of the gaming industry since 2023, the balance of payments situation has improved significantly. Affected by the rise in local wages and the improvement of manufacturing competitiveness in emerging market countries, Macao's advantages in traditional labor-intensive manufacturing have gradually weakened, and the merchandise trade balance has been in deficit for a long time. Thanks to the liberalization of the gaming industry and the prosperity of the tourism industry, Macau's current account surplus before the epidemic averaged more than 25%. Since 2023, benefiting from the significant growth in service exports under the strong recovery of tourism, the current account surplus is expected to increase to about 21% of GDP. The long-term large-scale current account surplus has accumulated considerable foreign exchange reserves, providing sufficient buffer to deal with external shocks.   The Macao SAR has a strong institutional strength, a relatively sound government fiscal system and legal system, and a high government governance efficiency. The orderly participation of residents in Macao's elections, legislation and decision-making ensures a strong government stability. The implementation of the new gaming law has strengthened the government's supervision of the gaming industry, reduced social risks such as cross-border capital flows and money laundering, and will effectively promote the development of the SAR's non-gaming industry, and the effectiveness of laws, regulations and policies has been continuously improved. The Basic Law stipulates the institutional framework of the Macao SAR and grants the Macao SAR a high degree of autonomy. The Macao SAR enjoys administrative power, legislative power, independent judicial power, etc., and has obvious institutional advantages. Based on prudent fiscal and macroeconomic policies, the SAR's economy has achieved rapid development, fiscal reserves have been continuously accumulated, and the government is highly effective. The new gaming law's constraints on the private investment behavior and expenditure of franchised gaming operators will play a role in stabilizing the competitive landscape of the gaming industry and supporting the development of non-gaming industries in the future.   The financial industry of the Macao SAR is dominated by the banking industry. International banking business is the main component of the SAR banking industry. Under unified supervision, the overall asset quality of banks is good, profitability is good, liquidity is sufficient, and banking risks are low. At present, there are a total of 33 banking institutions licensed to operate in the Macao SAR, among which the branches of Bank of China and Industrial and Commercial Bank of China in the Macao SAR are the largest banking institutions in Macao. Affected by the epidemic and the increased risk of commercial real estate loan exposure in mainland China, the asset quality of the Macao SAR banking system has deteriorated since 2020, and the non-performing loan ratio increased to 2.5% at the end of October 2023, but it is still at a low level. The Macao SAR banking industry has sufficient capital and liquidity. At the end of the third quarter of 2023, the capital adequacy ratio of the SAR banking industry was 15.77%, far higher than the minimum capital requirement of 8.0%.   Factors that could trigger a rating downgrade:   If the Hong Kong SAR's economic growth slows down more than expected, the economic transformation and upgrading falls short of expectations, and the government's stability faces challenges, leading to a significant deterioration in the business environment, CCXI will consider downgrading the Hong Kong SAR's credit rating ; if the Macau SAR gaming industry suffers a greater The external impact has caused a significant decline in the financial and external solvency strength of the Macao Special Administrative Region. CCXI will consider downgrading the credit rating of the Macao Special Administrative Region.

Highlights of this issue   Introduction to carbon emission reduction support tools In order to support the national "dual carbon" policy deployment, the People's Bank of China officially launched the carbon emission reduction support tool in 2021 to support financial institutions in providing preferential interest rate loans for projects with significant carbon emission reduction effects in key areas of carbon emission reduction. As a structural monetary policy tool issued by the People's Bank of China, the carbon emission reduction support tool has dual functions of financial resource allocation and environmental regulation. It is essentially a loan that provides low-cost financial support for the field of energy conservation and emission reduction, and can guide more social resources. Influx into the field of low-carbon emission reduction to help achieve the goal of "carbon peaking and carbon neutrality".   Carbon emission reduction support tool support scope In terms of the types of loans covered by the carbon emission reduction support tool, its reimbursement scope is limited to on-balance sheet loans directly issued by commercial banks to enterprises in related fields, including carbon emission reduction project loans, working capital loans to support projects during the construction period of carbon emission reduction projects, and personal photovoltaic loans for farmers. In terms of carbon emission reduction support tool support projects, the key areas of support include 23 sub-sectors in three areas: clean energy, energy conservation and environmental protection, and carbon emission reduction technology.   Implementation of carbon emission reduction support tools As of the first half of 2023, 21 national financial institutions have issued carbon emission reduction loans totaling 880.872 billion yuan, supporting a total of 7,543 carbon emission reduction projects, driving a total of 215.4755 million tons of carbon emission reductions. Judging from the carbon emission reduction benefits generated, the carbon emission reduction intensity of projects supported by carbon emission reduction loans is 24,500 tons/100 million yuan, of which the carbon emission reduction intensity of clean energy projects is 23,300 tons/100 million yuan, and the carbon emission intensity of energy conservation and environmental protection projects is 23,300 tons/100 million yuan. The emission reduction intensity is 62,700 tons/100 million yuan, and the carbon emission reduction intensity of carbon emission reduction technology projects is 71,400 tons/100 million yuan. Relatively speaking, carbon emission reduction technology projects can directly reduce the concentration of greenhouse gases in the atmosphere, and the carbon emission reduction benefits generated per 100 million yuan of investment are the most significant among the three types of projects.   Suggestions on the development of carbon emission reduction support tools   Ø Expand the scope of carbon emission reduction support Ø Further extend the implementation period of carbon emission reduction support tools Ø Unify the carbon emission reduction benefit calculation method   Introduction to carbon emission reduction support toolsIn November 2021, in order to support the national "dual carbon" policy deployment, the People's Bank of China issued the "Notice of the People's Bank of China on Matters Concerning the Establishment of Carbon Emission Reduction Support Tools" (Yinfa [2021] No. 278) (hereinafter referred to as "Carbon Emission Reduction Notice"), officially launched the carbon emission reduction support tool to support financial institutions in providing preferential interest rate loans for projects with significant carbon emission reduction effects in key areas of carbon emission reduction. The interest rate is the same as the market quotation for loans of the same term. Interest rates are roughly flat.The carbon emission reduction support tool adopts a direct mechanism of "loan first and then borrow". That is, after financial institutions issue loans to enterprises in the field of carbon emission reduction, they can apply to the People's Bank for carbon emission reduction support tools. The People's Bank will pay 60% of the loan principal. Provide financial support to financial institutions. The carbon emission reduction support tool has a term of one year and can be extended twice. Financial institutions need to provide qualified credit asset pledges to the People's Bank of China. For details, please refer to the medium-term lending facility (MLF) collateral requirements.The Carbon Emission Reduction Notice stipulates that the implementation period of the Carbon Emission Reduction Support Tool is tentatively set for 2021 and 2022, and clarifies that a total of 21 national banks are eligible to apply for the Carbon Emission Reduction Support Tool, including 3 policy banks, 6 large state-owned commercial banks and 12 joint-stock banks. On January 29, 2023, the People's Bank of China officially announced that it would continue to implement three monetary policy tools including the Carbon Emission Reduction Support Tool, and stipulated that the Carbon Emission Reduction Support Tool will continue until the end of 2024, and some local legal person financial institutions and foreign financial institutions will also be included in the scope of financial institutions that can apply for support from the Carbon Emission Reduction Support Tool, further expanding the policy benefits and deepening international cooperation in green finance.In terms of information disclosure, the "Carbon Emission Reduction Notice" stipulates that financial institutions should publicly disclose information related to carbon emission reduction loans supported by carbon emission reduction support tools on a quarterly basis, including the number of carbon emission reduction projects newly added by financial institutions this year and the cumulative number of carbon emission reduction projects supported since receiving support from carbon emission reduction support tools, the amount of carbon emission reduction loans and the weighted average interest rate, as well as carbon emission reduction effects and other basic information. At the same time, financial institutions are encouraged to actively increase disclosure content based on basic information.As a structural monetary policy tool issued by the People's Bank of China, the carbon emission reduction support tool has the dual functions of financial resource allocation and environmental regulation. In essence, it is a loan that provides low-cost financial support for the field of energy conservation and emission reduction. It can guide more social resources into the field of low-carbon emission reduction and help achieve the "carbon peak and carbon neutrality" goals. Scope of support for carbon emission reduction support toolsIn terms of the types of loans covered by the carbon emission reduction support tool, its reimbursement scope is limited to on-balance sheet loans directly issued by commercial banks to enterprises in related fields, including carbon emission reduction project loans, working capital loans for projects during the construction period of carbon emission reduction projects, and personal loans for farmers' photovoltaics. For working capital loans, the supporting materials submitted by financial institutions should include but are not limited to project feasibility reports, financing plans for projects, loan contracts signed separately for the issuance of working capital for project construction, and procurement contracts for raw materials related to project construction. Among them, the feasibility report must reflect the demand for working capital loans for the project, and the financing plan must reflect the bank's provision of working capital loan support for the project. In addition, the scope of funding coverage of the carbon emission reduction support tool does not include nested products such as related ABS projects. Commercial banks' replacement of other banks' project loans, merger and acquisition loans, subsidiary loans, financial leasing factoring, bill business, working capital loans required for enterprises to operate, personal loans other than farmer photovoltaics, and foreign currency loans of overseas enterprises used for the construction of overseas carbon emission reduction key areas are also not within the scope of support of the carbon emission reduction support tool.In terms of carbon emission reduction support tool support projects, the key areas of support include clean energy, energy conservation and environmental protection, and carbon emission reduction technology, with a total of 23 sub-sectors, as shown in Figure 1. Implementation of Carbon Emission Reduction Support Tools Scale of carbon emission reduction loansAccording to public information disclosure statistics, as of the first half of 2023, 21 national financial institutions have issued a total of 880.872 billion yuan in carbon emission reduction loans, of which Industrial and Commercial Bank of China issued the largest amount of carbon emission reduction loans, 145.736 billion yuan, accounting for about 16.54% of the carbon emission reduction loans issued by 21 national financial institutions. Agricultural Bank of China ranks second in terms of carbon emission reduction loan issuance, accounting for about 15.60%. Agricultural Bank of China, Industrial and Commercial Bank of China, China Construction Bank and Bank of China issued a total of 60.42% of carbon emission reduction loans, as shown in Figure 2. Types of projects supported by carbon emission reduction loansThe key areas of carbon emission reduction support tools include clean energy, energy conservation and environmental protection, and carbon emission reduction technology, which include a total of 23 sub-sectors. According to data published on the official websites of 21 banks, as of the first half of 2023, the carbon emission reduction loans issued by the 21 banks have supported a total of 7,543 projects[1]. Among them, there are 7,373 clean energy projects, accounting for 97.75%, with a total loan of 855.915 billion yuan; there are 155 energy conservation and environmental protection projects, accounting for 2.05%, with a total loan of 23.249 billion yuan; there are 15 carbon emission reduction technology projects, accounting for 0.20%, with a total loan of 1.707 billion yuan. Overall, the vast majority of carbon emission reduction loans issued by the 21 national financial institutions are used to support clean energy projects, which is consistent with the rapid development of China's clean energy industry in recent years. Carbon emission reduction benefits generated by carbon emission reduction loansAccording to data published on the official websites of 21 banks, as of the first half of 2023, carbon emission reduction loans issued by 21 banks have driven a total of 215.4755 million tons of carbon emission reductions, of which clean energy loans have driven 199.6689 million tons of carbon emission reductions, accounting for Energy conservation and environmental protection loans drove carbon emission reductions of 14.5878 million tons, accounting for 6.77%; carbon emission reduction technology loans drove carbon emission reductions of 1.2188 million tons, accounting for 0.57%. Judging from the carbon emission reduction benefits generated by an investment of 100 million yuan, the carbon emission reduction intensity of projects supported by carbon emission reduction loans is 24,500 tons/100 million yuan, of which the carbon emission reduction intensity of clean energy projects is 23,300 t/100 million yuan, which is energy-saving and environmentally friendly. The carbon emission reduction intensity of carbon emission reduction technology projects is 62,700 tons/100 million yuan, and the carbon emission reduction intensity of carbon emission reduction technology projects is 71,400 tons/100 million yuan. Relatively speaking, carbon emission reduction technology projects can directly reduce the concentration of greenhouse gases in the atmosphere, and the carbon emission reduction benefits generated per 100 million yuan of investment are the most significant among the three types of projects. Suggestions on the development of carbon emission reduction support tools Expand the scope of carbon emission reduction supportThe current coverage of key areas of carbon emission reduction is limited. In addition to the 23 subdivisions supported by the carbon emission reduction support tool, there are still a large number of project loans that can directly produce carbon emission reduction benefits that are not included in the scope of the carbon emission reduction support tool. , such as low-carbon agriculture, green buildings, green transportation and sewage treatment and many other categories. Therefore, the key areas supported by the carbon emission reduction support tools need to be further expanded, so as to give full play to the role of the carbon emission reduction support tools in promoting the realization of the "double carbon" goal. Low-carbon projects with greater investment and financing needs and significant carbon emission reduction effects Agriculture, green transportation, sewage treatment, green buildings and other industries will be appropriately supported. Further extend the implementation period of carbon emission reduction support toolsAt present, the implementation period of my country's carbon emission reduction support tool ends at the end of 2024. Since its launch in November 2021, after two years of development, it has achieved certain initial results in promoting green and low-carbon development and enhancing the internal driving force of the financial system. However, the actual support time of this tool for the carbon emission reduction market is still short, and the social effect has not been fully manifested, especially in the field of carbon emission reduction technology. Carbon capture, storage and utilization technology lacks experience in large-scale commercial application and needs time for further development. At the same time, carbon emission reduction project loans usually have a long recovery period, and carbon emission reduction support tools are currently phased monetary policy tools, and their use period cannot match the project loan recovery period. Therefore, converting carbon emission reduction support tools into long-term monetary policy tools will help better guide funds to green industries and support the development of the carbon emission reduction market. Unify the method for calculating carbon emission reduction benefitsAt present, the annual carbon emission reduction of projects involved in carbon emission reduction loans shall give priority to the feasibility study report and environmental impact assessment report of the project. If it is impossible to directly obtain carbon emission reduction data from these reports, it can be calculated according to the formula in the "Guidelines for Calculating Energy Conservation and Emission Reduction of Green Credit Projects" (Yinbaojianban Bianhan No. 739 [2020]) (hereinafter referred to as the "Guidelines"). However, for projects such as the construction and operation of pumped storage power stations, emergency standby and peak-shaving power sources, the "Guidelines" do not provide a clear calculation formula, resulting in different calculation methods for various financial institutions in actual operations, and different calculation results for the same project. In addition, the carbon emission reduction data in the feasibility study reports of some projects are quite different from the calculation results of the formula and the industry average level. Therefore, formulating a complete set of calculation methods and phase parameters for the types of carbon emission reduction projects supported by the tool, and publishing the industry average level data in real time, can effectively improve the accuracy of financial institutions in calculating carbon emission reduction benefits.

The impact of three major sovereign rating downgrades on China’s economy and suggestions for response   Main points   Review and impact analysis of the three major international rating agencies’ downgrade of China’s sovereign ratingSince 2013, the three major international rating agencies have made six adjustments to China's sovereign rating.On December 5, 2023, Moody's maintained China's sovereign credit rating unchanged and adjusted the rating outlook from "stable" to "negative". The main reasons for the downgrade were the risk of slowing economic growth in China in the medium and long term, the prominent problem of local government debt, and the structural loss of land transfer income exacerbating fiscal pressure. The next day, Moody's successively downgraded the rating outlook of about 115 Chinese companies, including central enterprises, local state-owned enterprises, infrastructure enterprises, local urban investment companies, leading private enterprises, banks, non-bank financial institutions, insurance companies, etc.From the perspective of economic performance, the downgrade of China's sovereign rating by the three major international rating agencies has limited impact on China's economy. However, due to the "ceiling effect" of sovereign ratings, the three major agencies often downgrade the ratings of Chinese companies in batches after downgrading China's sovereign rating, which may lead to a narrowing of overseas financing channels for Chinese companies, rising financing costs, and increased risks of fluctuations in overseas debt valuations. Pay attention to the potential risk of sovereign rating downgrades during the economic downturnInternational experience shows that when the economy is in a downward cycle, the three major international rating agencies frequently downgrade sovereign credit ratings, which will lead to a sharp increase in the yields of government bonds of the rated countries, triggering fluctuations in domestic financial markets, intensified cross-border capital flows, and increased risks of exchange rate fluctuations. It will also affect the interbank market and trigger a liquidity crisis, ultimately leading to a sovereign debt crisis and even a regional economic crisis.Compared with the macroeconomic situation when the three major agencies downgraded my country's sovereign rating in 2016-2017, my country's current economic situation and the external environment it faces are more severe and complex. The negative impact of Moody's downgrade of the sovereign credit rating outlook on my country's economy may be even stronger.Moody's downgrade of China's sovereign rating outlook may further weaken market expectations. We should pay attention to the volatility of the domestic capital market and the pressure of capital outflow, the risk of the "ceiling effect" of sovereign ratings raising the overseas financing costs of Chinese companies, and the subsequent rating actions of the three major international rating agencies. We should be wary of intensive downgrades that may cause market panic. While "doing our best", we will take multiple measures to enhance my country's international voice in ratings and ensure national financial stability and securityAt present, the Chinese economy is still facing multiple risks such as insufficient effective demand, overcapacity in some industries, weak social expectations, and many hidden risks. The key for the Chinese economy to overcome and cope with the current multiple pressures lies in achieving "progress to promote stability" in key areas and core concerns as soon as possible, doing a good job in the conversion of old growth drivers and the adjustment and transformation of the real estate market. While implementing counter-cyclical regulation, it will release institutional dividends through continuous reform and opening up, promote the improvement of total factor productivity, stabilize growth and boost confidence.We will elevate the international voice of local rating agencies to a national strategy, and strive to cultivate influential rating agencies to participate in international competition.Based on the high-level opening-up of finance, we will accelerate the international development of the rating industry. On the one hand, we will deepen the Hong Kong offshore bond market, expand the Chinese dollar bond rating business, accumulate international rating experience and resources, and gradually enhance the influence of rating results; on the other hand, we will focus on ASEAN countries, countries along the “Belt and Road” and BRICS countries in our business layout, promote bilateral and multilateral cooperation and establish rating alliances in parallel, and rely on international cooperation to enhance the international influence and competitiveness of Chinese rating agencies.Establish a sovereign rating system that is different from the three major international rating agencies to safeguard China's rating sovereignty. In line with national development strategies, such as the "Belt and Road" initiative and the BRICS economic partnership strategy, expand the scope of sovereign rating services, and thus increase the recognition and influence of sovereign rating results of Chinese rating agencies.   Recently, Moody's downgraded China's sovereign credit rating outlook from stable to negative, and also downgraded the rating outlook of about 115 Chinese non-insurance financial institutions, insurance companies, state-owned enterprises and municipal infrastructure companies. Although from a historical perspective, the impact of the three downgrades of China's sovereign rating on China's economy is very limited, but from international experience, frequent downgrades of sovereign ratings during economic downturns are very likely to trigger debt crises and impact the stability and financial security of the rated countries' financial markets. Therefore, under the current background of my country's economic recovery under pressure and increasingly complex international situation, it is necessary to focus on the possibility that the downgrade of the sovereign rating outlook will aggravate the weakening of expectations, trigger fluctuations in the domestic capital market, increase capital outflow pressure, and increase the overseas financing costs of Chinese companies. Under the current situation, the Chinese economy faces multiple risks, but it also has strong resilience and huge development potential: on the one hand, we need to do our own thing well, while increasing the implementation of counter-cyclical macroeconomic regulation to stabilize growth, release institutional dividends through continuous reform and opening up, promote the improvement of total factor productivity, and enhance the confidence of all parties in the medium- and long-term development of my country's economy. On the other hand, as my country's financial market continues to open up to the outside world, mastering rating sovereignty is of great significance to maintaining the country's financial stability and financial security. In this regard, we suggest that enhancing the international voice of local rating agencies be elevated to a national strategy, vigorously supporting the international development of the rating industry, mastering rating sovereignty and voice, and better maintaining the country's financial stability and financial security.   1. Review and impact analysis of the downgrade of China's sovereign rating by the three major international rating agencies 1. The three major downgrades of China’s sovereign rating   This is not the first time that the three major international rating agencies have downgraded China's sovereign credit rating. Since 2013, the three major international rating agencies have adjusted China's sovereign rating six times, three of which were downgrades of a subset of sovereign ratings and three were downgrades of rating outlooks. The debt risks of local government financing platforms, slowing economic growth, high leverage in the corporate sector, and uncertainty in the implementation of reforms are the main considerations for the three major international rating agencies to adjust China's sovereign rating or outlook (see Table 1). On December 5, 2023, Moody's maintained China's sovereign credit rating unchanged, but adjusted the rating outlook from "stable" to "negative". The main reasons for the downgrade of the rating outlook are: first, there is a risk of slowing down China's economic growth in the medium and long term; second, the local government debt problem is prominent. Although the central government has alleviated liquidity pressure through support measures such as issuing special refinancing bonds, the scale of support is limited relative to the size of the debt, and short-term support cannot solve the long-term sustainability of debt. At the same time, support measures to deal with local debt risks will weaken the fiscal strength of the Chinese government and may also weaken the effectiveness of policies to regulate economic growth; third, local governments are facing structural losses in land transfer income, coupled with debt burdens, local governments will face huge fiscal pressure. The next day, Moody's successively downgraded the rating outlook of about 115 Chinese companies, including central enterprises, local state-owned enterprises, infrastructure enterprises, local urban investment, leading private enterprises, banks, non-bank financial institutions, insurance companies, etc.     (II) From the perspective of economic performance, the three major downgrades of China's sovereign credit rating have limited impact   The downgrade of China's sovereign rating by the three major international rating agencies has relatively little impact on China's domestic financial market and international capital flows. Judging from the impact of the three major adjustments to China's sovereign rating or outlook on the market in the past, the exchange rate, ten-year government bond yield and Shanghai A-share index did not fluctuate significantly on the day when the three major adjustments to China's sovereign rating or outlook were downgraded, and in 30 transactions The daily range generally maintains range fluctuations without significant trend changes (see Figures 1, 2, and 3), which to a certain extent indicates that sovereign rating adjustments or outlook adjustments have limited short-term impact on China's exchange rate market and capital market. From the perspective of a longer range, after Moody's and S&P downgrade China's sovereign rating or outlook, it will indeed be accompanied by a short-term decline in the amount of foreign direct investment or negative year-on-year growth, but it usually recovers after one to two months (see Figure 4) , but considering that the scale of foreign direct investment is affected by multiple factors, overall, the three major international downgrades of China's sovereign rating or outlook have limited impact on foreign direct investment. Judging from the scale of RMB stocks and bonds held by overseas institutions , both have not been affected by the three major international adjustments to China's sovereign rating and have continued to rise (see Figure 5).     Affected by the "ceiling effect" of sovereign ratings, after downgrading China's sovereign rating, the three major banks often simultaneously downgrade the ratings of Chinese companies in batches, which may lead to rising overseas financing costs for Chinese companies and increased risks of volatility in overseas debt valuations.     Pay attention to the potential risk of sovereign credit rating downgrades during the economic downturn International experience shows that when the economy is in a downturn, intensive procyclical downgrades of sovereign credit ratings will amplify the risk of sovereign debt defaults in the rated countries. At present, my country's economic recovery is under pressure and the external environment is complex and severe. In this context, we need to pay attention to the potential risks brought about by Moody's downgrading my country's sovereign rating outlook, as well as the follow-up actions of the three major rating agencies, and be vigilant against frequent rating actions causing market panic and bringing obstacles to my country's economic recovery.   International experience shows that a procyclical downgrade of sovereign credit ratings will amplify the risk of sovereign debt default and increase the possibility of a sovereign debt crisis or even a regional economic crisis. A single downgrade of the sovereign credit rating of a rated country by a single rating agency may not have a significant impact on the economic development of the rated country. However, when the economy is in a downward cycle, the frequent downgrades of sovereign credit ratings by the three major international rating agencies will lead to a sharp increase in the yield of government bonds in the rated country, triggering fluctuations in domestic financial markets, intensified cross-border capital flows, and increased exchange rate fluctuation risks, which will also affect the inter-bank market. The pressure on bank balance sheets will trigger a liquidity crisis, which will eventually lead to a sovereign debt crisis and even a regional economic crisis. Take the European debt crisis as an example. In 2009, Fitch, S&P and Moody's successively downgraded Greece's sovereign credit rating, triggering the Greek sovereign debt crisis. Since then, the Greek sovereign debt crisis has continued to spread to the core countries of the eurozone. The three major rating agencies began to downgrade the sovereign credit ratings of eurozone countries on a large scale and frequently, accelerating the contagion of debt risks, and eventually triggering an economic crisis in the entire eurozone, causing a huge impact on the financial markets and political stability of the eurozone.   Combining the development process of the European debt crisis, we can see that when the economy enters a downward cycle, a downgrade in sovereign credit ratings will bring systemic risks to the rated countries, which are specifically reflected in:   1. The downgrade of sovereign credit ratings pushed up the risk premium and aggravated the volatility of domestic financial markets The downgrade of sovereign credit rating directly pushes up the yield level of sovereign bonds of the rated country by increasing the risk premium. When the sovereign credit rating of the rated country is downgraded, investors will demand a higher risk premium, thereby pushing up the yield of the rated country's government bonds. From another perspective, the downgrade of the sovereign credit rating of the rated country will trigger the market to sell off the country's sovereign bonds, resulting in a drop in sovereign bond prices and an increase in interest rates. During the European debt crisis, S&P and Fitch successively downgraded Italy's sovereign rating. As a result, Italy's long-term sovereign bond yield rose by about 2 percentage points month-on-month in November, reaching 7.26%, while the yield of German government bonds in the same period was only 1.78%. In addition, the downgrade of sovereign credit rating will also indirectly impact the stock market of the rated country through the path of "future corporate earnings and cost expectations." On the one hand, a downgrade in the sovereign credit rating of a rated country will weaken the market's expectations of the country's economic situation, causing investors to lower their stock market valuations; on the other hand, due to the restraining effect of the "sovereign rating ceiling", a downgrade in the sovereign credit rating of a rated country will lead to a passive downgrade in the credit rating of domestic companies, increasing their financing costs and difficulties in the international market, and thus leading to an increase in corporate financial costs. During the European debt crisis, Spain's sovereign credit rating was downgraded in March 2011, and the Spanish IBEX35 index fell from its highest point of 10,939.70 points that month to 5,987.8 points in June 2012, a drop of 45%.     2. The downgrade of sovereign credit ratings weakens international capital investment confidence and accelerates capital outflow On the one hand, a sovereign rating downgrade will weaken the investment confidence of other countries and international capital in the rated country, and the instinct of capital to seek profit and avoid harm will cause it to flow out of countries with greater investment risks. It is worth noting that the impact of sovereign credit rating downgrades on low-transparency countries is greater than that on high-transparency countries, mainly because international investors rely more on low-transparency sovereign credit ratings in cross-border capital allocation decisions. On the other hand, since some financial products have rating requirements embedded in the investment conditions, a sovereign rating downgrade will lead to a passive downgrade of the rating of the investment target, causing international capital to actively or passively adjust the investment target and accelerate capital outflows. Due to regulatory requirements, many institutional investors are not allowed to invest in non-investment grade or junk-grade financial products, nor are they allowed to accept these grades of financial products as collateral. Once a country's sovereign rating is downgraded, resulting in changes in the ratings of certain financial products, institutional investors will adjust their corresponding investment portfolios, causing capital outflows. During the European debt crisis, after Greece, Portugal, Ireland and other countries were frequently downgraded, in August 2010, direct investment from outside the eurozone to the eurozone fell sharply both year-on-year and month-on-month, turning from positive to negative. Although it turned positive in September and October, it still fell sharply year-on-year.   3. Although the downgrade of sovereign credit ratings does not change the long-term trend of exchange rates, it will increase exchange rate fluctuations of the rated countries in the short term. There are three forms of sovereign credit rating downgrades: rating downgrades, outlook downgrades and inclusion in the watch list. Among them, the impact of sovereign credit rating outlook downgrades and inclusion in the watch list on the exchange rate is greater than that of rating downgrades, which may be due to the fact that the financial market pays more attention to "possible actions". Since the future market downside expectations have been established and fully adjusted when the outlook is downgraded and included in the watch list, when the "real action" (rating downgrade) comes, the market performance is stable. The disturbance of sovereign rating downgrades to the rated country's foreign exchange market is mainly a short-term shock. As the economic situation recovers and improves, the impact of sovereign credit rating downgrades on the foreign exchange market gradually weakens. During the European debt crisis, when the three major rating agencies announced that the outlook of a country in the euro zone deteriorated or was included in the negative list, the volatility of the US dollar/euro rose by more than 56% on the same day, and the volatility fell by more than 48% on the next day. Although the average level of the euro/dollar exchange rate was relatively stable during the European debt crisis, the fluctuation range increased, falling from the highest point of 1.5136 to the lowest point of 1.1916, a drop of more than 20%.     (II) At present, my country's economic recovery is under pressure and the international situation is severe and complex. The negative impact of Moody's downgrading China's sovereign credit rating outlook is more worthy of attention.   Although historical experience shows that the impact of downgrading my country's sovereign credit rating on my country's economy is very limited, compared with the macroeconomic situation when the three major central banks downgraded my country's sovereign rating in 2016-2017, my country's current economic situation and the external environment it faces are more severe and complex. The negative impact of Moody's downgrading the sovereign credit rating outlook on my country's economy may be even stronger.   1. Domestically, my country's economy is currently in a stage of steady recovery, but it still faces multiple risks and challenges First, China's economic growth has slowed down and recovery has been under pressure. In 2017, supported by the recovery of external demand, the monetization of shantytown renovation, and supply-side structural reforms, China's economic structure has been continuously optimized and upgraded, and the national economy has been stable and improved, achieving a growth of 6.9%. At this time, the downgrade of China's sovereign credit rating by the three major rating agencies has little impact on China. Although China's economy is currently recovering steadily, it still faces constraints such as insufficient effective demand, overcapacity in some industries, weak social expectations, and many risks. In 2022, China's GDP growth rate was 3.0%. In the first three quarters of this year, the GDP growth rate was 5.2%. At this time, the downgrade of China's sovereign credit rating by the three major rating agencies may further weaken market expectations.   Second, the debt problem has increased the fragility of China's economy and finance. Compared with 2017, the current debt problem is more serious, especially the local government debt problem, which has increased the fragility of China's economy and finance. By the end of 2023, the scale of government debt may reach 73.6 trillion yuan, and the leverage ratio may rise by nearly 20 percentage points from 2017 to 55.8%. If local hidden debts are taken into account, the government leverage ratio is close to 100%. Although the structural risk of debt has increased, it is generally controllable, especially after the 724 Political Bureau meeting, the "package of debt reduction" measures have been promoted and implemented, and the market sentiment and liquidity risks of local governments and financing platforms have been greatly alleviated.   Third, the deep adjustment of the real estate industry has dragged down China's economic recovery. At present, the supply and demand relationship in the real estate market has undergone major changes, and the real estate industry has entered a downward cycle. Since 2019, the growth rate of the added value of the real estate industry has declined significantly, and negative growth has begun in 2022. The role of the real estate industry in driving GDP has also declined year by year since 2020. The deep adjustment of the real estate industry not only drags down economic recovery, but also increases the difficulty of dealing with local debt problems and may have an impact on the financial system.     2. Internationally, the external environment facing my country is becoming increasingly severe and complex. Compared with the economic interdependence, peaceful development and win-win cooperation among countries in the world in 2017, the current international situation facing China is more complex and severe. First, the Sino-US trade war is still ongoing, and the degree of anti-globalization is deepening. Since 2018, the United States has imposed tariffs on a variety of Chinese products and imposed sanctions on ZTE, Huawei and other companies. The United States continues to generalize the concept of national security, expand the scope of sanctions, continuously implement export controls in the field of science and technology, and abuse the "long-arm jurisdiction" to implement "technological bullying" against China. Second, the slowdown in global economic growth and intensified geopolitical conflicts in the post-epidemic era have increased the external uncertainty of economic development. Affected by the dual impact of the epidemic and the decline in the economic growth rate of trading partners, the cumulative year-on-year growth rate of exports has continued to decline since 2023. In addition, the Russian-Ukrainian conflict and the new round of the Palestinian-Israeli conflict have broken out one after another, and global geopolitical conflicts have intensified, affecting the stability of the international trade environment, causing impacts on commodity prices and the security of the international supply chain, and exacerbating macroeconomic fluctuations.   (III) Moody's downgrades China's sovereign rating outlook. The downgrade may further weaken market expectations. Pay attention to potential risks and subsequent rating actions of the three major international rating agencies.   First, pay attention to the volatility of the domestic capital market and the pressure of capital outflow. The adjustment of the rating outlook reflects the change in expectations. This time, Moody's adjusted China's sovereign rating outlook to negative, which means that China's sovereign rating may be downgraded in the future, or deepen the negative expectations of other countries and international capital on China's economic development, which will lead to a decline in the enthusiasm of foreign capital to invest in China's domestic assets. In addition, the current Fed's liquidity inflection point may aggravate the volatility of the domestic capital market in the short term, and may cause a new round of capital outflow pressure in the medium and long term, which will not only bring pressure to related companies in terms of funds, but also impact market investment sentiment and cause negative effects.   Second, pay attention to the "ceiling effect" of sovereign ratings, which raises the overseas financing costs of Chinese companies. Sovereign ratings not only directly affect the debt-raising capacity of sovereign countries, but also affect the overseas financing costs of a country's financial institutions and enterprises through the "ceiling effect". Recently, after downgrading China's sovereign rating outlook, Moody's also downgraded the rating outlook of about 115 Chinese companies, which may lead to an increase in the overseas financing costs of Chinese companies and restrict the financing flexibility of Chinese companies in the international financial market. With the continuous advancement of China's capital market opening to the outside world, the scale and demand of overseas financing of Chinese companies have continued to rise. The downgrade of the sovereign credit rating outlook may hinder the pace of Chinese companies' "going out" to a certain extent.   Third, pay attention to the subsequent rating actions of the three major agencies and be wary of intensive and continuous downgrades that may cause market panic. A single downgrade of a sovereign credit rating by a rating agency will have limited impact on the economy of the rated country, but when the economy is down, the three rating agencies will frequently downgrade sovereign credit ratings at the same time, which is likely to cause market panic. Therefore, in the context of China's economic recovery under pressure, we also need to pay attention to the subsequent actions of Moody's and the other two rating agencies, while boosting market confidence and stabilizing future expectations.   (III) While “doing our best”, we will take multiple measures to enhance my country’s international voice in ratings and safeguard national financial stability and security. For a long time, the three major international rating agencies have used their monopoly to firmly control the sovereign rating market. However, their sovereign rating system based on Western ideology has failed to fully and objectively measure China's sovereign credit and even deliberately underestimated China's sovereign credit level and the overseas rating of Chinese enterprises, which may have a negative impact on the overseas financing of Chinese enterprises and national financial security. Against the background of the continuous advancement of China's financial market opening up, the intensification of great power competition, and the increasingly complex external environment, mastering rating sovereignty is of great significance to maintaining the country's financial stability and financial security. Under the current situation, on the one hand, we need to "do well" ourselves, increase the implementation of counter-cyclical macroeconomic regulation to stabilize growth, and release institutional dividends through continuous reform and opening up, promote the improvement of total factor productivity, and enhance the confidence of all parties in the medium- and long-term development of China's economy [3] ; on the other hand, it is urgent for Chinese rating agencies to speak for more Chinese companies going abroad, get rid of the constraints of Western rating agencies on China in the financial field, and maintain national financial security. In this regard, we put forward the following suggestions:   (IV) Combining short-term stable growth with long-term reform to promote the improvement of total factor productivity and enhance the confidence of all parties in China's economic development At present, China's economy is still facing multiple risks such as insufficient effective demand, overcapacity in some industries, weak social expectations, and many hidden risks. At the same time, we should also see that China's economy still has resilience and huge development potential: super-large market advantages, continuous economic structural transformation, and continuous release of innovation momentum. Therefore, the key to China's economy overcoming and coping with the current multiple pressures lies in the key areas and core concerns to achieve "progress to promote stability" as soon as possible, and do a good job in the transformation of new and old kinetic energy, real estate adjustment and transformation, and risk mitigation, so as to promote the steady growth of the economy in 2024. On the one hand, strengthen counter-cyclical regulation, continue to release signals of stable growth, continue to strengthen measures to stabilize growth, coordinate non-economic policies with economic policies, form policy synergy, and guide expectations to further improve. On the other hand, through continuous reform and opening up, release institutional dividends, promote the improvement of total factor productivity, promote market-oriented reform of factors, supply-side structural reform, ownership reform, etc., promote China's economy to return to the "growth path", and enhance the confidence of all parties in the medium- and long-term development of China's economy. (II) Raising the international voice of local rating agencies to a national strategy, and focusing on cultivating influential rating agencies to participate in international competition Credit ratings may affect the financial stability and security of a country or even the global financial market. Therefore, the importance of credit ratings should be raised at the national level, and the international voice of Chinese rating agencies should be elevated to a national strategy, so as to master the favorable weapon to maintain domestic financial stability in the future when capital is more deeply open. At the same time, under the guidance and support of supervision, we should promote internal integration of the industry, enhance the credibility of my country's rating industry, strive to accumulate the good reputation of our rating agencies, adapt to the needs of the international market, encourage and cultivate competitive rating agencies to participate more in international business, and enhance their international voice. (III) Based on the high level of financial opening up, accelerate the international development of the rating industry Chinese rating agencies should continue to respond to policy calls. On the one hand, they should deepen their presence in the Hong Kong offshore bond market, expand Chinese dollar bond rating business, accumulate international rating experience and resources, gradually enhance the influence of rating results, help Chinese companies with overseas financing and domestic capital "going out", and protect international investment risk barriers for Chinese capital; on the other hand, they should grasp policy guidance and market opportunities, focus on ASEAN countries, countries along the "Belt and Road" and BRICS countries in their business layout, promote bilateral and multilateral cooperation and the establishment of rating alliances in parallel, rely on international cooperation to enhance the international influence and competitiveness of Chinese rating agencies, and better serve the opening up of my country's capital market and the internationalization of the RMB. (IV) Establish a sovereign rating system that is different from the three major international rating agencies and safeguard my country’s rating sovereignty Considering that Chinese rating agencies have certain practical experience in sovereign rating, it is suggested that they can build on this foundation and fully combine the systems and national conditions of emerging countries to establish a sovereign rating system that conforms to the political and economic characteristics of emerging countries and safeguard their own rating sovereignty. In addition, the concept of cross-cycle sovereign rating can be introduced into the sovereign rating system, and the three major pro-cyclical rating adjustment ideas can be abandoned; in line with national development strategies, such as the "Belt and Road " initiative and the BRICS economic partnership strategy, the scope of sovereign rating services can be expanded, thereby increasing the recognition and influence of the sovereign rating results of Chinese rating agencies. [1] Includes newly issued US dollar bonds used for debt replacement after debt restructuring or bankruptcy reorganization of Chinese real estate companies. [2] Only Sunac China Holdings Group and Zhenro Properties issued U.S. dollar bonds with similar maturities before and after their ratings were downgraded, which can be used for comparison of issuance rates. The U.S. dollar bonds issued by Yango Group after its rating outlook was downgraded have shorter maturities but higher issuance rates, which also shows that a ratings downgrade will increase issuance costs. [3] For details, see the China Chengxin International Research Institute’s macroeconomic special topic: “ China’s Economy in 2024: Seeking Rebalance between Stability and Progress, Destruction and Establishment ”