CHINA: An Introduction to Aviation: Finance (PRC Firms)
Environmental Considerations in China’s Aviation Finance: Sustainable Finance and Legal Insights
China’s aviation industry is experiencing an era of rapid expansion, fuelled by economic growth, increasing air travel demand and government-backed infrastructure development. As one of the largest aviation markets globally, China is projected to require 8,830 new aircraft by 2043, according to Boeing’s forecast. With such growth comes an increasing emphasis on sustainability, aligning with China’s dual carbon goals to peak carbon emissions by 2030 and achieve carbon neutrality by 2060.
In response, sustainable finance has emerged as a key driver in transforming China’s aviation sector. Airlines, leasing companies and financial institutions are actively exploring green financing instruments such as green bonds, sustainability-linked loans (SLLs), and ESG-integrated leasing models to facilitate the transition toward low-carbon aviation. However, while these developments present new opportunities, stakeholders must also navigate complex regulatory, tax and compliance challenges to fully leverage sustainable financing mechanisms.
Market Growth and Economic Drivers
China’s aviation market has demonstrated remarkable resilience amid global economic fluctuations. As the country continues its post-pandemic recovery, the aviation sector has witnessed accelerated fleet modernisation and substantial infrastructure investments. These developments have created an increasing demand for sophisticated and sustainable financing solutions to support airline expansion while aligning with evolving regulatory and environmental expectations.
Recognising the strategic importance of aviation as a pillar of economic growth, the Civil Aviation Administration of China (CAAC) has outlined ambitious plans to expand the national airport network to 270 airports by 2025. This large-scale infrastructure expansion reflects China’s commitment to enhancing connectivity and supporting the continued growth of domestic and international air traffic. Simultaneously, Chinese airlines are undertaking a major fleet renewal initiative, prioritising the acquisition of fuel-efficient and next-generation aircraft. The adoption of models such as the domestically developed COMAC C919, along with internationally manufactured Boeing 787 and Airbus A350, underscores a clear industry shift toward operational efficiency and reduced environmental impact.
The recovery of China’s aviation sector in the wake of the pandemic has further reinforced the need for diverse and innovative financing mechanisms. Airlines and lessors are actively seeking capital to support fleet expansion while concurrently addressing sustainability imperatives. This demand has prompted financial institutions to integrate environmental, social and governance (ESG) criteria into their aviation finance portfolios. The increasing focus on sustainability is not merely a regulatory requirement but a broader market shift that aligns with global investor sentiment and China’s long-term carbon neutrality objectives.
The Rise of Sustainable Finance in Aviation
Sustainable finance has become a critical pillar in China’s aviation industry, serving as a key driver in the transition towards environmentally responsible operations.
Green bonds have emerged as a particularly effective vehicle for financing low-carbon aviation projects. These bonds provide capital for initiatives such as fleet renewal programmes aimed at replacing older, less efficient aircraft with new-generation models that meet higher environmental standards. Additionally, green bond financing is playing a crucial role in supporting the expansion of Sustainable Aviation Fuel (SAF) infrastructure, a key component of long-term decarboniasation efforts.
Alongside bond financing, SLLs have gained prominence in the aviation industry. Unlike traditional debt instruments, these loans are structured to incentivise borrowers to meet specific ESG performance targets. Airlines that achieve predetermined sustainability benchmarks, such as reducing carbon emissions per available seat kilometre or increasing SAF usage, benefit from preferential loan terms, including lower interest rates.
The shift towards ESG-based aircraft leasing represents another key development in sustainable aviation finance. Leasing companies are now incorporating sustainability provisions into lease agreements, requiring lessees to maintain and report on emissions reductions throughout the lease term. This approach encourages airlines to invest in fuel-efficient aircraft and adopt best practices for fleet management, aligning with global carbon reduction commitments while ensuring compliance with evolving international regulations.
A notable example of sustainable finance in action is China Development Bank (CDB) Aviation’s recent issuance of USD1.23 billion in sustainable loans between 2023 and 2024. These funds have been allocated to support the procurement of next-generation aircraft with lower emissions and to enhance financing structures that prioritise ESG compliance. This development signals the growing role of major financial institutions in shaping the future of green aviation finance in China and highlights the increasing intersection between capital markets and sustainability objectives.
Regulatory and Legal Frameworks
Navigating China’s regulatory landscape is essential for aviation finance stakeholders seeking to capitalise on green financing opportunities. As the legal framework governing aviation finance continues to evolve, the implementation of ESG principles into financing structures will play a crucial role in shaping market developments. Compliance with both domestic and international legal frameworks is increasingly critical for ensuring the viability of ESG-driven financing models in China’s aviation sector.
The PRC Civil Aviation Law (Revised Draft) released by National People’s Congress in February 2025 is expected to introduce a more stringent regulatory approach toward environmental compliance and sustainability in aviation finance. The revised framework is likely to provide clearer incentives for low-emission aircraft financing, including preferential treatment in regulatory approvals and tax benefits for airlines and lessors investing in fuel-efficient fleets. These measures align with China’s carbon neutrality commitment and broader efforts to integrate green finance principles into aviation financing structures. Additionally, compliance with the Cape Town Convention, which governs international interests in mobile equipment, remains a cornerstone for aviation financiers seeking to ensure legal protection over secured aircraft assets in cross-border financing transactions.
Beyond domestic legislation, regulatory support for sustainable aviation finance is also emerging through sector-specific policies. The CAAC has taken proactive steps to encourage airlines and lessors to transition toward greener fleets by offering tax incentives, streamlined aircraft registration procedures, and preferential regulatory treatment for operators adopting fuel-efficient and lower-emission aircraft. Concurrently, the People’s Bank of China (PBOC) is driving green finance initiatives by promoting ESG-compliant investment structures, including the issuance of green bonds and SLLs designed to support environmentally responsible aviation projects.
Challenges and Solutions in Sustainable Aviation Finance
While sustainable finance presents a transformative shift in China’s aviation industry, it also introduces regulatory, economic and operational challenges for airlines, lessors and financial institutions. The complexity of regulatory approvals, the high cost of SAF, and taxation concerns remain key barriers to fully integrating green finance solutions into China’s aviation sector.
One of the primary regulatory hurdles is the complexity of aircraft ownership registration and leasing approvals under CAAC regulations. The multi-layered process of securing regulatory approvals for ESG-linked leasing transactions can be time-consuming, particularly when financing structures involve cross-border transactions and offshore special purpose vehicles (SPVs). Addressing these challenges requires streamlined regulatory mechanisms that facilitate faster approvals for green aircraft leasing, ensuring that ESG-compliant transactions can be executed efficiently within China’s legal framework.
The high cost of SAF adoption is another key challenge facing the industry. While SAF is seen as a crucial component of aviation decarbonisation efforts, its production costs remain significantly higher than those of traditional jet fuel. This cost disparity makes widespread adoption economically challenging for airlines, particularly in a competitive market where profit margins remain under pressure. Financial institutions can play a pivotal role in mitigating this challenge by structuring incentivised financing models, such as subsidised SAF investment schemes or public-private partnerships (PPPs) aimed at scaling up SAF production capacity in China.
Additionally, the taxation structure governing aviation finance transactions presents further challenges for industry participants. The application of value-added tax (VAT) on leasing transactions, combined with corporate tax implications on cross-border financing, can increase the overall cost of aircraft acquisition and financing, potentially reducing the attractiveness of green leasing models. To address this, China’s free trade zones (FTZs), including Tianjin Dongjiang and Hainan Free Trade Port, are being leveraged as key jurisdictions for reducing tax burdens on aviation finance transactions. These FTZs offer tax incentives and regulatory advantages that can facilitate the expansion of ESG-compliant leasing arrangements, making green financing more accessible to both domestic and international stakeholders.
Expanding sustainable financing models remains a fundamental solution for overcoming these challenges. Encouraging wider adoption of SAF financing instruments, government-backed loan facilities and carbon credit trading mechanisms can help reduce cost barriers and facilitate a smoother transition toward a low-carbon aviation industry. Financial institutions, in collaboration with regulatory bodies, must continue to explore policy-driven incentives and structured finance mechanisms that support long-term ESG adoption in the aviation sector.
Future Outlook
The integration of sustainable finance into China’s aviation sector marks a fundamental shift in how airlines, lessors and financial institutions approach aircraft financing. As regulatory frameworks continue to evolve, ESG-linked financing models, green bonds, and sustainability-linked loans are expected to play a growing role in shaping the future of aviation finance. Airlines that proactively align fleet expansion strategies with ESG criteria will be better positioned to comply with global emissions reduction mandates while benefiting from favourable financing conditions.
Looking ahead, stronger policy incentives for airlines investing in fuel-efficient aircraft, expanding access to green financing instruments and enhancing regulatory clarity on ESG compliance will be critical for ensuring the successful transition to a sustainable aviation finance ecosystem. Stakeholders must remain proactive in navigating evolving regulations, adopting innovative financial structures and leveraging emerging market opportunities to maintain competitiveness and resilience in a rapidly transforming industry.
By fostering continued collaboration between regulators, financial institutions and aviation companies, China’s aviation finance market can successfully integrate ESG principles into mainstream financing and establish itself as a global leader in sustainable aviation development.