China’s green sector becomes volatile epicenter in shifting BRICS financial landscape

The green sector in China, represented by indices tracking renewable energy, electric vehicles, and sustainable industries, remained largely stable until 2025, when trade tensions and policy shifts triggered sharp volatility spikes. During periods of stress, such as the COVID-19 pandemic and the 2025 escalation of U.S.–China trade restrictions, volatility spillovers intensified across BRICS markets, revealing short-term contagion but limited long-term integration.

Financial links among BRICS economies are weakening as global trade tensions and regional economic shifts reshape investment flows, reveals a new study published in Risks. The research shows that China’s green financial sector, once largely insulated from broader volatility, is now emerging as a key but unstable node in the group’s interconnected markets.

The study “Volatility Spillovers and Market Decoupling: Evidence from BRICS and China’s Green Sector” examines how volatility transmits across BRICS stock markets, Brazil, Russia, India, China, and South Africa, using advanced time-varying econometric models to capture the changing nature of their financial linkages.

China’s green sector emerges as a volatile but growing market force

The authors trace financial interactions from 2016 to 2025, focusing on the role of China’s green finance market amid global economic disruptions. Their findings show that while BRICS economies have strengthened political and trade ties, financial synchronization has declined, with markets showing signs of decoupling since the pandemic.

The green sector in China, represented by indices tracking renewable energy, electric vehicles, and sustainable industries, remained largely stable until 2025, when trade tensions and policy shifts triggered sharp volatility spikes. During periods of stress, such as the COVID-19 pandemic and the 2025 escalation of U.S.–China trade restrictions, volatility spillovers intensified across BRICS markets, revealing short-term contagion but limited long-term integration.

According to the analysis, the Total Connectedness Index (TCI), a measure of market interdependence, fell significantly over the decade. This suggests that BRICS financial markets are becoming more regionally fragmented, driven by domestic factors rather than shared economic trends. The researchers identify China’s green sector as a growing, yet still peripheral market, whose influence rises temporarily during global uncertainty.

The study’s models, including Bayesian VAR and Time-Varying Parameter VAR, confirm that volatility transmission from China’s green assets has increased in recent years, though the spillovers remain episodic and policy-driven rather than systemic.

Global uncertainty fuels short-term shocks but long-term divergence

The findings suggest that external shocks, such as trade disputes, pandemic-related disruptions, and shifts in monetary policy, create temporary bursts of co-movement, but fail to establish sustained financial integration among BRICS economies.

The authors find that Nasdaq, Bovespa, and South Africa’s JSE act as major volatility transmitters, while India’s Nifty and Russia’s IMOEX primarily absorb shocks, reflecting different levels of market openness and risk sensitivity.

Despite the headline-grabbing political coordination among BRICS members, the study finds limited evidence of lasting financial coupling. Instead, market behavior increasingly reflects local policy environments, currency risk exposure, and domestic investor sentiment.

Crucially, China’s green sector, often viewed as the future of sustainable finance, shows episodic contagion patterns. Its volatility spikes align with climate policy announcements, electric vehicle subsidies, and global supply chain disruptions rather than synchronized market cycles.

This decoupling trend points to a shift from globalization toward regionalization in financial systems, where nations respond more to internal economic dynamics than to global forces.

Decoupling, policy risk, and the future of sustainable finance

While green financial markets in China are expanding rapidly, they remain vulnerable to short-term shocks and regulatory uncertainty. The authors note that policy-driven volatility, such as tariff changes or new environmental regulations, continues to overshadow the stabilizing effects of sustainable investment growth.

At the same time, the study reveals a paradox: although BRICS nations advocate for financial cooperation and de-dollarization, their equity markets are drifting apart, with lower cross-market connectedness than a decade ago.

The findings suggest that investors looking to hedge or diversify across BRICS markets cannot rely on consistent correlations. During crises, the usual safe-haven relationships break down, and traditional portfolio diversification strategies lose effectiveness.

The authors caution that China’s green sector may soon play a more central role in regional contagion, particularly as it scales up financing for renewable energy, electric vehicles, and carbon-neutral projects. While this growth supports sustainability goals, it also introduces new channels of volatility transmission tied to commodity prices, global energy policy, and technology competition.

They recommend that financial regulators and policymakers strengthen transparency and risk monitoring in emerging green markets. Enhanced data reporting, standardized sustainability metrics, and cross-border policy coordination could help mitigate contagion risks and support stable market integration.