China's embrace of green bonds clouded by regulation concerns
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China's embrace of green bonds clouded by regulation concerns

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China’s issuance of $33bn of green bonds in 2016 made it world leader with 42% of sales but has raised concerns that the projects it is funding in areas such as coal would not be seen as environmentally friendly by Western-based watchdogs

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China is on track to become the world’s unalloyed leader in green finance, bankers and investors say — so long as Beijing and the world can agree what constitutes an eco-friendly use of investment capital.

According to Henry Shilling, a senior vice president at Moody’s Investors Service’s environmental and social governance group, China “has the potential and the platform to be a global leader” in green finance. China accounted for 42% of all global sales of green bonds in 2016, according to data from Dealogic — up from just 3.5% the previous year — completing 42 prints worth $33bn.

Rahul Sheth, an executive director in Standard Chartered’s capital markets team in Singapore, pointed to two key factors that underpinned China’s rapid rise to global pre-eminence in the asset class. First was the “galvanizing impact of a regulatory-push factor”, with regulations drawn up in December 2015 by the People’s Bank of China having lit a rocket under issuance.

Second was China’s desire to “green the entire finance system, including insurance, loans, stocks, bonds, and initial public offerings”, Sheth said. “This is a long-term, holistic process on China’s part. They are committed to this process.”

To that can be added two other motivating factors. China is keen to staunch a sharp rise in capital flight — or at least, to equalise flows — by convincing foreign investors to put cash to work in local green bonds.

Climate change risk

On top of that is the unavoidable fact that China, which is highly vulnerable to the effects of climate change, suffers some of the worst air, water and soil pollution. Gloria Lu, senior director, infrastructure ratings, at S&P Global Ratings, attributed the sharp spike in green-tinged debt sales in China to “the country’s heightened awareness of the risks a changing climate present to its economy, and a need to achieve cleaner and more sustainable growth”.

The challenges are huge — but so are the opportunities. Sheth said that China was sitting on a “huge stockpile of assets that could easily be classified as green, most notably an extension of its urban rail network. As more green assets enter the system, you’ll see another huge surge in green bond prints.”

Counterbalancing this is a quiet but bitter wrangle over the definition of green financial instruments and related investments. China considers clean coal and hydropower to be prime examples of green energy, a view which conflicts sharply with that of almost every other global regulator.

That looser definition has helped propel China from laggard to leader in the asset class. But its central bank needs to work more closely with foreign regulators if it is to remain ahead of the pack. “China’s government wants to bring more capital into green finance and to broaden the investor base, and key to that will be harmonising global rules on green finance,” said S&P’s Lu.

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