China should push green bond issuers offshore
China may be one of the world’s largest green bond markets, but its issuer base offshore has only seen limited growth. The market regulator may want to pick up cues from the development of its domestic green debt market to boost international issuance.
How is China’s green bond market performing? That depends on who you ask. Chinese green bond volumes in the offshore and onshore markets slid by 5.3% in 2017 compared to the previous year, according to Dealogic, which recorded $32.2bn in issuance. The Climate Bond Initiative (CBI), a London-based think tank, leans the other way: it thinks overall green volumes from China rose by a modest 4.5% year-on-year.
Whichever way you slice the numbers, one thing is clear: China’s green bond issuance is overwhelmingly domestic. Less than a fifth of China’s green bonds came from the offshore market last year. Although the scale of primary issuance is growing by the year, such growth has almost solely come from policy banks and large government-owned lenders, which accounted for nearly 80% of Chinese offshore green bonds sold in each of 2016 and 2017.
Government initiatives such as the Belt and Road have presented opportunities for the likes of Industrial and Commercial Bank of China to issue over $2bn-equivalent of climate bonds last year, but there is now increasing need for China’s regulatory authorities to get corporations in on the action. Green bonds provide a nice PR opportunity for the country’s biggest banks; they could provide a strong source of funding diversification for the right corporates.
The change has already happened in the onshore market. Financial institutions accounted for only 47% of 2017’s green issuance, instead of 73% in 2016, according to CBI. There have also been green local government financing vehicle (LGFV) bonds and asset-backed securities in the green format.
But offshore, Chinese corporates are trailing in the dust. The only corporations to sell green bonds last year were state-owned China General Nuclear Power Corp and China Three Gorges Group Co. Modern Land (China) Co, which made its green debut in 2016, remains the only green issuer from the otherwise active property sector.
True, financial institutions have the advantage of adapting quicker to new trends and developments in the capital markets, and may find it easier to put a green framework in place compared to corporations. But China should make a push to get more corporate issuers — like Zhejiang Geely Holding Group and Concord New Energy Group — from different sectors and backgrounds involved.
This is the only way to develop the market. One of the reasons for the lack of a green-dedicated investor base in Asia is an absence of diversification options. If more corporations come to the international market from China — which has long championed green and sustainable development — it could give a boost to the investor base.
Nor is it enough that this movement has already started in the onshore market. One continuing concern about green financing from the world’s second largest economy is that a significant amount of its bonds — 38% in 2017 and 33% in 2016, according to CBI — failed to meet international green standards, either because of differences in green eligibility definitions, the amount of proceeds allocated to working capital, or lack of disclosure.
If more issuance happens internationally, this could change.
Regulators can do this in many ways. For example, offshore green bonds could have a simpler and faster registration process at the National Development and Reform Commission, which has become notorious over the last year for slowing down offshore bond issuers, particularly high yield and property credits. The NDRC can also relax the limits on deal sizes through set quotas, so that issuers can have greater certainty in their funding plans and more flexibility in choosing the right windows to achieve favourable terms. Similar measures have already been encouraged onshore by authorities, which can be replicated internationally.
Credit enhancement from relevant government-linked entities could also help. That would lower funding cost for corporations and encourage them to tap the green format, albeit perhaps without providing that diversification boost to investors. Although local governments in China are forbidden from explicitly guaranteeing bond issuance, commercial banks could be incentivised to provide direct guarantees or standby letters of credit at lower fees to green issuers. Onshore, local governments are encouraged to set up funds to guarantee green debt issuance.
In short, there are many things Chinese institutions, including the regulators, can do to encourage more offshore green bond issuance from corporations. So far they have not done enough. That is understandable — Chinese officials have been a little distracted of late — but if they want to give the green bond market a boost, they should start by injecting some life into offshore issuance.