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China’s social bonds coloured by politics

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By Morgan Davis
03 Mar 2020

Bank of China made headlines last week for selling the first offshore Covid-19 linked bond. But the trade's status as a social bond — the first to come offshore from China — got less attention. The transaction shows the potential for social bonds from the country, while raising questions about why it has taken so long to see such a deal.

Social bonds, or debt raised for social benefits such as job creation or financial inclusion, have not been as prevalent as green bonds. The environmentally-friendly notes have been popular around the world, as global attention has turned to climate change.

To a certain extent, green bonds have also become a political tool, a way of making an easy statement about a government’s intentions. China has been particularly active in this way, making it the second largest green bond market in the world, according to the Climate Bonds Initiative.

But green bonds' social cousin has been slower to take off. Some bankers and issuers note that there aren't enough tangible projects tied to an eligible use of proceeds cases to spur social bond issuance. In fairness, this can also be a complaint for some companies when it comes to green bonds, as not every borrower has ready access to projects that need green funding.

Still, it seems remarkable that it took until the outbreak of the coronavirus for China to find a reason to sell social bonds.

Even sustainability bonds, which combine a green and social use of proceeds, are extremely rare in China. Just two have been sold, according to Dealogic. The only social bond to come from China is a social impact bond that was sold by Beijing Infrastructure Investment Co in September 2019.

In contrast, social bonds, while still relatively small in number, come more readily from south and southeast Asia. In January, for instance, India's Shriram Transport Finance Co sold a $500m social bond, with the proceeds going to help finance trucks for small and medium enterprises. The deal was incredibly popular with Western investors, and US accounts were allocated half of the notes.

The success of other social bond sales in Asia, in addition to BOC's success last week, should give Chinese borrowers ample examples of how to utilise social bonds. The United Nations Sustainable Development Goals, which are often referenced in sustainability frameworks, present a slew of options for social-linked projects, ranging from providing affordable housing to promoting gender equality. These are goals that should not just be tackled by emerging market countries, which generally have the most easily accessed projects to fund, but any country.

BOC's Covid-19 bond is set to use its proceeds to benefit SMEs that may be affected by the coronavirus, and support and encourage growth for the companies when the virus recedes. This is clearly a pet project for the government.

Beijing has made no secret of using BOC in the past to sell politically-driven bond ‘firsts’. The bank has led the way in selling green notes, as well as raising funds for projects like the Greater Bay Area and the Belt and Road Initiative. Because of that, it is no surprise that BOC would be the first to jump offshore to raise funds for SMEs that are already being battered by the virus outbreak. The Chinese government has been vocal about its hopes for propping up the economy in the coming weeks, and making sure that China remains strong after the virus dissipates.

The BOC trade may demonstrate why China hasn't produced social bonds in the same way it has enthusiastically pumped out green debt. Green bonds are easy for China to get behind, as the need for environmental funds is global. Social needs tend to be more country specific.

Access to affordable housing will look different in the US than it does in India, for example. China surely has a need for social funds, as any country does, but it waited until a global health crisis took off before it sold a social bond. A social Covid-19 bond isn't something that necessarily needs to be tied to China. Other nations and their SMEs will also be hurt as the coronavirus continues to wreak havoc.

It's unfortunate, but inevitable, that sustainability initiatives take on political meaning. We hope that BOC's social bond sale will bring forth more social and sustainability issuance from China as others see an easy use case for a social use of proceeds, but in truth the prospect seems dim.

The coronavirus, like climate change, is a global problem. That means it can be addressed by Chinese issuers without any implicit criticism of the government. The same is not true of many social uses of proceeds. There may be more coronavirus-linked bonds with a social label — but the broader development of a social bond market in China looks like a distant hope.

By Morgan Davis
03 Mar 2020