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Asia CommentGC Asia View

Social and sustainability Panda bonds: more than a win-win


China’s move to develop its ESG-linked Panda bond market is a natural next step

A recent announcement from the National Association of Financial Market Institutional Investors (Nafmii), a bond regulator in China’s interbank market, marked the latest development in what has been an eventful year for ESG financing in the country.

Nafmii wants foreign issuers to start selling onshore renminbi-denominated social bonds and sustainability bonds — a critical move that will help add the missing pieces to the onshore sustainable bond market. (Green, social, sustainability and sustainability-linked bonds will be collectively referred to as sustainable bonds in this article, where needed.)

The timing is important. China has grown to become not only the world’s second biggest economy, but also the second largest green bond market.

Last September, president Xi Jinping pledged for the country, which is also the largest contributing country to carbon dioxide emissions globally, to reach peak carbon dioxide emissions before 2030 and become carbon neutral by 2060. On top of that, during this month’s COP26 climate summit in Glasgow, China and the US agreed to boost climate cooperation over the next decade, in particular to meet the 1.5 degree Celsius temperature goal set out in the 2015 Paris Agreement.

The carbon and climate goals have added fuel to China’s already booming green bond market.

In the first quarter, a number of corporate issuers, as well as China Development Bank, took the lead in issuing so-called carbon neutrality bonds, a type of green bond with the proceeds earmarked to financing projects aimed at reducing carbon emissions.

Later in May, the onshore market saw the inaugural issuance of sustainability-linked bonds (SLBs) in support of the sustainable development of Chinese companies, particularly those from carbon-intensive industries.

The green securitization market also broke new ground in recent months. ABS backed by auto loans and credit card instalment loans for the purchase of new energy vehicles were issued by BYD Auto Finance Co, SAIC Finance and Industrial and Commercial Bank of China.

Offshore, too, Chinese issuers have expanded to selling not just traditional green bonds, but also blue bonds, transition bonds, sustainability bonds and SLBs.

But to develop its sustainable bond markets further, Beijing is taking a slightly different approach. In the past, the sale of new products —be it conventional bonds such as bank perpetuals, or green deals like carbon neutrality bonds and SLBs — typically started with domestic issuers.

Not anymore. For social or sustainability bonds, Nafmii wants non-Chinese issuers selling bonds onshore to take the lead.

This is a smart move, given the social and sustainability bond market has been rapidly developing internationally. Even in Asia, China has lagged Japan, South Korea and Singapore in meeting its vast social-related financing potential.

Real Pandas

Admittedly, a part of the Panda bond market is dominated by the so-called red-chip companies, or offshore-incorporated Chinese firms. Although these issuers are Chinese in nature, the fact they have established a relationship with both Panda and international investors through onshore and offshore bonds over the years means they will help develop the domestic sustainable bond market.

Far East Horizon, a financial leasing company registered in Hong Kong, has already taken the lead by marketing a Rmb150m two year sustainability Panda bond at 3.3%-3.4%. Lead underwriter and bookrunner Agricultural Bank of China and joint lead Standard Chartered are set to price the deal on Wednesday.

But the real Panda issuers — especially European corporations, financial institutions and global SSAs — have even more to offer when it comes to selling social or sustainability bonds.

Having them kick off such deals in China’s Rmb128tr domestic bond market means their valuable international experience, practices, and disclosure standards can be applied onshore.

The move can also help SSA issuers, in particular Asia or emerging markets-focused multilateral development banks like the Asian Development Bank, the Asian Infrastructure Investment Bank and the New Development Bank — all of which are active issuers of Panda bonds — to locally finance their social projects in China. This will, in turn, provide support to related funding needs in the country.

The move, too, could very well draw more attention, as well as demand, from foreign investors to this relatively new part of the onshore market, given their familiarity with the issuers internationally and their growing focus on buying ESG assets.

China’s domestic sustainable bond market holds immense potential beyond just green. And the market, still in its infancy, can only benefit from the benchmark and standards set by foreign issuers. Fuelling growth of the ESG Panda market sends the right signals.

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