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Asia CommentGC Asia View

Domestic issuers key to China’s sustainability bond development


The onshore sustainability debt market has unmet potential

China’s sustainability and social bond markets have plenty of potential for growth. But this will only be fully unleashed if domestic issuers are encouraged to sell bonds with these labels.

The Asian Infrastructure Investment Bank (AIIB) sold a renminbi bond with a sustainable development label last month, laying the groundwork for more sustainability bond issuance onshore.

While China has grown to become one of the world’s largest green bond markets, its domestic sustainability bond market is still in its infancy.

This market only began to develop last November, when regulator, the National Association of Financial Market Institutional Investors (Nafmii), issued guidance encouraging SSA and corporate Panda bond issuers to sell sustainability — or sustainable development — bonds and social bonds.

But fast forward six months, and the market has seen just two deals, by the AIIB, as well as by Far East Horizon, which pilot issued a Rmb150m ($22.5m) two-year sustainability Panda immediately after the Nafmii guidelines were released. The Hong Kong-based financial leasing company is a typical red-chip Panda issuer, or a Chinese firm incorporated offshore.

It is natural for Beijing to seek to develop this market through Pandas. After all, the social and sustainability bond market has been rapidly developing internationally — including in Asia across countries like Indonesia, Japan, South Korea and Singapore — in recent years.

Many foreign issuers, particularly SSA issuers such as the AIIB, can bring their invaluable fundraising experience and international practices, as well as environmental, social and governance (ESG) standards, onshore. They can also educate domestic investors about sustainability and social issuance.

European corporates and financial institutions, some of which are existing social or sustainability bond issuers, too have a lot to offer to help grow this relatively new market in China.

But it might be time for the regulators to expand their sustainability and social bond trials to beyond just Panda bonds, to speed up the development of the onshore sustainability market.

True, the focus of onshore ESG deals remains on using green bonds — including carbon neutrality bonds and sustainability-linked bonds (SLBs), both launched last year — to support China in meeting its climate targets. On Monday, for instance, Nafmii unveiled the pilot scheme for transition bonds, in a bid to aid low-carbon transition of Chinese companies, particularly those from carbon intensive industries like energy, paper, chemicals, petroleum and iron and steel.

That is a timely move, but the vast social financing potential in China also needs addressing, as the country battles with issues such as poverty, an aging population and a rise in urban unemployment rate. More sustainability bonds, which have both green and social benefits, could also help ensure greater funding flows to projects that have climate objectives.

The Panda market, while fast developing in recent years, has its limitations.

The market makes up a fraction of the Rmb138tr onshore market. The relatively small pool of existing Panda issuers means the potential borrowers of bonds with a sustainability or social label are fairly restrictive. There is also the undeniable fact that a large part of the Panda market is dominated by red-chip issuers, leaving the ‘real Panda’ market even smaller.

Moreover, new Panda bond issuers need to meet onshore requirements for documentation, reporting and rating, while jumping through other barriers such as language and domestic investor recognition.

On the other hand, many other types of Chinese issuers could benefit from sustainability or social bond issuance domestically.

Firms like Agricultural Development Bank of China, Bank of China, and corporate issuers such as Alibaba Group and some property developers, have already demonstrated that they have related funding needs offshore. These are names that, should they decide to tap the domestic market with similar deals, could enjoy far greater investor familiarity and recognition compared to Panda issuers.

Chinese policy and commercial banks, in particular, hold great sustainability or social issuance potential. They are already a key part of the domestic green market, having stepped up to sell nearly Rmb112bn of green bonds so far in 2022, versus Rmb28.2bn a year ago, according to Wind data.

Domestic Chinese issuers have been responsive to regulatory calls to sell Covid-19 labelled bonds, carbon neutrality bonds and SLBs. All of these submarkets have grown substantially since their launch.

Sustainability bonds and social bonds could be a powerful tool across a wide range of areas in China — from helping meet affordable housing demand and supporting employment to improving access to education, healthcare and elderly care. It’s time the regulators make this market a bigger priority.

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