Green Giant

China’s green bond market has quickly become one of the largest in the world. But a big part of the market still does not meet international standards. Matthew Thomas reports.

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Since the People’s Bank of China (PBoC) published guidelines on green bond issuance in Decem­ber 2015, China’s domestic green bond market has quickly become one of the biggest in the world. With Rmb248.6bn ($37.1bn) of such issuance in 2017, China was second only to the United States, home to $42.4bn of green deals, according to data compiled by the Climate Bonds Initiative (CBI).

International issuance is still small but it is picking up. Chinese issuers raised $6.4bn from dollar, euro or yen green bonds in 2017, and had already sold $4.8bn by the middle of August this year, according to data from Dealogic. They are also experimenting with novel structures: Bank of China sold a dollar green covered bond in 2016, and Industrial and Commercial Bank of China sold a euro and dollar ‘One Belt One Road Green Climate Bond’ last year.

Still, the domestic market remains the centre of attention, benefitting in large part from the focus on climate policy by Chinese president Xi Jinping, who has repeatedly stressed the need to tackle pollution and protect the environment.

“China has grown to be one of the most important green bond markets in the world,” says Venn Saltirov, a credit analyst at BlackRock. “On the back of the country’s focus on greening its economy and taking a very supportive regulatory stance, the growth of the Chi­nese green bond market has continued.”

There have been numerous regula­tory initiatives. The PBoC, the National Development and Reform Commission and the Shenzhen and Shanghai stock exchanges have all released guidelines on green bond issuance. The PBoC has joined the Network for Greening the Financial System, an eight-member group of central banks and regulators that was set up at the end of 2017. China’s central securities depository has teamed up with China Industrial Bank to launch a green bond index, which the bank is now offering to its clients through an index tracker fund.

There have even been efforts to develop a retail green bond market. China Development Bank targeted indi­vidual investors through bank counters and online with Rmb600m of bonds in late 2017 as part of a Rmb5bn deal.

But despite the obvious progress the market has made, there is still some debate about what exactly should qualify as green in China’s market.

Of the total Rmb248.6bn of green bonds sold by Chinese issuers last year, the CBI notes that Rmb154.3bn aligned with international standards whereas the remaining Rmb94.3bn, representing 38% of the total, ran afoul of interna­tional guidelines.

Most controversially, clean coal projects can qualify for green bonds in China, but local regulators are also less stringent when it comes to the use of the funds, allowing up to 50% of the pro­ceeds of a green bond to be used for debt repayments or working capital, rather than for funding a specific green project.

Bankers are keen to put these deals into perspective, pointing to the wider devel­opment of the green bond market.

“The vast majority of Chinese green bonds are still classified as green by international standards, aside from certain use of proceeds such as clean coal bonds,” says Herry Cho, head of sustaina­ble finance in Asia Pacific at ING. “And the moment Chinese issuers go overseas for green financing, they usually abide by the international standards.”

Work has also been done to harmonise China’s green bond standards with those overseas. The PBoC and the European Investment Bank published a white paper in November 2017 calling for stronger links between the two markets. But for now, China’s green bond market is a darker shade of green than those in Europe and the US.

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Green bonds do not appear to offer Chinese issuers much of a funding cost benefit in the domestic market, reflect­ing the situation overseas. When the CBI compared 90 green bonds to deals with an equivalent maturity and rating, it found that 55 paid more than vanilla deals and 35 paid less.

But funding cost is only one consider­ation for issuers. Market participants say that Chinese issuers selling these deals will be able to diversify their inves­tor base, and attract foreign investors through Bond Connect and other market access schemes. Green bond issuance also gives banks and corporations a way of aligning their issuance plans with a policy direction that comes from the very top.

“In light of the clear and coordinated government direction and regulations, the sizeable domestic investor base and significant investment needs, we are very optimistic about the growth of the Chinese green bond market,” says BlackRock’s Saltirov.