China shows leadership in global green finance push
Green finance in China, particularly the domestic green bond market, has taken off this year, in part to the strong policy support from the Chinese government. At a roundtable in early September, GlobalCapital and some of the market’s leading figures discussed the recent developments in China, including incentive schemes and whether the government’s top-down approach to green financing can be replicated by the rest of the world.
Frank Li, chief financial officer, Zhejiang Geely Holding Group
Ivan Chung, head of Greater China credit analysis and research, Moody’s
Ivan Tong, partner, climate change and sustainability services, Ernst & Young
Irina Burukina, treasury department, New Development Bank
Jonathan Weinberger, head of capital markets engineering, Société Générale
Ma Jun, chief economist, People’s Bank of China
Martin Scheck, chief executive, International Capital Market Association
Spencer Lake, chairman, International Capital Market Association
Wang Yao, dean, International Institute of Green Finance, Central University of Finance and Economics,
Moderator: Rev Hui, deputy editor, GlobalRMB
GlobalCapital: Given how the People’s Bank of China has been spearheading this charge into green finance, Dr Ma can you give us a brief introduction to some of the major developments we’ve been seeing globally in terms of green finance?
Ma Jun, PBoC: It is certainly a good time to promote green finance, because the momentum in China is very strong. Both China and the US have formally signed up for the Paris Agreement, which means the participating countries now make up 40% of global CO2 emissions. Before China and the US signed, it was only 1% of the total — so we’re seeing massive progress.
A few days ago [September 4-5], we also had the G20 meeting conclude in Hangzhou, which, for the first time in history, included green finance in its agenda. This contained the work of the G20 Green Finance Study Group, which was co-chaired by the PBoC and the Bank of England, and we produced a report that was accepted by the G20 leadership.
This is a big signal because most people think of green finance as a private sector initiative only. Previously, governments were not involved and only a few central banks knew the phrase. But now, it has become the consensus among government leaders to really start promoting green finance.
GlobalCapital: You mentioned the work of the G20 Study Group. Can you elaborate more what the report was on?
Ma, PBoC: The report touched upon some of the challenges for green finance globally and also a list of proposals on how to further develop this market.
The report pointed to five challenges. One was that many green projects are simply not profitable enough. We can address this with incentives such as China’s method of central bank relending and government guarantees for green projects. This would enhance the rate of return of green projects to a level that allows for the participation of the private sector.
But that is only one challenge. There are other challenges that do not require fiscal subsidies but instead call for financial sector innovation.
One example is the mismatch of maturities. Many long-term green projects are unable to get financing in a system where financing is dominated by bank lending. This is because banks simply cannot lend too much on a long term basis due to their relatively short maturity on the liability side. This calls for the need of green bonds with structures such as a yield call as well as collateralised lending based on future cashflows.
The third challenge is a lack of definition. A lot of countries don’t have a definition for green credits, green bonds or green assets. So even if investors want to invest in green assets, they don’t know where to find them. Governments and international organisations need to collaborate better so that the search costs for investors can go down.
Just to give you an example, if every bank defines their green credit differently, there will be a few thousand definitions of green loans and green credits. It is very difficult for transactions to take place because investors will need to spend a lot of time doing their due diligence and it is almost impossible for governments to come up with all-encompassing incentive schemes because all the assets are different. In China there is only one definition, which is more efficient than having a decentralised definition.
The next is information asymmetry, which essentially talks about disclosure transparency. Investors can only gauge whether a company or a project is green when the information is out there. If companies don’t release such information, investors won’t know and they won’t trust them to invest in their projects.
And the fifth challenge is capacity building. This is very important because a lot of banks and institutional investors are unaware that their exposure to environmentally risky areas could eventually be bad. For example, if I invest in a lot of oil assets, they could become stranded assets if they are later found to have been environmentally polluting projects. There is also a risk of policy tightening, which could lead to projects quickly turning into non-performing loans. This calls for more environmental risk analysis by banks and investors.
The solutions proposed by the G20 study group
Spencer Lake, chairman, ICMA: I have a question for Dr Ma. What are the intersection points between green in infrastructure? When we talk about green, we mostly talk about green bonds. But virtually all of what we’ve seen has been at the corporate level, as opposed to the project level. The project bond space has been quite slow to adapt and nothing has been labelled green.
I make this point because one of the most efficient infrastructure and project bond markets in the world is the US in the form of its municipal bond market. Most of it is green and 90% is infrastructure oriented.And two of the mechanisms that have made that work are tax incentives and credit enhancements.
What I want to know is how do we get green finance put in place not on a corporate level but on a project level? Can we use some form of credit enhancements from either multilaterals or the state? These were not one of the options put out by the G20 statement but are there any discussions surrounding this?
Ma, PBoC: This is quite complicated because within the G20 we have countries like China and UK, which are quite aggressive in pushing for action plans and incentive schemes. But there are also countries that are reluctant to promote green finance using fiscal money.
The rule of the G20 is that it is consensus based. As a result, we need to write in a language that is accepted by all our members, which was why credit enhancement was not included as one of our proposals. We did mention it in the report but only as examples rather than recommendations.
What I can say is at least for China, we are moving in that direction. As I said, one of the incentives that China has put in is guarantees. This is a broadly defined guarantee, meaning it could be full credit enhancement but also partial guarantees like what the IFC [International Finance Corporation] does — covering only a fraction of the potential loss but still substantially reducing the cost of funding.
Lake, ICMA: Another observation that I would make is what the G20 is trying to do is to build a common framework globally.And when you look at who can influence that — the governments can and multilateral development banks (MDBs) as a group can.
But when we look at the MDBs, we look at them as individual entities all with separate mandates and, in many situations, pursuing their own agendas. There is more room to collaborate across such big, systematic issues. They don’t have a common purpose or a common set of products that can be rolled out, so that Boston-based and Paris-based investors can look at investment opportunities on the same basis. And I think that is what we really need to strive for, otherwise it is a bespoke business, and the project nature of it makes it even more bespoke. I think the G20 can really do a lot of work around this and have MDBs collaborate more with one another.
Ma, PBoC: That is an interesting proposal and I think you should take that to the next G20 green finance study group meeting. Now, part of the problem is the next study will be hosted by Germany and it wants to narrow down the discussion to just two topics. One is risk analysis management and the other one is disclosure of environmental information.
But as mentioned, there are other areas that are important such as the role of MDBs and credit enhancements. In the next meeting, which we will hold in Washington next month, there will be discussions on whether we should have more than two topics. I am more than happy to hear more suggestions.
One thing to note on this is there is also an infrastructure working group within the G20, which is going to look at how MDBs can be better involved with infrastructure investments. One possibility would be for the suggestions you mentioned to go into that discussion instead.
GlobalCapital:What about China?The concept of green finance is very new to the country. But, in spite of its short history, the pace of the development of green bonds, for example, has been extremely impressive, with China now boasting the largest green bond market in the world even though the asset class effectively only appeared this year. Where are we in terms of the development of green finance in China?
Ma, PBoC: For China, we started off with green credit a couple of years ago when we put out the Green Credit Guidelines in 2012. One of the key targets of that effort is to promote and collect statistics on green credits. Only when you have such data are you able to accurately measure the green performance of banks.
And from that, we were able to start designing some incentives and initiatives for the banking industry to attain good green scores. China is now one of three countries to have a definition on green credit, with the other two being Brazil and Bangladesh.
About 10% of credit in China is green. In Brazil it is 10% and in Bangladesh 5%. That is why people always say the global composition of green credit is less than 10% because only three countries are reporting such statistics.
Of course, multinational banks such as IFC also claims to be 70% green, but these are individual banks. From a sovereign perspective, there is definitely substantial scope for the further development of green credits.
The second area that we have made some progress is in the green bond market. We started from scratch and last year, there was only one issuance by a Chinese bank (Agricultural Bank of China) in London. But after that we launched our own domestic green bond market following the PBoC’s guidelines for green financial bonds in December.
This was released together with the Green Bond Catalogue from the country’s Green Finance Committee, which is effectively the Chinese version of [ICMA’s] Green Bond Principles. These two documents essentially laid the foundation of the Chinese green bond market. In the first seven months of 2016, the market has really started to grow, with China issuing a combined Rmb120bn ($18bn) worth of green bonds domestically as well as internationally, or roughly 40% of global green bond issuance.
Our friends from Euromoney commented that China grew from zero to hero and I think that is accurate. I am not sure if we can keep up with the 40% status, but I think 30% is quite likely by the end of the year. In the longer run, I hope other countries will catch up and China will eventually make up 20% of issuance. If that happens, we’re going to see it as a success rather than an issue.
GlobalRMB: And what more can we expect in terms of regulatory development?
Ma, PBoC: Green funds are also being developed now with at least four provinces having launched their green development funds. These are essentially equity funds providing the equity base for green projects, so that they can go to the banks and the bond market to borrow. We are also planning a nationwide carbon trading system that will be launched next year.
But the biggest step China has made is the new guidelines on establishing China’s green financial system. That was published just a few days ago and was approved by president Xi Jinping himself. It is very rare that the president of a country will come down to such a technical level, but this shows just how strong China’s commitment is in terms of developing green finance.
This document contains 35 action points and is an expansion of existing guidelines. These action points will be allocated to seven ministries and local governments for implementation.
Under the new guidelines, local governments should develop their individual green finance development plan. So 30 provinces will probably look like 30 countries, each with their own green finance framework. The performance of each green finance plan will be part of the local governments’ performance matrix. This is one of the incentive schemes China is building to promote green finance.
Other incentives that we have is supporting green credits through central bank relending operations, which is quite innovative. We’re the first in the world where the central bank offers cheap credit to banks for them to launch green credit programmes.
We are also promoting interest subsidies to green projects as well as guarantee programmes. This, we hope, is going to inspire local governments to launch their green guarantee companies, programmes or funds, similar to the US Department of Energy’s programme for guaranteeing of new energy projects. But in China’s case, the guarantee will be for green projects
Ivan Tong, Ernst & Young: One point to add is there will be many
changes in the Chinese green bond market simply because it is so new and we are
still trying to find the best approach to build a sustainable asset class.
Ivan Tong, Ernst & Young: One point to add is there will be many changes in the Chinese green bond market simply because it is so new and we are still trying to find the best approach to build a sustainable asset class.
We have had many discussions with regulators and other market participants over the past few months and one issue we are seeing in China is there is no uniform way of getting green bonds done.
There are basically two set of rules for green bond definitions in China — one from the PBoC and the other from the National Development and Reform Commission (NDRC).
We are also seeing the same issue for third party verification in China because there are no rules to guide us, such as how deep our verification work needs to go. For example, do we just review the documents provided by the company or do we have to conduct on-site checks?
This is an issue that needs to be addressed because even though we have seen many green bonds in China this year, investors are finding it hard to make comparisons based on the work done by different verifiers. The standards can be very different with different companies looking at very different things.
There is a fear that the green bond market in China has developed too quickly and the rules are unable to keep up with the issuance.
Ma, PBoC: Those are issues we are aware of and we have written in the green finance guidelines that we are going to consolidate the various definitions within China.
For those of you who know China, you will also know that the regulatory regime is complicated and there are many regulatory bodies.
When we first started the idea of having a green bond market, the way we did it was: whoever can do it, do it in your territory first. So the PBoC did it in the interbank market with the Green Finance Committee, and then the NDRC did it with their own set of definition. The exchange market also has its own definition, but that is more or less based on our definition.
In terms of issuance, more than 95% are based on the Green Finance Committee’s definition. But, even though not a lot of people are actually using the NDRC ones, there are still two sets of definitions, which can make people uncomfortable. The government has decided to merge the definitions and hopefully we can see that happen by the end of the year. The Green Finance Committee has promised to conduct a revision of their definition every year, so there is a chance for the consolidation to happen by year end.
But there are actually other types of discrepancies that we are looking into as well. For example, the NDRC has a different set of listing requirements, which is not as high as the ones set out by the Green Finance Committee. Some of the financial ratio requirements are also different, which can lead to arbitrage opportunities.
And as mentioned, one more thing we need to work on is to improve the standard of third party verification. At the moment, there are three local verifiers, together with four international verifiers, which are essentially the big four accounting firms. So that’s seven verifiers in a matter of nine months.
There are complaints about the quality of their work not being fully assured, so we are thinking about setting some standards on the quality of the third-party verification process as well.
Wang Yao, International Institute of Green Finance, Central University of Finance and Economics: I agree that there needs to be some sort of guidelines for third party verifiers in China.
But if we look at how things are done internationally, we can see that the standards for third party verification can be pretty different as well. I don’t think it is a problem if the verification processes are different because each company will have their own way of doing things. But the key is to make sure each individual verification process is built on the same level of standards.
What we should do is, together with regulators, issuers, investors and verifiers, create a set of minimum standards for third party verification. If we’re able to do this, I think China will probably have the strongest and most stringent green bond framework in the world.
For us verifiers in China, the issue we face the most is international investors’ distrust in our work. They are constantly questioning our ability to validate whether bonds are green, which can put us in quite an awkward spot.
The point I want to make is we are very conscious of our brand as well, so the last thing we want to see are projects that we have validated [as green] turning out to be otherwise. I can’t speak for the other verifiers in China, but I am pretty sure we are all conscious that all it takes is one scandal and this budding asset class will be ruined. We don’t want to see that, which is why internal standards are set at a very high level.
Jonathan Weinberger, head of capital markets engineering, Société Générale: I would agree with the point made by Yao earlier that the Chinese guidelines for green bonds are superior to what we have seen elsewhere in the world. Yes, the third party verification process is not regulated, but I don’t see it as an impediment as long as it is moving thoughtfully along the way.
I think the world doesn’t necessarily need to move down to the top-down regulatory approach so early, but it certainly needs to look at China a lot more closely than before and learn from how it is able to grow a sizeable green finance system in such a short time.
We have been saying for a couple of years that when China sinks its teeth into this, which it has, it will become the driver for the rest of the world. In terms of direction, China is far more positive than what we can see anywhere else.
GlobalCapital: You mentioned the need for governments to start making a regulatory push just like China. Are there any specific areas that you think the rest of the world should copy?
Weinberger, SG: If I think about the way in which the green bond market has developed globally over the last couple of years, we have seen it as a set of voluntary standards. And I think a phrase that comes up often is a ‘big tent’ approach. We want to encourage a lot of diffident people to enter the green bond market by allowing a reasonably wide range of use of proceeds, and a lot of voluntary procedures. I think this was exactly what we did in the beginning because the market was new. We wanted to see what shape it might take if it worked in a ground-up way.
However, we have uncovered that there are some interesting things missing in the development of the green bond market using this approach. I think many people on this table are of the view that the green bond market needs to be much bigger. So what are keeping issuers out?
One interesting point that came out from what Dr Ma said is the possibility of fiscal incentives. This could be the start of a more prescriptive sort of green bond market. When it is purely voluntary, and when there is no obvious economic benefit to issuing green bonds, a voluntary ‘big tent’ approach makes a lot of sense. But with the introduction of fiscal incentives and specific government policy to support and encourage the market, it makes a good deal of sense to have something a little bit more precisely defined and prescriptive.
And I think we can all see from China that the prescriptive approach solves some problems. One of the reasons issuers are not more active in the global green bond market and why so many green financings are not labelled as such, especially in the hydroelectric and wind farm space, is because they are concerned about the reputational risk of claiming to be green when the market is still changing and the standards are changing.
The establishment of a more prescriptive green bond market allows the introduction of good incentives, which will also catalyse the market and remove some of the uncertainty investors who are staying away have.
Martin Scheck, ICMA: With the G20 meeting, I think we could well be
at a turning point in the growth of the green bond market.
Martin Scheck, ICMA: With the G20 meeting, I think we could well be at a turning point in the growth of the green bond market.
Investors are increasingly changing their investment policies to make sure they are greener and issuers want to feed into this demand and make a statement as good corporate citizens. I think one of the things coming out of the G20 meeting is what authorities can do to scale this market — this is very necessary even after a lot of hard work by global market participants such as MDBs and the private sector.
But the reality is, even if we get $100bn of green bond issuance this year this is still rather wide of the mark in the context of how much green investment the world needs and the size of the global bond market. Last year, we saw about $42bn of green bond issuance globally, which was just 0.2% of the global bond market.
I strongly believe there are tremendous opportunities to really scale up the market. And coming back to Dr Ma’s point on building capacity, we believe that the more standardisation we have, the more predictability and the more clarity in the market, the easier this will be.
Coming back to China, there are a lot of green projects which need to be financed in the country but most of the green money is outside its borders. The key is how do you build the trust to bring that money in? It all goes back to having more transparency, more predictability and disclosure — then we are more likely to see these cross-border flows.
I think the opportunity in China is huge. The green financing needs are huge and there is an enormous focus on getting it right, which I think is very encouraging. Plus, there is also demand from global investors to invest in green products. So I think it should all fit together and, hopefully, we’ll be able to scale it up from what is essentially a cottage industry into the mainstream world.
Lake, ICMA: On incentives, I think the template already exists such as in the US munibond market where there are tax incentives for investors either on a local state level or the federal level.That — in combination with a standardised issuance methodology, use of proceeds guidelines, and whether itis a revenue bond or general obligation bond — allows it to have a common footprint. This has shown to be highly effective with an average of $400bn of issuance out of the US per year.
And there are credit risks, so we are talking about a real credit market even though it has an overlay from federal state or local state governments. That will become a very green market, or the second largest green market in the world behind China at the end of the day.
So there are lessons to be learned. But that is difficult to do in Europe because you don’t have tax harmony across the 28 member countries. On the other hand, it is much easier to do this in China.
There have been discussions on credit or risk weighted asset (RWA) incentives. The latter I think is more challenging because a bank looks at RWAs in a certain way. They have different risk appetite for different industries and when you start to move things around and lighten the consumption because you want to have more wind farms, solar or biomass projects, that becomes tricky as these projects are supposed to stand on their own feet. If you all of a sudden deviate from a credit procedure, it becomes quite difficult to then be compliant.
Maybe the Financial Stability Board (FSB) is going to make things easier when they come out with their report at the end of this year or early next year in terms of disclosure.And maybe you can have a different mechanism in place on the back of that.I think that will be quite helpful in thinking about incentives because you are then going to have much clearer vision on what exposures are out there and what financial institutions own it.
Scheck, ICMA: When we think about incentives, we need to think about what they are really designed to do. Their purpose is to make it more attractive for issuers to issue, or more attractive for investors to buy.
Maybe this is the temporary phase that the market needs to go through before it is mature enough to stand on its own. Tax is the obvious one to look at, adjustments to RWA measurements are probably less so.
But there are even softer things that one can think about. In many countries there are some very well developed public sector pension funds and the authorities could advise them to invest a certain portion of their portfolio into green bonds. There are indirect measures one could introduce to increase demand and perhaps open up some sort of pricing benefit to attract more issuance and investment without actually having to go into things like tax incentives.
Wang, International Institute of Green Finance, Central University of Finance and Economics: We have had conversations with the Ministry of Finance talking about the possibilities of fiscal incentives such as tax concessions. But all the Ministry asked was one simple question: what is green?
This is actually a very important question because the only type of bonds that benefits from tax incentives are Chinese government bonds and policy bank bonds. The returns paid out by the Chinese government bonds are exempted from income tax. On the other hand, returns gained from financial bonds issued by policy banks are also exempted if the notes are held by individuals or public mutual funds.
This is already quite a controversial topic in China as there are a lot of debates about whether those bonds should even enjoy tax concessions in the first place. So it is very difficult for the Ministry to even consider expanding the tax incentives to green bonds.
I think the Ministry also managed to point out an issue with green bonds in China: that there is no uniform standard or definition of green bonds. We don’t have one in China and neither do we have one internationally. As long as we don’t have that, it is very hard for any tax authority to be able to push out tax incentives.
But what we also realised is that on the local government front, they are very interested in providing incentives to promote green bonds. The incentives here are not direct incentives such as tax concessions. Instead, we are talking about indirect measures such as credit enhancements.
Perhaps we could set up a green guarantee fund, which would be backed by the state, the local governments and other social funds.
We released a report in June this year that reviewed all the unlabelled Chinese green bonds issued in 2015 and what we realised was that 85% of those were issued by state-owned entities. This means that those that really need the money, the private sector corporates, are not actually getting the financing they need. Having a credit guarantee facility will benefit this group of private sector companies to access the debt market for funding.
GlobalRMB: A lot of the discussions on incentives have been on the side of the issuers. What about investors? Does the buyside need to be incentivised to invest in green bonds?
Wang, International Institute of Green Finance, Central University of Finance and Economics: It is something that should be considered if we are not seeing any investor demand in transactions. But an investment decision should be based on the strength of the credit and the expected rate of return. Obviously, if we start giving investors financial incentives, they will be more interested to buy green bonds. But even without such incentives, we have seen with the amount of green bond issuance this year that demand is there to absorb the supply. So I think any incentives should be aimed at the issuers, not investors.
Ivan Chung, Moody’s: Going green is a social and moral obligation. But,
at the end of the day, investors care more about their returns. Incentives will
ultimately depend on a government’s policy orientation: whether they want to
speed up a certain task or if they want to change the industrial landscape.
Ivan Chung, Moody’s: Going green is a social and moral obligation. But, at the end of the day, investors care more about their returns. Incentives will ultimately depend on a government’s policy orientation: whether they want to speed up a certain task or if they want to change the industrial landscape.
Looking at China right now, I think things are going very well. But the next step is how can China make the transition to a low-carbon economy?
How can China motivate a coal mining company, for example, to switch into a more environmental business model or industry? Such companies will obviously need more incentives to make that switch. But the difficulty is that it can be hard to develop incentives on such a granular scale.
How much tax incentive is needed to improve a company’s corporate rating to an investment grade rating? In the case of credit enhancements, obviously a government guarantee is the best way to promote it. But at the same time from the government’s perspective, they might want a more efficient form of guarantee, because a full guarantee will increase their contingent liabilities. So they might only want to do a partial guarantee instead.
When we ask investors how much tax incentive is good enough, they do not have an answer because there are still too few deals for them to come to a conclusion. If we are indeed to go down the fiscal incentive road, we will need to make sure that the market understands that such incentives are not going to last forever.
Take the Chinese wind power industry, for example, their tariffs used to be heavily subsidised. But as the industry matures and wind projects become more economically viable, we are now seeing less subsidies from the government. If we are to introduce tax incentives, this should be the model to follow because what we want ultimately is a market that can stand on its own.
Weinberger, SG: A further point on investor incentives: we are going to have an interesting experiment in indirect incentives in France, because we got the propagation of a new law, article 173, which is imposing a reporting requirement on institutional investors.
It will be interesting to see whether this non-fiscal measure, which does require them to do a bit of work and be transparent about the environmental characteristics of their portfolios, will increase the attention they pay to some of the core principles that we have talked about in green bonds before, namely, transparency, and clear reporting measures around things like carbon or oxides emissions. We can call them incentives, or we can call them requirements, but in either case, drivers of investor behavior that can change the way in which they view this market.
Lake, ICMA: Our world will not be successful unless we move to a sustainable model quickly. What we have all been talking today are the possible bridging mechanisms – steps that need to be taken in the interim in order to facilitate the channeling of funds into projects, which have the right characteristics to be sustainable.
Eventually, however, these projects should no longer need those incentives and it will become the new norm. In fact, we’re already starting to see some of this in France where investors are banding together and refusing to buy anything that do not fit with their green protocols.
GlobalCapital: We have with us two green bond issuers with us. Irina, can you share with us why did NDB choose a green deal for its bond market debut?
NDB green bond
Pricing date: July 18, 2016
Size: Rmb3bn ($449.5m)
Tenor: five years
Listing: Chinese interbank bond market
Order book: More than three times covered
Use of proceeds: On-lending to clean energy, renewable energy and pollution control projects
Irina Burukina, NDB: Our choice to issue a green bond as our first capital markets transaction was in line with our mandate to promote sustainable development projects in BRICS and other emerging markets. It was supported by the fact that all our approved projects are in the green sector such as renewable energy.
For us, the commercial aspect of the bond issue was also very important because, as an MDB, we have to provide the most beneficial terms to our final borrowers when financing projects.
But if we look at the market, there is no price difference between green bonds and traditional bonds. Yet at the same time, the complexity of the deal, as well as the expenses related to the green aspects of the deal and its ongoing support are much higher, mainly due to the additional requirements in terms of third party verification, assurance reports and information disclosure.
Still, this was a very unique experience because it was the first time that an international institution was issuing a green bond in China. And given also that NDB is a new institution, we were granted a number of exemptions by the regulators. One of the exemption relates to providing financial statements for the past three years. The other was that we were allowed to make cross currency swaps and use the bond proceeds offshore.
This was critical for us as we have to finance green projects offshore. Going forward we intend to continue issuing bonds here in China, including further green bonds, and to be a regular borrower in the local market.
GlobalRMB: How interested were investors in the bonds?
Burukina, NDB: Investor interest was good: the transaction was more than three times oversubscribed. But it is also worth mentioning that the participation of offshore investors was rather low, although it was in line with the levels seen in the Chinese interbank bond market.
I think incentives to facilitate the access of foreign investors to the local bond market should be stronger. More global participation in local bond issuances can not only provide more liquidity, but also potentially more demand for bonds with longer maturities.
GlobalRMB: The low level of international participation in the Chinese bond market, especially the credit market, has long been a problem. What are some of the possible measures the authorities can take to improve the situation?
Chung,Moody’s: Broadly speaking, there are two ways to increase international investor participation: improving disclosure and market liquidity. In China, some of the disclosure requirements are actually high and might even be stricter than international standards. But we need to translate it into a format that international investors understand, so that they are able to make a like for like comparison.
The question we always get from global investors is ‘how does this domestic rating translate into an international rating?’
For the bond market in particular, there are close to no covenants in China, although there is a proposal to start introducing them. If that happens, the key will be to have the covenants written in a way that international investors understand.
It is normal for standards to vary among different jurisdictions but the key is to have investors easily spot and understand how the standards are different. This is all about presentation.
Burukina, NDB: I agreed that the regulations need to be clearer becauseanother challenge for us when executing our deal was the use of unallocated proceeds. And this is particularly important for newly established institutions like NDB.
NDB approved five projects worth $911m in five member countries. But when we issued our first bond for Rmb3bn ($450m) disbursements for the projects had not started yet. As a result, we had to follow the rules on the use of unallocated proceeds.
According to the guidelines issued by the PBoC, unallocated proceeds can be invested in green financial bonds of other institutions and other market instruments with high grade ratings and high liquidity. In this respect we needed additional clarifications from the regulator in terms of what instruments were possible for us to invest in.
Tong, EY:The market has developed very quickly in China but we will eventually come to a stage where green bonds are more or less viewed like a conventional bond. When that happens, it is going to be all about returns because the green aspect is already automatically taken into account.
We have talked a lot about tax incentives, credit incentives for both issuer and investor in order for the market to grow initially. But all of these will eventually be gone once the market matures.
My point is that it is very important to go back to the basics. We need to go back and look at different regulations, verification guidelines and come up with a uniformed standard to let investors look at green bonds in a unified way, not just locally but also internationally.
Dr Ma talked about building channels for investors to invest in green projects in China. In order to do that, it is very important for China to try and develop a system where investors from all over the world can easily access. It all goes back to one principle, we need to have standardised rules, we need more transparency and we need more disclosures.
GlobalRMB:Frank, getting international investors to participate was not a problem for Geely’s green bond since the notes were denominated in dollars. Can you share with us your experience in issuing a green bond?
Zhejiang Geely green bond
Pricing date: May 19, 2016
Tenor: five years
Order book: $2.3bn
Use of proceeds: Development and production of zero emission capable vehicles
Frank Li, Zhejiang Geely Holding Group: For our transaction, we managed to tap into the green money mentioned earlier in the discussion. We did a $400m green bond in May whereby all the proceeds went into the development and production of a next generation, zero emission capable London taxi.
This is a green project because the product is green and even the new production facility we have in Coventry is green. For us, it was a natural decision to issue offshore because the project is overseas.
Secondly, it helped raise our corporate profile internationally, so this was also a marketing event for us.
We did not bother going to the US for our roadshow and we only toured in Asia and Europe. For the European leg, we actually visited Frankfurt, which is rare for a dollar bond. But we went there because a couple of large green accounts were there.
International investors were very interested in our project. But is it important to point out that SRI investors were particularly focused on things like third-party verification, as well as the reporting and monitoring mechanisms we have in place for the notes. For our offering, we had Deloitte to verify that the use of proceeds were aligned with the green bond principles. We also established a separate bank account to ringfence the proceeds for the reporting process.
From a pure economics standpoint, I don’t see much difference between a green bond and a conventional bond. But if we look from another angle, we were eight times oversubscribed when we completed our roadshow in London. In the end, we managed to bring pricing down by 30bp and we still ended up with a close to six times covered trade. So, to me, that is a strong sign that the market was receptive to the green bonds regardless of pricing.
Chung, Moody’s: Geely’s deal is a very good example of the transformation I was talking about: a switch to a greener business model and a greener product.
In certain sectors, such as automobiles, companies are facing more challenges because everyone knows they will have to start switching to electric cars soon. But how soon is soon? What is missing is a clear roadmap on the government level in terms of setting out clear guidelines on, say, the proportion of electric cars they want to see, CO2 emission reduction targets and when such initiatives will be phased out.
The market needs clear objectives in order for investors to have a better judgement on companies that are undergoing the transition.
While the bonds might be linked to one specific project, investors will also want clarity on the policy environment surrounding the industry in order to get a longer term view on the credit itself.
After the G20 statement, I am pretty sure China will respond with more policy guidelines surrounding green bonds. But in order to make a larger impact, the government will need to also start looking at a deeper level and think about how it can think of ways to make green financing work in specific industries.
Scheck, ICMA: The G20 is going to be a turning point and one of the things I am particularly pleased to see is there is a concerted commitment from the world leaders to promote green finance.
They will look at policy options and arguably that is what’s missing in the green bond market so far. I noticed a little bit of nervousness from Dr Ma talking about fiscal options, but there are many different policy options that could be considered.
I think what is urgently needed is a review by the leading countries to look at what policies can be applied and assess their effectiveness, as well as to ensure they don’t compromise other policy objectives they are pursuing. If we can get that debate going that will already be a big step forward.