China’s bond market goes green

Everything comes at a cost, and China’s rapid economic growth is no exception, with the annual cost to clean up China’s environment and cut carbon emissions estimated at over 3 trillion RMB (US$436 billion), according to Ma Jun, chief research economist at the People’s Bank of China (PBoC).

This economically undesirable by-product however, can be translated into an investment opportunity. In the case of China, it is the green bond market; whereby proceeds collected are required to be used for environmentally-friendly purposes.

The rapid growth of the green bond market is also being fuelled by the PRC government, which has provided substantial policy support on this front.

“The Chinese government has a very clear green finance objective,” says Sean Kidney, chief executive officer at the Climate Bonds Initiative, an investor-focussed not-for-profit organisation working on mobilising the bond market for climate change solutions.

“Many institutions in China, including the major banks, are looking for ways they can contribute to achieve the [most recent] five-year plan, which has a very strong emphasis on the shift of the green economies,” he adds.

China’s latest five-year plan, which will guide the country’s economic and social development from 2016 through to 2020, emphasises establishing a green financial system consisting of green loans, green bonds, a green development fund and other innovative green financial products.

“China is increasing its commitment to environmental protection and green bonds are a part of this,” says Dr. Sean Chang, head of Asian debt investment at Barings. “This commitment bodes well for the green bond market in the country.”

Meanwhile, in December 2015, PBoC published its first official Chinese green bond guidelines, which set out the official requirements for which projects qualify as green, management of proceeds and reporting.

This, together with a clear signal to support green financing from the government, provides a solid foundation for the green bond market to bloom in China.

“CBRC (China Banking Regulatory Commission) has set green finance guidelines for many years now, but some of them are difficult to interpret and therefore slow to take up,” says Mr. Kidney. “When PBoC brought up the regulations, it provided the opportunity for people to do something quickly and more easily.”

Investor demand to change and seek more secure investments has also driven this growth.

Leading the issuance of green bonds in China are financial institutions, renewable energy gencos (generation companies), as well as companies in the transportation and power utility sectors, explains Dr. Chang.

“China has more than US$160 billion worth of outstanding bonds that could potentially be re-labelled as green bonds if verification and reporting procedures are established,” he says, citing figures from the Foreign & Commonwealth Office of the UK.

Dr. Chang adds: “These new green bonds could potentially be beneficial to institutions and investors in the private sector and non-profit organisation investors that have additional requirements for green and environmental issues. They could ensure those green-principle criteria takes place to meet those green bond standards in their investments.”

While many opportunities lie in the areas that require higher standards for green and environmental protection considerations such as the renewable energy gencos, power utility companies, transportation and construction companies, these sectors cannot ignore the importance of reporting and administration.

“Enhanced transaction reporting would increase transparency and ensure more effective disclosure of information. Corporate management in green areas should seek to enhance standards for proper control and administration,” says Dr. Chang. “That would benefit green investors to identify their green eligible instruments and receive better corporate governance in green and environmentally-eligible projects.”