Green bonds are not just new to China: they are also fairly new to Asia. Only four borrowers in the region have previously sold international green bonds.
And a quick glance at that list – Advanced Semiconductor Engineering (ASE), Asian Development Bank (ADB), Export-Import Bank of Korea (Kexim) and Export-Import Bank of India (India Exim) – shows that it is so far dominated by supranationals or agencies.
That is unsurprising, given those issuers' close government links, which make them the perfect proxies to spearhead government initiatives such as green bonds. Investors certainly feel more comfortable seeing a name like Kexim on the offering memorandum. SSAs offer liquidity and security – all welcome attributes for a new and nascent product.
It has been a similar story elsewhere, too. In Europe it was SSAs that led the charge.
But China is curiously veering away from this tried and tested strategy, by having Industrial Bank, a lender in Fujian province, to be its first green bond issuer.
With a market capitalisation of Rmb380bn ($62.4bn), Industrial Bank is by no means small. It is, however, a relatively unknown name to foreign investors, having never tapped the international bond market before. It seems an odd choice to be the flag bearer for China’s green bond ambitions.
The word on the street is that China does not want to throw a high profile name into the ring in case something goes awry. That's believable: this way of thinking would definitely be in line with how China has been developing its capital markets, using a “better safe than sorry” approach. And there is some logic to this, given that the consequences of something going wrong could be longlasting.
But as the second largest economy in the world, China risks sending out the wrong signals by being so cautious.
The offshore renminbi bond market is not known for its liquidity, and deal sizes tend to be small. Add to that the fact that this is a fairly unknown and untested issuer — at least in an international context — and the chosen approach doesn't seem like a confident, ringing endorsement of the asset class.
What China should do is push one of its own agencies, such as Export-Import Bank of China (Chexim), or one of the big four Chinese banks to be the first issuer. Beijing has no qualms about directing issuers to sell products when its suits its aims and investors will be much more comfortable putting their money into a top tier name like Chexim.
And if China is really adamant in having Industrial Bank issue first, then why not take a page out of India’s book and let the borrower print a green bond onshore to get things started? Yes Bank printed a Rs10bn ($157m) 8.85% 2025 onshore in February in what was India's first green bond. That was followed by a much larger internationally marketed $500m 2.75% 2020 offering by India Exim a month later.
First impressions count. Taking timid steps might sometimes be the sensible thing to do when venturing into the unknown, but here this approach risks hurting the development of the asset class even before it has started. It’s not easy being green: China is in danger of making its task all the more difficult.