It has been an impressive start to green bonds in China. Two deals from SPDB and Industrial Bank and the market is already a tenth of the size of last year’s record global issuance of $42.2bn, as reported by Moody’s.
The country is certainly well positioned to generate huge volumes thanks to the government’s efforts to push borrowers to sell green debt.
As a result more banks (only banks can issue at the moment) are expected to hit the market. If a pair of mid-sized lenders are able to raise Rmb30bn, imagine the size of the Chinese market once the big four — Agricultural Bank of China, Bank of China, China Construction Bank and ICBC — come into play.
China is on track to become one of the biggest green bond markets in the world and will certainly dominate in Asia where issuance has so far been intermittent.
But boasting plenty of issuance is different from having a successful market. Unlike many aspects of capital markets, volumes are not the ultimate measure of success for green bonds. Tracking proceeds and ensuring that green bonds are actually green is critical for the market to have credibility and endure.
This requires a huge effort on the part of issuers to regularly disclose information and also have an internal system to track the proceeds — all of which is quite an ask especially when Chinese issuers are more used to a “take your money and run” approach in conventional bonds.
As it stands, China seems to have tracking covered based on the guidelines from the People’s Bank of China and National Development and Reform Commission, though with just two deals it will be some time before the market can tell if they are working.
But monitoring the use of proceeds is the most important aspect of a green bond because the last thing investors want to find out is their money being left untouched in a bank account or worse, spent on something that does not fit in with environmentally friendly principles.
And it is not uncommon in less developed capital markets for implementation to veer away from the official rules.
Time will tell but having more green bond issuance will certainly be helpful since investors will have a better idea of the likely adherence to the rules. To aid this, getting approval for corporates to issue green bonds needs to be a priority.
China has made a great start with green bonds, here’s hoping the market can really take root.