CHINA’s DOMESTIC green bond market only opened at the start of 2016, but already Chinese issuers, especially banks, are driving global green bond issuance. Nearly half of the $37bn issued in the first half of 2016, and two thirds of July and August’s $16bn of sales, came from China.
A big chunk of that was Bank of China’s landmark $3bn euro, dollar and renminbi jumbo in July. But smaller and more regional names have also issued, such as Industrial Bank and Bank of Qingdao.
Then at the end of August, the People’s Bank of China, Ministry of Finance and five other government agencies jointly published the Guidelines for Establishing the Green Financial System, the most comprehensive policy statement yet by any state, containing a myriad of green finance measures.
Sovereign creation
“There is no question that China is playing a very significant role in the development of the green bond market this year,” says Henry Shilling, senior vice-president, environmental, social and governance at Moody’s.
“China is exemplary in showing how a sovereign can create a green bond market within its own frame, where local banks can refinance green assets,” believes Christopher Flensborg, head of climate and sustainable financial solutions at SEB.
The market’s emergence is “hugely positive, both for the technical reason that the supply is going to influence investors’ ability to build portfolios and to show that it can be done,” adds Stephanie Sfakianos, head of sustainable capital markets at BNP Paribas.
This year’s growth is largely due to the government's drive. “There is an extremely strong political agenda,” says Lars Eibeholm, head of treasury at the Nordic Investment Bank.
Late last year the PBoC unveiled green bond guidelines and a project ‘catalogue’. The National Development and Reform Commission has also published guidelines.
“We were delighted to see China essentially using the framework of the Green Bond Principles to develop its own regulation,” says Nicholas Pfaff, senior director at the International Capital Market Association. “They have kept the voluntary aspect in many respects and ended up with a regulatory component that remains close to the philosophy of the GBPs.”
“China is one step ahead in mainstreaming green bonds for their purposes,” adds Pfaff. “That may prove a blueprint for other countries — and a way to help Europe and the US think more about combining the voluntary approach with incentives, to help take the market to the next level.”
Others are more sceptical, however. “The Guidelines listed an impressive array of green initiatives,” says Christopher Wigley, senior portfolio manager, credit at Mirova in London. “However, it is difficult to see just yet how these ideas will come together in a comprehensive and effective strategy. The intention is admirable but a number of hurdles have to be overcome. For example, Chinese companies have been criticised in the past for their environmental, social and governance profiles. Additionally, some investors are concerned about a credit bubble in China. China has come a long way in a short space of time, but it seems it has more to do.”
Some green bond players also dispute how replicable China’s model is. “I am a bit sceptical. China is a very specific political and economic system,” says one who favours the voluntary guidelines of the GBPs.
‘Clean coal’
China’s green bond rules permit some investments, such as ‘clean coal’, not accepted under other standards, such as the Climate Bond Initiative’s. But bankers defend this. “The Chinese authorities have shown leadership and can, if they want, change their eligibility criteria alongside new solutions appearing,” argues Flensborg.
“Development and infrastructure factors need to be taken into account. Funding projects outside the G7 is key — it is not just about greening what you already have,” adds Sfakianos.
International investors should start buying domestic Chinese green bonds, suggests Hans Biemans, head of sustainability at Rabobank Markets in Amsterdam. “The market has made a lot of progress. And it is not closed.”
Asia’s new supranational bank recently launched its first bond in China. Headquartered in Shanghai but owned equally by Brazil, China, India, Russia and South Africa, the New Development Bank issued a Rmb3bn five year bond in July.
Other international issuers may struggle to access Chinese investors with green bonds, however. “The market has become more liberal step by step, but issuing Panda bonds is still very challenging,” judges Doris Kramer, vice-president at KfW in Frankfurt.
Still, some see scope for China’s increasing activity in international green bond markets to help the domestic sector mature. “I think the Chinese green bond market will grow gradually but sustainably, with good practice helped by, for example, continued issuance in dollars and euros,” says Wigley.