The numbers are in, and the results look good. China’s domestic green debt market has flourished in 2022, with more than Rmb668bn ($99.8bn) raised through 443 bonds over the first half of the year, shows Wind data.
In comparison, the market recorded Rmb290bn in volumes from fewer than 300 deals during the same period in 2021. The data includes not only green labelled bonds, but also carbon neutrality bonds, blue bonds and the newly launched transition bonds.
In addition, there were Rmb17.6bn worth of sustainability and sustainability-linked bonds sold onshore by June 30, roughly flat to the Rmb18.4bn a year earlier, according to Wind.
China’s green bond — and the broader sustainable finance — market has had a good run, thanks to continuous policy support amid Beijing’s carbon neutrality campaign and its pledge to cut emissions and transform into a more sustainable economy.
But is the work over? Not nearly yet. Rather, this should only be the beginning if the regulators want to propel their ESG market further.
Home to one of the largest green bond markets globally, China moved to launch more types of ESG bonds and related labels over the past couple of years. These include carbon neutrality bonds, sustainability-linked bonds, sustainability and social Panda bonds, and, most recently last month, low carbon transition bonds.
Five issuers have already sold pilot transition bonds in China’s interbank market, raising Rmb2.29bn between them. At the trial stage, such deals are expected to help companies from eight carbon intensive sectors — such as power generation, steel, and chemicals — become greener.
The governor of the People’s Bank of China (PBoC) Yi Gang recently spoke about the country’s green efforts in a TV interview. The transcript was published on the central bank’s website, and sheds light on the extent of support for the green market.
Long road
Yi said financial institutions received over Rmb210bn in funding by the end of May from the PBoC’s two new monetary policy instruments that support emission cut and the clean use of coal. Other incentives, like banks’ green business evaluation, have also helped China’s outstanding green loan balance to exceeded Rmb18tr by the end of March.
He also spoke about regulators’ efforts to crack down on issues such as greenwashing, by stepping up information disclosure requirements and implementing strict supervision of the market. The government has urged more than 200 financial institutions to release environmental information reports, with a plan to expand the pilot programme to cover more lenders across the country, said Yi.
The progress is encouraging. And while the policy support has helped fuel growth in domestic ESG financing, China still has a long road ahead in its ambitions around achieving sustainable transformation.
One case in point: while Beijing has been working on aligning its green bond standards with international ones, about a third of green-labelled Chinese bonds in 2021 were still not recognised internationally.
The domestic green definitions and standards, information disclosure requirements and post-issuance monitoring still need to be improved and perfected. Away from green, other overarching concerns across the whole onshore bond market also need addressing — whether it is about rating standards, pricing transparency, secondary market liquidity or investor diversification.
What is equally important is the need for the country to unleash its sustainability and social bond potential.
Not just green
As GlobalCapital has previously written, China needs to bolster its social and sustainability markets, in addition to expanding its green leadership. This is critical, because while the nation’s reliance on coal has long been a focus, it also faces other pervasive social challenges around poverty, widening inequality and access to essentials like public health and education.
There are already various social-like labels for bonds onshore, which have been categorised as such by the likes of data provider Wind. These include Covid-19 bonds, rural revitalisation bonds, and poverty alleviation bonds.
But very few of these deals adhere to internationally recognised standards, such as the Social Bond Principles by the International Capital Market Association (ICMA).
It is true that even in markets like Europe, social bond guidelines are less mature than those for green bonds. Regulators and non-profit bodies continue tackling issues around how to better measure the social impact of the bonds and the need to improve transparency and reporting standards.
But all that means China has even more catching up to do.
A good place for policymakers to start would be to clearly define social bonds, while bringing together and consolidating the different social-related labels already existing onshore.
Another apt move would be to unify standards and guidelines across different type of bonds regulated by different regulators in the long-divided interbank and exchange bond markets.
With an aging population and a pandemic that continues to threaten the livelihood of its citizens, the time is now for China to face up to its mounting social challenges.