Ever more green in China

IFR IMF/World Bank 2020
10 min read
Jonathan Rogers

While welcomed, China's aim to revolutionise the green sector came as something of a surprise. Now the hard work begins

China’s recent bold commitment to become carbon neutral by 2060 demonstrates the top-down policy dynamic that has underpinned the breathtaking growth of the country’s green bond market. As China has begun to address a fragmented regulatory backdrop and move into line with international norms, the direction of market travel is clear - upwards.

The need for stringent green bond market regulation has been imperative in China as the market has grown to be the world’s largest for the green bond product even in the context of the seemingly unwieldy purview of three powerhouse regulators - the People’s Bank of China, the China Securities and Regulatory Commission and the National Development and Reform Commission.

China’s green bond market stands to attain further dizzying heights of growth if the country’s deep pool of domestic savings - the world’s largest - together with international investor demand finds its way into green debt. A hefty refinancing requirement over the next five years, involving Rmb866bn (US$128bn), or almost 90% of the total China green bonds outstanding, can only turbocharge this dynamic.

“China’s bond market is segregated and its respective regulators have discrete philosophies and styles but there is a dynamic of convergence on the question of what constitutes green, said Wenghong Xie, China programme manager at the Climate Bonds Initiative in Beijing.

The explosive growth of China’s green bond market - which, according to the CBI, printed Rmb386.2bn of paper last year in domestic and overseas markets, representing a heady 33% growth in issuance year-on-year - is bifurcated: only US$31.3bn-equivalent met international standards, while the remaining US$24.2bn, raised mostly onshore, did not.

But that bifurcation is poised to dissolve, if the unveiling in June of a Green Bond Endorsed Products Catalogue that aims to align China’s green bond methodology with international standards proves to be as significant a development as market participants suggest.

Alignment with international standards, as espoused by organisations such as the CBI and the International Capital Markets Association and which are enshrined in the European Union’s Green Taxonomy - regarded as a watershed moment for the sustainability movement and which was wheeled out in March - will open up China’s green bond market to a universe of investors that is unambiguously stringent when it comes to definitions of what counts as green.

“The new green catalogue is in fact an upgrade of what was in place before, with multiple catalogues now streamlined into one, in the process moving closer to international standards, and in particular to the European Union taxonomy, which is regarded as the upcoming international benchmark,” said the CBI’s Xie.

“The consultative process is ongoing and is intended to be two-way, with China playing a key role in the inter-governmental thrashing-out of green standards via working groups.”

In the world of green finance there are two areas of consideration: green as applied to the real economy and the actors therein - a taxonomy or classification system which determines whether an economic activity is environmentally sustainable - and the same applied to the labelling of a financial product, be it a bond, a loan or a securitisation, as green.

The EU’s Green Bond Standard, published in 2019 and refined in March, aims to link use of proceeds to the region’s Taxonomy Regulation, and in the same way China’s Green Bond Catalogue links back to sustainable activity in the real economy.

Corporate reporting of ESG compliance is fast moving in China from a voluntary to a mandatory regime rooted in definitions of what comprises sustainability and where climate change is now enshrined as axiomatic as the country aims to meet the targets enshrined in the COP 21 Paris Climate Agreement of 2015, which aims to reduce global heating to well below two degrees Celsius above pre-industrial levels.

“China’s green finance agenda was introduced primarily due to pressure from severe domestic pollution, but climate change is now a key part of the agenda and attention to it has increased, as evidenced by, for example, the revision of the green finance catalogue to remove ‘clean coal’ projects as well as other ‘clean fossil fuels’ projects,” said Luo Nan, China country head of the United Nations-supported Principles for Responsible Investment in Beijing.

The PBoC in June in a landmark regulatory move halted financing for clean coal - a fossil fuel which produces less CO2 emissions than thermal coal - stating that the decision was made to “align with international standards”.

“It’s foreseeable that green finance will be given more focus with the aim of achieving climate objectives following President Xi’s recent speech at the recent UN annual conference pledging carbon peaking and neutrality targets by 2030 and 2060,” said Nan.

To say that Xi’s declaration at the virtual UN General Assembly in New York last month that China was aiming to be carbon neutral before 2060 caught delegates by surprise would be an understatement.

But his framing of that decision within the context of coronavirus and its demonstration that the world was in need of a “revolution” that would speed green development seemed to catch perfectly the prevailing zeitgeist on the topic of climate change and sustainability, however much scepticism might have lingered about the achievability of the goal for the world’s biggest emitter of greenhouse gases.


China emits around 10.5 million metric tons of CO2 per annum, according to the Global Carbon Project, estimated at 26% of the world’s total in 2016, with emissions growing 2.6% last year, according to independent research firm the Rhodium Group, even as coal consumption in the country fell - rising energy consumption and oil and gas use accounted for this rise.

If that goal is to be achieved, then the alignment of China’s green bond market with international standards will be crucial and impact directly on activity in the real economy, where, as it stands under current regulations, issuers can apply 50% of a green bond issue to general corporate purposes, something which conflicts with international green standards.

“As far as foreign capital with potential interest in investing in domestically issued green bonds from China is concerned, the demand is there. The problem has been supply. This means supply that meets the need of investors and independent verifiers for consistent and reliable data,” said Ricco Zhang, senior director, APAC, at ICMA in Hong Kong.

“The Green Bond Catalogue goes some way to unifying a fragmented regulatory backdrop wherein there were diverse taxonomies under the purview of the three main regulators. And while structural economic differences mean it is unlikely that China’s green bond taxonomy will fully harmonise with that of the EU, there will be substantial overlap in areas of crucial concern to international investors.

“The target of moving to full decarbonisation by 2060 demonstrates that, but between the present and achieving that goal, a lot of work needs to be done, much of it technical,” said Luying Gan, head of sustainable bonds, APAC, at HSBC in Hong Kong.

“The banks have a crucial role to play in pushing forward the green finance dynamic in China, not only by providing credit but also because they are big investors within the green bond asset class.”

Last year was marked by notable developments in China’s green bond market, including a sharp rise in issuance from non-financial corporates - a 54% year-on-year gain, according to CBI data - with the transportation sector the best represented in the international standard-compliant space, wherein issuance rose 11%. Corporate issuance eclipsed FIG issuance for the first time last year, with the latter having accounted for the bulk of China's green bond supply since the market's inception in 2015.

“Compliance with internationally accepted standards is just around the corner in China and a virtuous circle is being created as the country’s domestic bond markets open up to foreign participation both in terms of investment and issuance,” said HSBC’s Gan.

The potential for green bond issuance in China to balloon as a result of increased international participation is immense, thanks to access to the domestic interbank market via the Bond Connect trading link in Hong Kong, which launched in 2017 and which the CBI is hoping to supplement with the introduction of a Green Bond Connect platform to enable international investors easy access to China’s domestic green bond market.

Meanwhile, the reduction of international investment quotas and an opening up of participation to international investment banks, some of which such as Deutsche Bank, HSBC and Standard Chartered have been granted licences to lead domestic bond deals, are also likely to power up demand for green China bond issuance.

The presence of international banks is likely to provide an orientation towards best practice in the green arena as the lenders aim to entice overseas investors into the domestic markets, with grumbles about failure to meet international standards fast melting away. Panda bond issuance, which has surged this year to almost US$6bn, according to Refinitiv data, is an obvious place for these banks to bring green bond deals and test China’s emerging green credentials.

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