Banking & Finance

Development banks tipped to give China’s green bond boom a further boost

Green Finance Committee estimates mainland needs to spend at least 2 trillion yuan a year on energy saving and pollution reduction projects

PUBLISHED : Sunday, 24 April, 2016, 9:01am
UPDATED : Sunday, 24 April, 2016, 9:01am

The boom in mainland China’s nascent green bond market is set to continue this year after deal volume ballooned in the first quarter, with mainland and multilateral development banks tipped to take the torch after a spate of jumbo issuances by commercial banks early in the year.

The boom will help diversify financing channels for companies and government entities seeking to fund projects that would reduce emissions of harmful gases and water pollution, enhance energy efficiency and conserve water.

The mainland needs at least 2 trillion yuan (HK$2.39 trillion) annually to fund energy-saving and carbon emission reduction projects and to deal with its pollution problems, according to the Green Finance Committee, a think tank tasked by the People’s Bank of China (PBOC) with estimating the cost.

“Besides commercial banks, a number of development banks and supranational banks operating in China are seriously looking at the green bond as an important part of their fund-raising programme,” Frank Kwong, head of primary markets, Asia-Pacific, at French bank BNP Paribas said.

Given China’s size and its ambitions in the field of green finance, China is a top candidate for issuing a sovereign green bond
BNP Paribas

He said BNP was working on a few green bond issuance transactions with clients which could be executed in the next few months.

“2016 could be the year of the first green sovereign bond ... given China’s size and its ambitions in the field of green finance, China is a top candidate for issuing a sovereign green bond,” BNP said in a research report.

The Shanghai-based New Development Bank, backed by the BRICS countries – Brazil, Russia, India, China and South Africa – indicated late last month it planned to issue 3 billion to 5 billion yuan of yuan-denominated bonds in China by June 30, which would fund hydro, wind and other renewable energy projects in the BRICS nations, China Daily reported.

Another potential green bond issuer is the Asia Infrastructure Investment Bank (AIIB). Formally set up in January with an initial focus on financing power, transportation and urban infrastructure projects in Asia, it has vowed to be a “lean, clean and green” institution.

Global green bond issuance totalled US$16.6 billion in the first quarter of year, up 140 per cent year on year according to financial markets data provider Dealogic.

If the pace of growth is sustained throughout the year, ratings agency Moody’s said in a note on Wednesday that the year’s total issuance could reach almost US$70 billion, compared with its earlier projection of US$50 billion.

Of the first quarter’s US$16.6 billion, some US$7.49 billion – 45 per cent – were issued in China, including two issuances by Shanghai Pudong Development Bank totalling 35 billion yuan (US$5.4 billion) and a 10 billion yuan (US$1.55 billion) one by Fujian-based Industrial Bank.

The PBOC released a set of green bond guidelines in late December covering bonds issued by regulated financial entities, and the National Development and Reform Commission, in charge of planning industry policy, issued another set of guidelines for bonds issued by non-financial firms.

They outlined the types of projects qualified to be labelled “green”.

Qualified issuers are given more latitude on the size of green bonds they can issue than is the case with conventional bonds. Local governments are also encouraged to provide financial guarantees to green bond issuers.

In the past few months, mainland commercial banks have been active in issuing green bonds even though the bonds’ prices and yields – interest rates – have been largely the same as non-green bonds of similar maturity, while green bond issuance carries higher disclosure and compliance costs.

Kwong said this was because issuing green bond allowed banks to diversify their sources of funding, adding banks were accustomed to the reporting requirements and did not view them as overly burdensome.

Robert Barker, head of Asia-Pacific corporate social responsibility and sustainable investment solutions at BNP’s corporate and institutional banking division, said the market was anticipating further policy measures to boost the size of the green bond market. Such support could include tax breaks and subsidies, potentially directed at both issuers and investors.

Why China is tipped to beat global green bond issuance growth rate in 2016

Barker said that despite a lack of mandatory requirements for issuers to disclose the environmental impact of projects funded by green bond proceeds, or have those impacts assessed by third parties, investors were increasingly going focus on factors such as reductions on carbon dioxide emissions and improvements in energy efficiency.

“Quantification of benefits are increasingly being seen as required,” he said. “It is an evolution from today to whatever will be expected by investors in the future, which could lead to a differentiation in bond pricing.”

Kwong said given the green bond market was relatively young, investors had been giving issuers some latitude on transparency on the use of proceeds, but as more green bonds were issued they would demand more disclosure.

A case mentioned in a HSBC report is Hong Kong-listed Beijing Jingneng Clean Energy, which issued a 1 billion yuan green bond in late January, becoming the second non-bank company to issue such an instrument after Xinjiang Goldwind Science & Technology, the world’s largest wind power generation equipment maker.

“It does just enough to technically qualify as a green bond [by providing] the bare minimum information,” HSBC analysts said, adding it had not provided a list of green projects that would be using the bond proceeds and had not commissioned an independent party to give an opinion on the bond’s expected green benefits.