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China’s green bond market set to rocket in the next five years

The green bond market could grow up to ten-fold by 2020 as Beijing is expected to soon roll out regulations on its development; Hong Kong to benefit

PUBLISHED : Sunday, 01 November, 2015, 2:42pm
UPDATED : Sunday, 01 November, 2015, 2:42pm

Mainland China’s green bond market could grow up to 10-fold by 2020 as Beijing is expected to soon roll out regulations on its development, and Hong Kong could get in on the action as a key international financial centre to tap its vast market potential, says the chief of an international climate change financing solutions promoter.

Sean Kidney, the chief executive of London-based non-profit organisation Climate Bonds Initiative (CBI), said the People’s Bank of China is expected to announce the regulations on green bond issuance in around two weeks.

“In China, it is a top down revolution, the government has decided the economy needs to go green ... [It] has lifted a billion people out of poverty ... but at an incredible sacrifice to the environment which can’t go on,” Kidney said in an interview with the South China Morning Post.

He cited an estimate by the People’s Bank of China that the nation requires five to nine billion yuan of annual investment a year to meet its pollution reduction goals, of which 15 per cent could be government-funded and the rest by a mix of domestic and international savings.

This is the natural window into China, but it needs to become a green window
Sean Kidney, chief executive of London-based non-profit organisation Climate Bonds Initiative (CBI)

“So they want to open up China’s financial markets to allow foreign investors to invest in green [projects] in China. This is a revolution ... bonds are a big part of the mix.”

CBI works with institutional investors, commercial entities and governments to promote investment in projects and assets needed to transform the global economy into a low-carbon emission one that could withstand the impact of climate change.

According to Kidney, the new regulations would spell out criteria for bonds to be certified as “green” and rules on the validation and disclosure of projects’ greenhouse gases emissions reduction performance by independent parties.

Beijing’s 13th five-year plan for the nation’s economic development between next year and 2020 includes a “big section” on green financing, he added.

Potential incentives for issuers of certified green bonds include better access to government procurement, participation in state projects and co-investment from the government, while investors of such bonds may enjoy tax credits on interest earned on the bonds, according to an HSBC research report.

CBI projected the value of outstanding global green bonds to grow to US$1 trillion in 2020 from US$600 billion last year, based on investment required “to avert catastrophes scientists say are waiting for us at the moment,” Kidney said.

Of the US$1 trillion, some US$300 billion are estimated to come from China, up from between US$30 billion to US$50 billion currently.

Internationally, “labelled” green bonds issuance is small relative to all bonds issued on projects that could reduce emissions, since the internationally-recognised voluntary guidelines called “green bond principles” drawn up early last year and first revised in March this year have left room for subjective judgement on what constitute “eligible green projects,” the HSBC report said.

Some issuers have therefore chosen not to label their bonds as “green” or they have chosen not to follow the guidelines.

According to financial market data provider Dealogic, some US$26.3 billion of green bonds have been issued globally so far this year, compared to US$32.6 billion for the whole of last year.

Most of the issuances were in Europe, while Asia Pacific’s deal volume amounted to just US$3.5 billion year-to-date, compared to US$1.25 billion for all of last year.

The first yuan-denominated green bond, worth 500 million yuan, was issued in 2014 by the International Finance Corp, a member of the World Bank Group that focuses on financing private sector development in emerging markets.

Agricultural Bank of China issued the second one, worth US$1 billion, last month.

Kidney said Hong Kong should set up the necessary financial market infrastructure to tap the vast growth potential from the mainland’s green bond market.

“Unless you have these mechanisms in place [to link between Chinese and overseas capital markets, unless there is a green bond listing [platform] in place, you are going to miss the boat,” he said.

CBI has held a green bond forum at London’s stock exchange last week attended by around 150 Chinese banks and corporate potential issuers, European bond investors and British and Chinese government officials including the assistant governor of the PBOC, he added.

“Where is Hong Kong [in this] exactly, why are we not doing it here [in Hong Kong] ... we should,” he said. “This is the natural window into China, but it needs to become a green window.”

A Hong Kong Exchanges and Clearing spokesperson said the exchange already provides a platform for bond trading, and it has issued initiatives a few years ago to make it easier for issuers to list their bonds in Hong Kong.