Why China is tipped to beat global green bond issuance growth rate in 2016
China’s green bond market is expected by analysts to see faster growth than the global market this year thanks to a clearer regulatory regime and its environmental commitments.
But more fine-tuning to regulations are needed if the nation is to develop a fully-fledged green bond market with active participation from international investors.
“China’s green bond market could potentially expand more rapidly than internationally … due to central bank policy support and incentives announced for financial institutions issuers in the form of collateral eligibility, relending and interest subsidies – terms which are generally not available in other countries,” said ratings agency Moody’s senior vice president Henry Shilling in a note.
Moody’s early this month forecast global green bonds issuance to exceed US$50 billion this year and break last year’s US$42 billion, the highest recorded since such bonds were first issued in 2007. Last year’s volume - of which 40 per cent was issued by financial institutions - was 16 per cent higher than in 2014.
“We expect the momentum from the United Nations conference on climate change as well as the signing of the Paris agreement scheduled this April to likely [spur] additional and repeat issuance of green bonds,” Shilling said, adding issuance guidance from China and India will also bolster growth.
According to the Green Finance Committee, a think tank approved by the People’s Bank of China, the nation needs at least 2 trillion yuan annually to fund energy-saving and carbon emission reduction projects and to deal with its pollution problems.
Of the sum, some 85 per cent are expected to have to come from the private sector.
Early this year, industry policy planner National Development and Reform Commission (NDRC) released guidelines on green bonds issued by non-financial corporations.
They came close on the heels of the People’s Bank of China’s release of a set of green bond guidelines late December covering bonds issued by regulated financial entities in the interbank market, such as policy banks and commercial banks.
Qualified projects include those that conserve energy, reduce pollution and recycles resources.
Still, HSBC’s analysts said more clarity, definitions and transparency are needed for the guidelines.
“Investors in Chinese green bonds will require high quality and transparent environmental data in order to be assured that their investments actually benefit the environment rather than damage it further, inadvertently or otherwise,” they said. “We note that at this stage, most of the assurance and disclosure requirements are either voluntary or unaudited.”
Environmental impact data provider Trucost’s head of Asia business development Huang Chaoni said a notable difference between China’s green bond issuance guidelines and the international ones is the eligibility of projects for cleaner usage of coal in China for the purpose of green bond issuance, while all fossil fuel-related projects are excluded from the international guidelines set by The Climate Bonds Initiative, a London-based non-profit organisation promoting green bonds.
“This is an important difference for foreign institutional investors who have environmental mandates in their investment strategies, and in the light of support for coal divestment and carbon reduction pledges made at the [Paris] climate conference [last December],” she said.
HSBC expects global green bond issuance to reach US$55 billion to US$80 billion this year, raising the total outstanding issued bonds to between US$133 billion and US$158 billion.
“For 2016, China holds the presidency of the G20 [the group of 20 major economies] and we expect more green financing initiatives to arise during the year,” said the bank’s climate change strategist Chan Wai-shin and green bond strategist Michael Ridley in the report. “The environment remains high on the political agenda.”
Under the NDRC guidelines, issuers are allowed to raise up to 80 per cent of qualified projects’ estimated required investments by issuing green bonds, compared to between 60 to 70 per cent of other projects.
Provided an issuer’s total debt-to-total asset ratio is below 75 per cent, regulators will not cap the amount of green bonds issuers are allowed to issue, regardless of the amount of other bonds they have already issued.
Green bond issuers are allowed to use not more than half of the proceeds to retire bank loans and boost working capital to lower interest costs.
Local governments are encouraged to provide financial guarantee to green bond issuers, in the event that the revenue from a qualified project over the term of the bond backing it falls short of the principal and coupon interests.
The governments can take the projects’ future income from carbon emission credits as collateral.
Of last year’s US$45.7 billion worth of green bonds issued globally according to HSBC’s tally, only US$3.2 billion or around 7 per cent were in Asia, of which the largest deal was Agricultural Bank of China’s US$1 billion issuance.
Earlier this month, Shanghai Pudong Development Bank made China’s first domestic green bond offer worth 20 billion yuan.
It was closely followed by Fujian-based Industrial Bank’s issuance worth 10 billion yuan.
To develop a green financial system that China aspires for, HSBC said it needs to build up more issuance by entities other than domestic and multinational policy banks, as well as more participation from domestic investors such as government-run pension funds.
In addition, more independent assessors such as academics from the Tsinghua Univeristy and Chinese Academy of Sciences are needed to enable more accurate and comprehensive data gathering and quantification of environmental benefits of green projects, it said.