Across The Border | Policy support, higher standards seen boosting China’s green bonds market
China’s onshore green bonds may reverse course and outperform this year as the prospect of greater policy support to promote green financing and an improvement in market standards drive demand.
Green bonds share the same characteristics as regular bonds but are issued to raise capital specifically for climate-related or environmental projects.
Chinese investors bought US$6.8 billion of green bonds in the second quarter, making it the largest market globally, with the United States in second place on US$5.8 billion. However, Chinese issuers accounted for 21 per cent of issuance worldwide, a figure described by Moody’s Investors Service as “reasonably muted” compared with the 35 per cent in the whole of 2016.
Chinese regulators have closed the gap between domestic and international standards for green bonds
Efforts by the authorities to stabilise capital outflows earlier this year, and liquidity pressures in the interbank markets which led to tighter financial conditions and higher yields, have weighed on both China’s green bond and ordinary bond markets, analysts said.
“While 2016 was a ‘break-out’ year for China’s green bond market, we expect to see a more sustainable pace of expansion in the second half of 2017 and beyond, supported by strong policy momentum,” said Rahul Ghosh, vice president, credit strategy and standards at Moody’s.
The People’s Bank of China (PBOC) estimated that an annual investment of 2 trillion yuan to 4 trillion yuan (US$297 billion- US$594 billion) will be required to address environmental and climate change issues.
Last year Chinese energy major Datang announced there was a leak at the evaporation pond of its loss-making Duolun coal and chemical plant in Inner Mongolia. The Duolun spill, which caused severe environmental damage, especially around water supplies and treatment, was just the tip of the iceberg for the government in tackling companies bypassing environmental regulations, according to Greenpeace.
Meanwhile the opening of the mainland’s domestic bond market to foreign investors through the new bond connect scheme via Hong Kong is likely to increase the flow of money into Chinese green financing instruments, according to Debashis Dey, a partner at law firm White & Case. About 72 per cent of Chinese green bonds were issued in the mainland, compared to 27 per cent offshore. One per cent were green panda bonds, denominated in yuan and sold by overseas entities in China’s onshore bond market.