China’s environmentally-friendly green bond issuance set to accelerate

Issuance of green bonds in China is increasing quickly thanks to growing clarity in the sector’s regulatory infrastructure.

China now has 759 ‘climate aligned bonds’ according to the China Green Bond Index, which was launched by the China Central Depository & Clearing Co. just last month.

Green bonds are capital-raising devices designed to provide funding for new and existing projects with environmental benefits. They are particularly targeted at those looking to direct investment towards environmentally focussed projects.

Such projects are growing in significance on the mainland, as both enterprises and government bodies give greater weight to green initiatives. In a reflection of the importance policy makers now place on issues relating to environmental sustainability, green development was one of the five development concepts identified in the 13th five-year-plan passed by the two sessions in March.

Chinese economic development, in both the Mao Zedong era and since reform and opening in the 1980s, has been dominated by manufacturing and construction, causing significant damage to the country’s air, water and land quality. Recent years have seen a range of policies designed to mitigate environmental damage, and the 13th five year plan includes targets to reduce energy intensity and to raise the proportion of energy derived from non-fossil fuels.

This will require major financing, and so lies the rationale behind efforts to create a functioning green bond sector.

The next step in the development of the sector will be the publishing of regulations for Chinese corporate green bond issuance by the National Association of Financial Market Institutional Investors (NAFMII). This is set to take place in the next few months.

A report by HSBC says that a significant wave of corporate green bond issuance is expected to follow the release of these regulations.

“We find it interesting that some Chinese corporates are issuing green bonds before official NAFMII guidelines are formally released. We think this is evidence that Chinese firms are keen to demonstrate support for China’s latest five-year plan,” the report said.

Chinese corporations who have already issued onshore corporate green bonds include Concord New Energy, who did so for the purpose of developing solar and wind energy projects in China, and the BAIC Motor Corporation Ltd who sought funding for the development of new energy vehicles.

Following the release of the corporate guidelines by NAFMII, the writers of the HSBC report said that they anticipated that the next step would be the release of local government or “municipal” green bond guidance, leading to Chinese on-shore green bond muni issuance.

The rise in green bonds in China is part of both a regional and global trend. March saw the first green bond issued by a South Korean corporate, Hyundai Capital Services, which will go to financing a range of electric and hybrid vehicles.

Globally, in the first four months of this year, the green bond market saw US$18.9 billion (HK$146.71 billion) equivalent of issuance, a rise of 92 per cent year-on-year from 2015.

The HSBC report said that this growth was on track to reach an expected US$55 - US$80 billion of issuance in 2016 as a whole, adding that investor demands for clarity and transparency on use of proceeds did not appear to be cramping market growth.

“The green bond market is developing globally, with issuance not just from European and North American entities, but also from Chinese, other Asian and Latin American issuers,” said the report, “We are seeing issuance from Investment Grade and High Yield issuers, and from Developed Market and Emerging Market issuers,” it added.

Currently there are US$43.9 billion equivalent of US$-denominated green bonds outstanding, US$35.3 billion equivalent of euro-denominated green bonds and US$24.8 billion of other currency green bonds.