Carbon neutrality goal: China is leading global surge in green bond financing this year

The country accounted for 13.4 per cent of all green bond proceeds globally as of May this year, according to Refinitiv
The pace of green bond issuance globally is its fastest in five years

Banking & finance

Chad BrayandEric Ng

Published: 8:30am, 3 Jun 2021

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China has led a surge in green bond financing this year, with global issuances growing threefold to about US$194 billion in the first five months of 2021, and was on target to easily pass record issuance levels seen in 2020, according to a new report.

Through May 27, China accounted for 13.4 per cent of all green bonds issued globally, raising US$26.1 billion, according to data provider Refinitiv. That is more than double the US$10.1 billion raised in the first five months of 2020 and nearly as much as the US$27 billion raised in all of last year.

The pace of green bond issuance globally is its fastest in five years, with more than double the number of bonds issued at this point in 2020, according to Refinitiv. Last year, companies and governments collectively raised US$242.8 billion in green bonds.

The increase in China was driven by the swift recovery of China’s economy from the coronavirus pandemic and a push by Beijing to reach carbon neutrality by 2060, Refinitiv said.

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Green bonds are issued by financial institutions, companies and governments to fund projects that have environmental benefits. However, the rapidly growing Chinese green bond market remains closed to many foreign investors because of looser rules on how domestic businesses can use proceeds from the debt issuance. Onshore debt accounted for about 72 per cent of green bond issuance in China this year, according to Refinitiv.

Under Chinese regulations, up to half of the proceeds raised by green bonds can be used to repay bank loans or to bolster a company’s general working capital. International standards restrict that to no more than 5 per cent of the proceeds.

“Chinese financial market regulators need to take a serious look at how the country’s state-owned enterprises are using the proceeds of their green bonds,” said Christina Ng, the research and stakeholder engagement leader of Australia-based Institute for Energy Economics and Financial Analysis.

State-owned power companies China Energy Investment Corporation and China Huaneng Group planned to use about 30 per cent of the 7 billion yuan (US$1.1 billion) they raised combined from a series of carbon-neutral bonds this year for working capital, she said. “In other words, the proceeds are to fund their day-to-day – and not necessarily green – operations,” she added.

Their offering documents stated that coal-fired plants make up about three-quarters of their total power assets and coal power was expected to remain a core part of their businesses going forward, Ng said. The companies also provided little information on their future plans to phase out fossil fuel sources, she added.

The energy and power sector accounted for about 28 per cent of all green bonds issued in China this year.

At the same time, global investors are increasingly looking to add Chinese debt to their portfolios as the country’s US$18 trillion bond market further opens up to foreign investors, and major bond index compilers add Chinese sovereign debt to their flagship indices, adding pressure to bring standards in line with global norms.

Overseas investors held about 3.6 trillion yuan in Chinese bonds at the end of April, according to data from Bond Connect Company, a joint venture between Hong Kong Exchanges and Clearing (HKEX) and the China Foreign Exchange Trading System.

Against this backdrop, Beijing was moving to reform its green bond regulations and move closer to international standards. Beginning July 1, so-called clean coal usage, as well as secondary oil and gas extraction projects, will no longer qualify for support from fundraising through green bonds issuance, according to a joint circular issued by Chinese financial regulators in April.

China and the European Union also are cooperating on a jointly recognised classification system for green finance, which regulators hope to put in place later this year. The push comes as Chinese President Xi Jinping pledged last September that China would cap its emissions by 2030 and reach carbon neutrality by 2060.