Chinese banks to retain role as leading issuers of green bonds in 2017
Chinese financial institutions are expected to continue to dominate green bond issuance globally this year, bankers say.
Most of the issuance is likely to come through the onshore bond market amid concerns of further devaluation of the yuan.
Financial institutions, including commercial banks and supranational financiers such as Shanghai-based New Development Bank, accounted for 82 per cent, or US$26.6 billion of the global volume of green bond issuance in the first 11 months of 2016, while that of utilities companies amounted to US$2.9 billion, according to Dealogic data.
“This is because banks and investment banks are a natural conduit to funnel private capital for smaller environmental projects,” said a Bank of America Merrill Lynch report, adding that real estate companies could also issue green bonds for energy saving improvement projects.
Laurent Morel, Asia-Pacific head of debt capital markets at Societe Generale, also expects financial institutions to continue to dominate.
He said this is because most projects funded by green bonds, such as renewable energy, energy efficiency enhancement and water treatment projects, are primarily project-financed by banks, which act as a wholesale allocator of capital.
Other potential application of funds raised from green bonds include the adoption of mass transit, teleconferencing, waste recycling , sustainable forestry and agriculture, and energy efficient manufacturing.
Water infrastructure projects that help countries mitigate or adapt to climate change are also eligible to be funded by green bonds.
Although green bond issuers have yet to enjoy significantly lower financing costs, , Morel said that “over time this should be the case” as investors price in their reputation profile and lower pollution-related penalty risks.
Zhou Xiaole, investor relations director at Hong Kong-listed wind and solar farm developer Concord New Energy Group, which in April issued mainland China’s first onshore green bond by a non-financial firm, raising 500 million yuan, said although the financing cost is the same as traditional bonds, it has enjoyed “other conveniences” in the form of speedy regulatory approval.
The company said in December it has received approval to raise up to 1 billion yuan within the next two years by issuing a green bond and listing it on the Shanghai Stock Exchange.
In mainland China, expectation of a continuation of the yuan’s depreciation trend means green bond issuances and purchases will remain a largely domestic affair.
Conan Tam, co-head of Asia Pacific debt solutions at Bank of America Merrill Lynch, said the yuan’s devaluation has seen mainland companies shift their green bond issuances from the offshore market to the domestic bond market, since the devaluation trend effectively raises the financing cost for the issuer.
“The onshore market will continue to grow as the mainland government encourages companies to tap into green finance tools to fund expansion,” Tam said.
Still, Credit Agricole CIB head of Asian syndicate Benjamin Lamberg said internationalisation of the yuan, and its inclusion as one of five reserve currencies in the International Monetary Fund Special Drawing Rights basket since October would drive demand for yuan bonds.
“This means central banks and many other large fund houses have a strong demand in yuan bonds as they need to increase their reserve in yuan,” he said. “The dim sum bonds [denominated in yuan and issued offshore] with green concept has been very popular.”
In Hong Kong, where government-backed companies such as the Link Real Estate Investment Trust and MTR Corporation have issued green bonds, Tam expects limited interest from potential private sector issuers, given the higher compliance costs of green bonds and the price advance of ordinary bonds.
Additional reporting by Enoch Yiu