Green bonds

How Hong Kong can be the bridge to the world for mainland China’s green bond market

City launches a certification scheme for green bonds amid calls for it to use its expertise in financial services to help develop the market

PUBLISHED : Monday, 12 March, 2018, 11:23pm
UPDATED : Tuesday, 03 July, 2018, 5:31pm

Hong Kong can play a major role in bridging the gap between issuers of green bonds in mainland China and overseas investors, bringing its expertise to bear to help lower Chinese entities’ financing costs, according to an academic in the field. 

Shi Yingzhe, vice director general of the International Institute of Green Finance at Beijing’s Central University of Finance and Economics, said mainland bond issuers were paying much higher interest rates than their peers in developed markets, and could do with a broader investor base to help lower their costs. 

“Hong Kong’s potential as a green bond issuance centre is huge as it has the Bond Connect scheme which allows overseas investors to buy mainland bonds,” he said, speaking after the launch ceremony of a green finance certification scheme by the Hong Kong Quality Assurance Agency (HKQAA). 

“During my visit to Europe, I found out that European issuers pay only around 2 per cent coupon rates on green bonds, while even an “AAA” rated mainland Chinese issuer pays around 5 per cent, so there is a huge opportunity to link low-cost financing in developed markets and China’s green projects.” 

He estimated mainland China’s green bond market could reach 1 trillion to 2 trillion yuan (US$158 billion to US$316 billion), without giving a time frame. 

Last year, mainland Chinese issuance of so-called labelled green bonds amounted to 248 billion yuan – around 22 per cent of global issuance, of which 204.5 billion yuan were issued in the mainland and the rest in offshore markets such as Hong Kong, Shi said. 

To have their green bonds qualify as “labelled”, project developers need to meet stringent internationally recognised green benefits verification and disclosure standards, with the help of external advisers or independent third-party verifiers. 

Shi said given the mainland’s “unlabelled” green bonds amounted to over 400 billion yuan, if some of them were turned into labelled ones, potentially with the help of an emerging international green bond centre like Hong Kong, it could accelerate China’s green bond market growth and lower financing costs for issuers. 

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The HKQAA, a non-profit certification unit of the city’s government, launched a green finance certification scheme on Monday which would help issuers issue labelled green bonds. 

Deputy chairman Ho Chi-shing said potential participants in the scheme included the Hong Kong Airport Authority, subway and property projects developer MTR Corporation, property developer New World Development and city gas utility Hong Kong and China Gas. 

Swire Properties and Modern Land (China) have already issued green bonds earlier this year with HKQAA certification. 

Earlier this month, the government announced in its 2018-19 budget a package of measures to accelerate development of the city’s bond market by launching a grant scheme for green bond issuance, and an up to HK$100 billion (US$12.75 billion) green paper programme issued by the government itself. 

The measures will take the form of a three-year pilot grant scheme that will give eligible first-time green bond issuers in Hong Kong up to HK$2.5 million, which could potentially halve their issuance costs. Each issuer can apply for a grant for two bond issuances at most. 

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The HK$2.5 million is some 6 per cent higher than a bond grant offered by the Singapore government last year to green paper issuers for the purpose of offsetting credit rating expenses, although there is no limit on the maximum number of issuances under the Singapore scheme. 

Diana Cesar, the chief executive of HSBC’s Hong Kong operations, noted that only just over US$310 million of green bonds were issued by a handful of companies in Hong Kong last year, well below volumes in other Asian markets such as India or the Philippines, citing Dealogic data. 

“It’s a surprisingly small amount given that Hong Kong is ideally placed to facilitate the financial flows between East and West, and between mainland China and the rest of the world,” she said.

“The government’s new green bond initiative will hopefully help redraw this picture [and] help position Hong Kong as a leader in this fast-growing area of the global financial system.”