How Hong Kong can connect China’s carbon market with the world

Hong Kong can act as the testing ground for mainland carbon products, showcasing them to international investors, while providing a source of important feedback for mainland market players
In addition, the region’s carbon market opportunity can help support local fintech innovation, particularly in the use of blockchain

Bing Li

Published: 4:30pm, 8 May 2022

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Despite the many challenges and limitations brought on by the pandemic, Hong Kong’s financial regulators have continued to find opportunities to preserve its current and future status as one of the world’s leading financial centres.

Following the launch last year of schemes to bridge China and international markets, like the Wealth Management Connect and Southbound Bond Connect, policymakers in Hong Kong and their mainland counterparts have been stepping up efforts to position Hong Kong as a sustainable finance hub.

This development also feeds into Hong Kong’s most recent budget, which tagged green and sustainable finance development as a key initiative in Hong Kong’s Climate Action Plan 2050, seeking to combat climate change and achieve carbon neutrality.

There is no other financial centre in the world better placed to tap into China’s massive – but still nascent – carbon emissions trading market, estimated to be three times bigger than the European Union’s and set to grow by another 70 per cent by 2025.

Looking to the future, Hong Kong can play to its traditional strengths: bridging China’s carbon markets with the rest of the world by offering regional expertise and market understanding that cannot be found elsewhere. There is, however, no guarantee of success unless steps are taken to solidify this opportunity.

Feedback garnered from the local financial sector echoes the latest assessment by Hong Kong Exchanges and Clearing, and the Securities and Futures Commission, that Hong Kong is well placed to become the mainland’s offshore risk management centre for carbon market development.

Hong Kong can act as the testing ground for mainland carbon products – like carbon trading indices and carbon-themed exchange-traded fund products – showcasing them to international investors, while providing a source of important feedback for mainland market players.

It’s worth stepping back and considering the scale of this opportunity. In less than a year of operation, China’s carbon emission trading scheme is already the largest carbon market in the world by volume. Some estimates put the size of China’s 2021 carbon market programme at 4,500 megatonnes (Mt) of carbon dioxide, compared to 1,500Mt of CO2 in the European Union.

Current projections by the Shanghai United Assets and Equity Exchange suggest more than 8,000 companies from eight sectors will eventually be able to trade allowances for CO2 emissions by 2025, bringing China’s coverage to 7,800Mt of CO2.

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Carbon trading systems continue to evolve, but one constant in every iteration is the need for detailed emissions and pricing data to underpin the market. Again, Hong Kong finds itself with unique advantages: a sophisticated financial talent pool, high-end technology infrastructure and a global investor community used to doing business here.

Investors can already access a breadth of global carbon insights, pricing libraries and analytics, and net-zero and carbon offset tools with which to make their investment decisions. The ingredients for a thriving carbon market in Hong Kong are already broadly in place.

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However, one should not confuse ingredients for a recipe. The global impetus to reduce carbon emissions and a sense of the opportunities available mean that globally relevant carbon markets will be hotly contested and fiercely competitive.

China’s financial opening continues unabated and with Hong Kong’s leading position as an international financial centre that has a mature and deep regulatory system and an advantageous location in the Greater Bay Area, the idea of a unified carbon market that bridges Hong Kong to the world is certainly compelling and there for the taking. This same opening can be Hong Kong’s point of difference relative to other potential carbon markets.

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In addition, this region’s carbon market opportunity can help support local fintech innovation, particularly in the use of blockchain to enhance transparency of carbon market transactions.

A robust trading infrastructure will be needed for the listing and trading of carbon-related products, registries for post-trade services, collection and dissemination of information, and connectivity of the participant base. Doing this through smart contracts can digitalise the carbon credit life cycle and enhance transparency and traceability of the registry.

The evolution of Hong Kong as a capital gateway has been marked by the many financial bridges it has established with mainland China. In the coming decades, we also expect Hong Kong to establish itself as a regional climate hub for mainland China, especially as the world urgently transitions to net-zero. We welcome the work of local policymakers that takes this agenda forward.

Achieving the status of being the region’s premier carbon trading and sustainable finance hub is certainly a goal that is within reach for Hong Kong, and one worth pursuing.

Bing Li is head of Asia-Pacific at Bloomberg

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