TheTreasurer

Green bonds “key to mobilising private capital into China”

Bonds designed to boost green technology and infrastructure cited as essential for backing China’s efforts to tackle climate change

Green bonds must be harnessed as critical tools for mobilising private capital into China, according to a new report from green finance advocacy group the Climate Bonds Initiative (CBI).

Published on 1 December, the report points out: “China is now the world’s second-largest economy, with an expected annual GDP growth rate of 6.5%. This economic success has, however, come at an immense cost for the environment.”

The report stresses that to support China’s transition to a green economy – and address its current climate change and environmental issues – the nation will need to drum up extra, annual investment of around ¥2-4 trillion ($320-640bn).

It notes: “The People’s Bank of China has made a clear statement that public investment alone will not be sufficient to meet this need; public funds will only contribute 10% to 15% of the required investment.”

That leaves a significant gap for private capital to fill, with institutional investors – particularly pension and sovereign wealth funds – increasingly looked to as “viable actors” for providing the finance.

CBI gives China significant credit for its rapid uptake of green bonds. Indeed, the report points out, in 2016 China’s green bonds issuance grew from almost zero to ¥246.5bn ($36.2bn) – amounting to 39% of global issuance in the field.

“However,” it says, “barriers such as lack of awareness of green bond issuance opportunities, differences between international and Chinese green definitions, and limited understanding of China’s green bond market need to be addressed in order to facilitate cross-border capital flows.”

Other, more fundamental, issues that China faces in attracting foreign investors to its green bonds include:

  1. its approval process for overseas bond issuance;
  2. capital flow controls;
  3. lack of hedging options;
  4. barriers to bond-market entry; and
  5. transparency of domestic credit ratings.

“As a result,” the report says, “although China is the third-largest bond market in the world behind the US and Japan, only 2% of the bonds are foreign owned.”

CBI recommends measures in the areas of education, policy and infrastructure that will help to make the green bonds market a more effective force in China – such as:

  • raising Chinese issuers’ awareness of green bond opportunities through market education activities and demonstration issuance;
  • boosting foreign investors’ understanding of China’s green bond market through events and engagement platforms;
  • developing a green bond database in China, plus supporting indices and exchanged-traded funds;
  • simplifying the approvals process for green bond issuers;
  • providing clearer guidance on market-entry schemes;
  • developing renminbi hedging instruments for the market;
  • improving domestic credit rating practice; and
  • opening up the market to international credit rating agencies.

CBI CEO Sean Kidney said: “China leads global green bond issuance in 2017 – but the need to accelerate global capital flows and green investment remains.

“Investment levels at the hundred billion need to move towards the trillion as we approach 2020 and the new decade.”

He added: “Facilitating cross-border capital flows is critically important for China’s green finance development and growth. We need to deepen international investors’ understanding of the green bond market in China.”

Read CBI’s full report here.

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