China’s green bond market is now the largest in the world, and green finance will likely receive further policy support as going green was again emphasised in the 19th National Congress of the Communist Party of China (CPC) commenced on Wednesday.  

 “[The country will] establish market-oriented green technological innovation system, develop green finance, strengthen energy saving and environmental industries, clean production industries, clean energy industries,” Chinese President Xi Jinping's said in the working report delivered at the beginning of the quinquennial Party Congress.

Whilst economic policy details will mostly be unavailable before the Central Economic Work conference in November or December, Xi’s reiterated pledge on green development suggests that the market will see continuing policy initiatives in support of green finance, particularly the fast-growing green bond market.

“We wouldn't expect specific policy proposals to be unveiled at this stage, but we do think that a focus on green energy and green investment as a policy direction makes complete sense, and could well materialise into tangible green finance targets down the road,” Bryan Carter, head of emerging market debt at BNP Paribas Asset Management, told AsianInvestor in an email reply.

The 18th Party Congress report included a standalone section on efforts to promote ecological progress. Since then, authorities have stepped up their sustainability and climate agenda and unveiled an ambitious framework to instill “green” in the country’s financial system,” Rahul Ghosh, senior vice president for ESG at Moody's Investors Service, told AsianInvestor in an email.

Authorities will likely relax the rules on green bond issuance, such as easing the requirements for the bonds to be listed on the Shanghai Stock Exchange and allowing more non financial institutions to issue green bonds, Jay Lee, partner at international law firm Simmons & Simmons, told AsianInvestor.

Green bond appetite

China has issued $17.57 billion worth of green bonds so far this year, more than 13 times the $1.29 billion issued in the full year of 2015. Although the country’s year to date green bond issuance has dropped by 20% compared to last year, China continues to lead green bond issuance globally and currently accounts for 20% of global volume, according to figures provided by Dealogic.

Six out of the top 10 green bond issuances so far this year have come from financial institutions, with the biggest one being Bank of Beijing’s $2.18 billion high-yield bond issued in April, Dealogic data shows.

However, Lee at Simmons & Simmons reckons that domestic green bond investors mostly comprise government-related institutions who are not investing into the papers because of the purpose they serve—funding projects that have positive environmental and climate benefits.

“If you buy a green bond, then you can show the government or some other people that you have holdings in green bonds….and that you are trying to be supportive of the government’s initiatives,” Lee said.

“In Asia, we don’t have that many investors who are motivated to help on this and to try to make some contribution to the values [of sustainable development],” he said.

Carter at BNP Paribas AM meanwhile said that the relative novelty of green bonds in China is a challenge, and investors have to press issuers for clear and consistent clarifications as there is yet no standard definition of a green bond. 

“What is a green bond supposed to look like?  How is it supposed to be structured? Who is supposed to do the due diligence on the use of these funds? “ he said.

Hong Kong’s role

In Hong Kong, the green bond market is still in its infancy in terms of issuance size, as only $1.24 billion from four issuances have taken place in the city after the first-ever such note was issued last year. MTR Corp is by far the biggest green bond issuer in Hong Kong.

To promote the development of green finance, the Hong Kong government will take the lead in arranging the issuance of a green bond next year and will encourage public sector bodies to do the same, according to Hong Kong’s Policy Address released last week.

This will be similar to a sovereign bond and will provide certainty to the market, Anna-Marie Slot, finance partner at international law firm Ashurst, told AsianInvestor.

“It is a benchmark. That helps to drive the development of the market because people can look at the sovereign credit and that gives them a reference,” she said.

Ghosh at Moody’s believes Hong Kong is well-placed to become a regional green finance hub, as developments such as the Bond Connect will help to bring international investors into China’s green bond market now dominated by onshore investors.