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China leads world on green bonds but the benefits are hazy

China has rapidly emerged as the leading issuer of green bonds, spurring excitement among the green finance community that they will help the world’s largest emitter reduce its choking pollution. But although the amount raised is carefully tracked, how the money is being spent is less clear.

China issued $36bn of green bonds in 2016, up from almost none the year before, and analysts expect it to match that this year. That was almost 40 per cent of the $81bn of green bonds issued globally last year.

“This is one of many measures the central government has approved to shift the supertanker to green,” says Sean Kidney, chief executive of the Climate Bonds Initiative, which works closely with the People’s Bank of China to develop green bonds. “They are ‘zero to hero’, as we like to say, in one year.”

The PBoC, China’s central bank, has estimated that the country needs $320bn a year to meet government targets for addressing widespread air, soil and water pollution. A planned opening of the domestic bond market to foreign investors via Hong Kong this year will increase the flow of money into Chinese green financing instruments. Chinese green bonds received an enthusiastic response overseas.

There is less transparency, however, on how the money raised through green bonds is being used. The increase in issuance comes as Chinese banks are struggling with bad loans built up during years of slowing growth, particularly in the property and coal sectors.

Two Chinese banks topped the list for issuing green bonds last year. They were Shanghai Pudong Development Bank and Industrial Bank; each was allocated a quota of Rmb50bn ($7.4bn) to issue. Industrial Bank is the most exposed to the shadow banking markets of the Chinese mid-sized banks; the two banks are the leaders in issuing trust beneficiary rights products in China, a form of off-book loans.


Proportion of bonds issued by Chinese domestic entities classified as ‘green’

Much of the money raised through green bond issuance appears destined to refinance existing work, although some banks are targeting new projects. Bank of Communications, the third biggest issuer, whose Rmb30bn in green bond issuance last year was the largest ever, confuses this distinction. The bond prospectus referred to a list of unspecified projects and the bank reserved the right to direct the proceeds to a different list after the money came in.

Bank of China, the last big Chinese green bond issuer, sold $3bn in three tranches, including one in US dollars and another in offshore renminbi. Other entrants include renewable energy companies, city transport systems, a local government financing vehicle in Anhui province, automaker Geely, property developers, and the government of the Tibet Autonomous Region.


Proportion of bonds issued internationally classified as ‘green’

Some observers wonder whether the funds raised in green bonds are reaching their targets. Most green bonds in China have a three- or five-year tenure. That allows Chinese banks and project developers to address a pressing problem: the mismatch in maturities between long-term infrastructure projects and the much shorter terms of trust products or other wealth management products that many banks have come to rely on in recent years. “The green bonds are longer term and help balance it out,” one foreign expert says. Green bonds tend to have an easier approval process as well.

In China, green bonds play a larger role than in other economies, accounting for 2 per cent of all bonds issued by domestic institutions and corporations compared with 0.2 per cent internationally, according to the Climate Bonds Initiative. That proportion is expected to grow once the bonds can be traded in Hong Kong later this year.

“In China, people are very emotional. If they see something good, they are all in. Regulators want a more sustainable way to develop,” says Ricco Zhang, Asia-Pacific director for the International Capital Markets Association.

China’s regulatory bodies allow green bonds to be invested in ‘clean’ coal projects

China has two different regulatory bodies that oversee green bonds. The PBoC regulates all non-corporate issuance, while the National Development and Reform Commission looks after corporate bonds. The two bodies have slightly different third-party verification requirements for green bond uses.

Both, however, allow green bond funds to be invested in “clean” coal projects — something that would be ruled out for most green bonds issued overseas. China also permits looser applications of green financing to other sectors such as transport. (Calculations of the total sums invested in green bonds vary according to whether coal-related issues are counted.)

Another difference is that China lets corporate borrowers use up to half the bonds for working capital and paying down loans. “There is an appetite for more information about how the proceeds are used,” the foreign expert says.

Some of that missing detail could come this year as banks begin to publish reports on the application of their bonds, including which projects are funded. This month, Luxembourg signed a memorandum of understanding to provide clearer information on Chinese green bonds via an index in Luxembourg. Mr Kidney’s Climate Bonds Initiative also plans to begin tracking how the money is used over the life of each bond. 

Additional reporting by Archie Zhang

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