China is poised to issue more labeled green bonds, driven by the country's push to align sustainable debt with international standards and growing demand from global investors.
The volume of labeled, or internationally aligned, green bonds that meet the criteria acceptable to global green investors, such as the use of proceeds and the types of projects, is likely to rise further and become the biggest driver of green financing in China, analysts said.
China's issuance of internationally aligned green bonds more than doubled year over year to a record US$23.91 billion in the second quarter, according to Climate Bonds Initiative, a U.K.-based green debt tracker. The growth of internationally aligned green bonds has cemented China's position as the world's biggest green bond issuer in 2022.
It is "the turning point where we will see more green bonds issued in alignment with international standards and traded on international markets," said Judy Li, Asia-Pacific sustainability leader at EY. Greater alignment allows more international investors to enter China's green bond market, both onshore and offshore, Li added.
China has stepped up efforts in recent years to spur cross-border investments of green debt as part of the nation's drive to achieve its carbon neutrality goals by 2060. The harmonization also comes amid global investors being attracted by the higher yields of Chinese debt as one of the few countries still in a monetary easing mode.
The Common Ground Taxonomy – Climate Change Mitigation, or CGT, first published in November 2021 and then updated in June, contains a list of projects and economic activities recognized as green by both China and the EU. The report was produced by the IPSF Taxonomy Working Group, which was initiated by the EU and China to assess the existing taxonomies for environmentally sustainable investments. The Chinese central bank also conducts an annual review of projects eligible for green bonds and removed clean coal in its 2021 review — a point of contention for some international investors.
In China, the issuance of green debt not aligned with international standards is set to grow more slowly, analysts said. The issuance of nonaligned green bonds in China rose about 26% year over year to US$10.21 billion in the second quarter, according to Climate Bonds Initiative data. It was equivalent to about 30% of the total volume of green bonds issued in China in the second quarter, the lowest proportion since the fourth quarter of 2019.
Bilateral recognition
At least three offshore green bonds aligned with CGT or its updated version were issued in 2022 by Chinese banks, including Bank of China Ltd., China Merchants Bank Co. Ltd. and Industrial Bank Co. Ltd., according to a Credit Agricole report published June 7.
The updated CGT is "one step closer to being more aligned with the international green bonds standards," said Jay Lee, Hong Kong-based partner at Simmons & Simmons. Lee added that the move could support the expansion of China's green bond market, as well as make it easier for Chinese entities to issue green bonds overseas.
The growth of internationally aligned green bonds in China will likely continue, although the trend will be gradual and volatile, Lee said. The CGT adds clarity to the common ground on the definition of green between China and the EU for as many as 72 climate mitigation activities, Lee added.
Chasing yield
China's green bonds are expected to offer global investors higher yields compared with sustainable debt from the U.S. and the EU "for a while," Lee said.
"Chinese issuers have wider credit spreads than issuers of equivalent credit rating. From a valuation perspective, that makes Chinese bonds more attractive," said Rong Ren Goh, a portfolio manager for fixed income at Eastspring Investments, adding that this does not just apply to green bonds.
Chinese issuances make up more than half of the debt market capitalization in Asia, creating a demand-supply imbalance for investors who seek diversification by adding bonds issued in other countries to their portfolios, Goh said.
Moreover, onshore yuan green bonds have enjoyed policy stability from the Chinese central bank, compared to bonds denominated in other currencies, such as the U.S. dollar, which have come under pressure due to monetary policy tightening, Goh added.