China's $230 Billion Green Bond Thirst to Supercharge Market

  • Forecast for $46 billion of sales each year in China to 2020
  • Green bonds will fund renewable energy and environment work

China’s effort to build a green bond market may reap 1.5 trillion yuan ($230 billion) for renewable energy and environment projects within the next five years, potentially supercharging growth in a market that barely existed a few years ago.

The nation authorized the first sales of the securities in December, prompting two Chinese banks to raise a total of 30 billion yuan last month. The market may rake in 300 billion yuan a year from now to 2020 in China alone, according to Xu Nan, a senior policy analyst at the Research Center for Climate and Energy Finance under the Central University of Finance and Economics.

Sales of that magnitude would add weight to the $46 billion in green bonds sold worldwide in 2015, according to Bloomberg New Energy Finance, which estimates that the value of deals has doubled in the past two years. China’s government is encouraging green bonds as a way to finance its drive to build both clean-power generators and the manufacturing companies that promote them.

“China will be the main battlefield for future energy saving and emission reduction,” with rising demand for green financing, Lu Zhengwei, chief economist at the Industrial Bank Co. Ltd., said at a briefing in Beijing on Feb. 2. It also “means that China’s efforts to protect the environment and cut emissions are put under the international supervision” of investors who will buy the bonds.

Bonds labeled as green use proceeds on projects that save energy, curb pollution and recycle resources as well as clean transportation and renewable energy. Clean energy investment alone in the Asian nation increased by almost 10-fold in the past decade to a record $110.5 billion in 2015, Bloomberg New Energy Finance data shows. The market was worth less than $5 billion a year until 2010.

The two Chinese banks that sold green bonds to date were Shanghai Pudong Development Bank Co., which raised 20 billion yuan in China’s first domestic green bond on Jan. 27, and Industrial Bank Co., with a 10 billion-yuan issue. Shanghai Pudong had offers to buy twice the value of securities it sold.

“China could become a major green bond issuer in the world,” Ma Jun, the chief economist at the People’s Bank of China’s research bureau, said at a briefing in Beijing on Feb. 2.

The niche product used to fund projects tackling climate change has been gathering pace worldwide in recent years. The value of outstanding green bonds may almost double this year to as much as $158 billion from a year earlier as they start to become mainstream, according to HSBC Holdings Plc. 

Green bond sales are needed to fund China’s political policies on reducing pollution and building alternatives to fossil fuels, said Li Haitao, head of fixed income trading at Hua Fu Securities Co.

“Major buyers are currently banks as they are more driven by policies than the market,” Li said.

Chinese companies were starting to tap the green bond market abroad last year. In July, Xinjiang Goldwind Science & Technology Co. issued $300 million of three-year bonds, marking China’s first sale of green bonds denominated in dollars. In October, Agricultural Bank of China Ltd.’s sale of 600 million yuan of two-year green bonds was eight times oversubscribed.

Even the green bond sales forecast may not be enough to fund all the projects China envisions. The nation needs 2.9 trillion yuan of investment annually in the next five years to support its green energy ambitions, the Financial Research Institute of the State Council’s Development Research Center forecasts.

Until now, bank lending has been the primary source of funding for environmentally-friendly initiatives. Green-project lending from 21 major Chinese banks -- including China CITIC Bank Corp. and Industrial & Commercial Bank of China Ltd. -- exceeded 6 trillion yuan as of the end of 2014, according to the China Banking Association. That represented almost 10 percent of the lending activity on the part of the group.

Green bonds may become a cheaper source of finance than traditional bank loans. Shanghai Pudong and Industrial Bank will both pay 2.95 percent interest annually on their three-year green bonds. This compared with a rate of 3.18 percent for traditional financial bonds from commercial banks with similar terms and the central bank’s benchmark rate of 4.75 percent for borrowings of up to five years.

China could issue policies such as helping energy saving projects cover some of a bond’s interest to attract investors, said Hao Yijun, a senior trader at China Guangfa Bank Co. in Shanghai.

“As more policies come out, the group of green investors will become bigger,” said Ivan Tong, a partner on climate change & sustainability services in Ernst & Young Hua Ming LLP.

— With assistance by Feifei Shen

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