A vibrant green bonds market is desirable for China because it not only promotes environmental protection and sustainability even amid rapid economic development but also introduces a diversified portfolio into the capital market to alleviate climate challenges. Moreover, it reflects the determination of decreasing carbon emissions and enhancing the environment in China.
A vital role in the nation's pursuit of dual carbon goals
In 2020, China's GDP exceeded CNY 100 trillion for the first time, and the GDP per capita reached USD 10,000. China's economy has shifted from a stage of high-speed growth to high-quality development. However, along with rapid economic development, China has caused serious damage to the living environment at the same time. The government has resolved to pursue environmental protection and sustainable development as a crucial national strategy and to mitigate some negative impacts brought about by decades of rapid growth.
In September 2020, President Xi Jinping announced the "30/60 goal" at the United Nations General Assembly1, which aims to peak carbon emission by 2030 and reach carbon neutrality by 2060. More specifically, the goal is that by 2030, China's carbon dioxide emission per unit of GDP will be lowered by over 65% compared to 2005 levels. Furthermore, the use of non-fossil energy in its primary energy consumption will reach about 25%, forest accumulation will increase by 6 billion cubic meters from 2005 levels, and the generation of wind and solar power will reach more than 1.2 billion kilowatts.
To implement the "30/60 goal", the 14th Five-Year-Plan, which started in 2021, aims to accelerate low-carbon development in China. A Guiding Opinions2 released in 2021 reiterates the importance of establishing a sound green and low carbon circular economic system and includes comprehensive guidelines. The guidelines include the accelerated development of green finance, the strengthening of legal and regulatory support, the improvement of green standards, the green certification system, and the statistical monitoring system. The setting of such high-level policy announcements releases a strong signal to the market and spurs market players to actively initiate green projects and raise funds in green finance.
Under the "30-60" target, China's green development has entered a new stage with carbon reduction as a key strategic direction. With China's goal of achieving carbon peaking by 2030 and carbon neutrality by 2060, the importance of green low-carbon development and addressing climate change has increased significantly in the face of enormous pressure to reduce emissions.
China's ecological civilisation construction has entered a key period in which carbon reduction is the key strategic transformation of economic and social development during the 14th Five-Year Plan period. It is a crucial period to promote pollution reduction and carbon synergy, promote the comprehensive green transformation of economic and social development, and achieve improvement in ecological and environmental quality from quantitative to qualitative change.
At the same time, many provinces including Beijing, Shanghai, Anhui, Jiangsu, Guangdong, and Yunnan have issued different policies and provided subsidies for companies to decrease carbon emissions. For example, one of the districts in Anhui Wuhu issued several support measures for energy saving and carbon reduction: the initiative to close high energy-consuming enterprises can receive up to CNY 8 million in subsidies3. In March 2022, "Energy Conservation, Emission Reduction and Carbon Reduction Special Funds Management Measures"4 was issued by Xuhui District Shanghai. It encourages both industrial energy and building energy conservation, emission reduction and carbon reduction and will offer up to CNY 3 million in subsidies.
Serving the "30-60" target has become one of the priorities for the future development of green finance in China. According to Yi Gang, the governor of the People's Bank of China, one of the priorities of the financial field this year (2021) and in the future period is to serve the strategic plan of carbon peaking and carbon neutral. The work conference of PBOC in 2021 also listed "implementing the major decision of carbon peaking and carbon neutrality" as one of its ten key tasks 2021. On November 8, 2021, the People's Bank of China officially launched the Carbon Emission Reduction Support Tool5, a structural monetary policy tool which aims to leverage more social capital to promote the low-carbon transition of key industries and support the development of clean energy, energy saving, environmental protection, and carbon emission reduction technologies.
Under this context, establishing the green bonds market assumes crucial significance in China's ongoing economic transformation from an energy-and-pollution-intensive economy to a resource-conserving and environment-friendly economy.
Green bonds system in China
China's green bond market development was primarily driven by a top-down policy endorsement from the central government. There are broadly three categories of green bonds in China, and they are launched and administered by different regulatory agencies, namely green enterprise bonds administered by The People's Bank of China (PBOC), the National Development and Reform Commission (NDRC), and the China Securities Regulatory Commission (CSRC).
In 2013, the "Notes on the Green Credit Statistics Information Disclosure6" was released by the China Banking Regulatory Commission. In 2015, the "Green Bond Endorsed Project Catalogue" was released by the People's Bank of China7. In 2019, the "Guidelines on the Issuance of Green Bonds" were released by the National Development and Reform Commission. On May 29, 2020, the three parties above jointly issued and released the Consultation Version of "Green Bond Endorsed Project Catalogue (2020 Edition)". It represents the beginning of the harmonisation of domestic green bond definitions as well as the consolidation of the green bond market in China soon.
The Chinese green bond market went from essentially no issuance in 2015 to becoming the world's largest green bond market by the end of 2016. In 2020, a total of 153 issuers in China issued 218 green bonds with an issue value of CNY 222.116 billion, accounting for 15% of the global market8. According to the data released by the National Association of Financial Market Institutional Investors, in 2021, China issued a total of CNY 607.242 billion of green bonds, an increase of 168.32% year-on-year; the stock size of green bonds was CNY 1.16 trillion, ranking first in the global market in terms of both issuance and stock size.
Special characteristics of green bonds market in China
Currently, China's green bonds market has several characteristics that differ from another major market as well as international standards. More importantly, these include the profile of major issuers, requirements on the use of proceeds, sustainability information disclosure, and credit ratings.
Major issuers' profile
Contrary to other markets where private issuers play a vital role, the major issuers of green bonds in China have been state-related or state-owned entities so far. While there has been a change in the profile of major issuers of green bonds over the years, the main groups of issuers remain state-owned, or state associated. According to the data from Dagong Credit9, among the issuers of green bonds in 2021, the number of state-owned enterprises is about 392, accounting for 96.55% of the total number of issues, and the issue size is about CNY 480.634 billion, accounting for 97.69% of the total size.
Use of proceeds
The Chinese requirements on the use of proceeds for green bonds differ from international standards as well. Under Guidelines on Green Bond Issuance, up to 50% of the proceeds raised by green bonds can be used to repay bank loans or to bolster a company's working capital, while the international green bond guidelines believe that issuers should use the proceeds to focus on green project related projects.
Another related concern is the major area of a green bond investment. The inclusion of "clean coal" in the 2015 Green Bond Endorsed Project Catalogue had created conflicts between China's and global standards, a point of contention for some international investors and many environmental groups and has become the key to the integration of Chinese and International relevant standards. The challenge with this old arrangement was that, although it fit the needs of China's industrialisation process, it limited the potential growth of green bonds and the utilisation of foreign funds.
According to the latest 2021 Edition of the Catalogue, China has removed "clean utilisation of fossil fuel" projects from the list of programs that can be funded by green bonds to achieve an alignment between the 2021 catalogue and internationally relevant standards, in addition to enhancing China's discursive power in the landscape of green bonds, which means fossil fuels are no longer considered "green" by China.
Sustainability information disclosure
China's Ministry of Ecology and Environment (MEE) issued the 'Measures for the Administration of Legal Disclosure of Enterprise Environmental Information'10 that will require domestic entities to disclose a range of environmental information on an annual basis. The Measures came into force on February 8, 2022, and it applies to listed companies and bond issuers that were subject to certain environmental penalties in the previous year and other entities identified by the MEE, including those that discharge high levels of pollutants. Covered entities must disclose information on environmental topics including:
- Environmental management
- Pollutant generation, treatment, and emission
- Carbon emissions
- Mandatory clean production review information
- Information on ecological and environmental violations
- Contingency planning for environmental emergencies
Credit ratings
Green bond credit ratings in China are generally concentrated above AA+, with most receiving AAA ratings on bond ratings. The bonds are mostly certified by third-party evaluation agencies in China, with a small portion certified by overseas agencies. However, there are also several unrated bonds, and the proportion of green bonds that are certified is currently not as high as desired.
China to ease domestic green market access for foreign investors
To make it easier for international investors to access the country's green finance market, China will promote the harmonisation of domestic and global green standards as part of its efforts to achieve net-zero emissions by 2060. China's green finance industry needs to learn from the asset management experiences of foreign investors, such as multinational pension funds and insurance companies.
A closer alignment between the international standards and China's green bond standards is also expected. In November 2021, the PBOC and the European Commission launched the Common Ground Taxonomy (CGT First Edition)11 together. The mission of CGT is to comprehensively assess existing taxonomies and identify similarities and differences between green activities in methodologies and outcomes. It will provide essential insights and clarity into the rapidly growing green finance market for both parties. In June 2022, the second version of the CGT report has been published12, which now includes 72 climate mitigation activities that are recognised by both the EU Sustainable Finance Taxonomy and China's Green Bond Endorsed Project Catalogue.
According to the head of the research bureau of the Peoples bank of China, China's green financial market is very attractive to overseas investors. It is known that overseas investors are very concerned about green bond standards and climate information disclosure in China, which is the next focus of the PBoC. In terms of green financial standards, PBOC is taking the lead with the European side to study the development of common standards for green finance between China and Europe. This will give a strong impetus to the coordinated development of green financial markets and promote cross-border investment. In terms of information disclosure, China further improves environmental and climate information disclosure requirements for financial institutions, enhances the availability and accuracy of ESG data on enterprises and financial assets, and facilitates foreign investors' participation in China's green financial market.
In recent years, China has made significant progress in the opening of its financial markets. For example, for the opening of the bond market, PBOC has worked with relevant departments to continuously optimise institutional arrangements such as bond market entry management and capital management. For example, China has unified the entry rules for QFII, RQFII, CIBM and other investment channels; improved the level of financial infrastructure services, extended bond trading hours, and provided better transaction and settlement services for foreign institutions; and continuously improved the liquidity of the bond market. All these will facilitate and attract foreign investors.
In the next step, PBOC will work with relevant departments to further unify the entry standards and procedures for the interbank and exchange bond markets, so that foreign investors can entrust their assets to qualified domestic custodian banks either directly or through their foreign custodian banks. Central bank will continue to improve the policies and systems, continue to promote the relevant systems and rules with international standards, and further improve the level of financial market opening to provide a more convenient and friendly investment environment for international investors.
Besides, to enhance investor confidence, the Chinese government has published draft regulations for third-party certifiers, and guidelines on the environment risk disclosures of listed companies, while also pushing for harmonisation of green taxonomy at home and abroad. These actions will likely keep attracting more overseas investors to the Chinese green bond market and facilitate more cross-border transactions.
Footnotes
1 Xi Jinping Attends the General Debate of the 76th Session of the United Nations General Assembly and Delivers an Import Speech, Ministry of Foreign Affairs of the People's Republic of China, 2021-09-22
2 "Guiding Opinions on Accelerating the Establishment and Improvement of a Green and Low-Carbon Circular Development Economic System", China's State Council, 2021-02-22
3 ??????????????????????????????_????????? (wuhu.gov.cn), 2022-03-09
4 ????«?????????????????»??? (xuhui.gov.cn), 2022-03-02
5 The People's Bank of China Launches the Carbon Emission Reduction Facility, 2021-11-09
6 Notes on the Green Credit Statistics Information Disclosure, China Banking Regulation Commission, 2013
7 People's Bank of China Announcement [2015] No. 39, 2015-12-22
8 ????????,????????1600?,xinhuanet, 2021-05-14
9 2021???????????????, 2022-02-21
10 Measures for the Administration of Legal Disclosure of Enterprise Environmental Information, 2021-12-11
11 Common Ground Taxonomy - Climate Change Mitigation, 2021-11-04
12 Common Ground Taxonomy - Climate Change Mitigation, 2022-06-03
