China: Powering growth in global green bonds
Key points
- China’s energy-intensive and investment-driven growth model has achieved stellar economic success, but at an immense cost to the environment.
- Beijing has recognized the danger of environmental degradation and has started to transform China to a green and environmentally-sustainable country.
- This epic transformation will require massive investments that cannot be financed solely by public resources. This leaves a vast funding gap to be filled by private-sector capital.
- Green bond has been identified as a key instrument to mobilize private capital, and significant policy supports have been devoted to develop the market.
- After ground-breaking regulation from the People’s Bank of China, the market took off in 2016. Within a year, China became the largest green bond market in the world.
- With a strong pipeline of new issuance and the potential to “back-label” existing green credit, China is set to dominate global green bond supply in the coming years.
- Contrary to popular belief, we find China’s green bond standards to be mostly aligned with those followed internationally. The remaining misalignments can be detected and avoided by self-investigations of investors. We expect ongoing regulatory refinements to help harmonize these standards in the near future.
- We think China offers attractive opportunities to global investors looking for ESG-compliant investments. Its size, depth and diversity, together with regulatory clarity make it a market that international investors should not ignore.
China on the path to a green transformation
The rapid economic development over the past four decades has turned China into an economic powerhouse, lifting hundreds of millions of people out of poverty. This economic success, however, has come at an immense cost to the environment – one that has become increasingly apparent in recent years. The World Bank estimates that the economic and social costs associated with China’s air, water and soil pollution, along with the ensuing changes to the climate, could amount to 3% to 6% of its GDP1.
To address the environmental issues, China has started to rebalance its economy. Moving it away from the highly-polluting, energy-intensive and investment-driven growth that has characterised its development in recent years towards a greener, more efficient and sustainable system, powered by consumption and services. The Chinese government has set ambitious targets to reduce carbon emissions and lift the energy efficiency of the economy in its 13th Five Year Plan. To achieve these goals, the People’s Bank of China (PBoC) estimates that an annual investment of at least RMB 2~4tn, or US$320bn~640bn, will be required2.
1 “Cost of Pollution in China”, The World Bank, February 2007
2 Jun Ma, PBoC’s ex-chief economist, “China’s Central Bank wants private capital for green investment”, CNBC’s interview, 25 February 2016
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