AXA IM's Aidan Yao comments on the expansion of the green bonds market in China

AXA IM's Aidan Yao comments on the expansion of the green bonds market in China

Market commentary
12 January 2018

Aidan Yao, Senior Emerging Asia Economist at AXA Investment Managers (AXA IM), comments on the expansion of the green bonds market in China.

2018: the expansion of private financing for the Chinese green transition

To address its environmental issues, China has started to rebalance its economy from a highly-polluting, energy-intensive and investment-driven growth model towards a green, efficient and sustainable system, powered by consumption and services. The Chinese government has set ambitious carbon emission reduction and energy efficiency targets 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 RMB2tn to RMB4tn, (US$320bn to $640bn), will be required.

Considering only 10% to 15% of this will be funded by public finances, an effective mechanism for channelling the remaining 85% from private-sector capital into green projects is needed.

The green bond market has been developed precisely for this purpose. China has quickly emerged as a major green bond market. Building on the projection from the Climate Bond Initiative, our estimate shows that China is set to dominate the global supply of green bonds for many years to come (Exhibit 1).

Exhibit 1

A growing share of the global green bond supply

Source: Climate Bond Initiative (CBI) and AXA IM Research

More clarity needed to increase investors’ confidence in Chinese green bonds

In December 2015, the PBoC released a set of rules and regulations. By doing so, China became the first country to have clear regulations governing its green bond market. Nevertheless, the coexistence of various other standards beside the PBoC’s can create risks and confusion that may harm the development of the market. A future harmonisation of these rules is therefore vital for improving clarity and investor confidence in Chinese green bonds.

Common international standards for green bonds issuances on track

Comparing China’s green bond standards with those of the usual international “standards” shows that there are still some deviations. Some projects, mainly relating to fossil fuel, are eligible for green bond financing in China, but are excluded by the international principles. In addition, global investors are concerned about the level of transparency and credibility of reporting, despite the fact that more than 70% of onshore issuances last year were verified by international green bond reviewers, such as Ernst and Young and Price Waterhouse Coopers. Finally, even for the investors that are already interested in Chinese green bonds, market access can be a practical hurdle given China’s controlled capital account and limited convertibility of its currency.

Despite the outstanding issues, the Chinese authorities are moving fast to develop and liberalise its market. The PBoC, for example, has been in close discussions with regulators, issuers and investors in Europe, such as the European Investment Bank, to develop common standards for the green bond market. Internally, the PBoC and the National Development and Reform Commission are expected to announce an update of their respective regulations in early 2018, leading to a close convergence of green bond standards in China. Finally, Beijing is determined to continue the path of capital account liberalisation, which will aim to ease foreigners’ access to the onshore market going forward.

About AXA Investment Managers

AXA Investment Managers (AXA IM) is an active, long-term, global, multi-asset investor. We work with clients today to provide the solutions they need to help build a better tomorrow for their investments, while creating a positive change for the world in which we all live. With approximately €732 billion in assets under management as at end of September 2017, AXA IM employs over 2,450 employees around the world and operates out of 29 offices across 21 countries. AXA IM is part of the AXA Group, a world leader in financial protection and wealth management.

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