Pollution-hit China grabs global green bond lead
03 November 2016 – China is extending its dominance of the global market for green bonds, just as the Paris Agreement on climate change takes effect this week.
The world’s most-populous nation accounted for $21.9 billion of the $61.1 billion in global green bond sales this year, data compiled researchers showed. China, which in 2015 sold less than $1 billion of the debt whose proceeds are earmarked for environmental projects, is accelerating regulation to channel funds toward reducing pollution, Moody’s Investors Service said in a report last week.
“When you live in Hong Kong or China, pollution is there, it bothers you,” said Vincent Duhamel, head of Asia in Hong Kong at Lombard Odier Darier Hentsch & Cie. “There’s been a number of family offices here in Hong Kong that once Dad has given away the controls and the kids take over they go for a much more impact-investing viewpoint.”
Lombard Odier estimates that within three years green bonds will account for 20% of the $700 billion annual investment needed under the Paris Agreement on climate change, which takes effect 4 November. China issued new measures to boost investment in green industries on 31 August before President Xi Jinping opened the Group of 20 meeting in Hangzhou in September with five-year environmental goals that would help make China “a beautiful country with blue sky, green vegetation and clear rivers.”
“Concerns over rising levels of pollution in China and Hong Kong have raised awareness of the consequences of China’s growth story that started a few decades ago,” said Magdalene Teo, head of fixed income research Asia, at Bank Julius Baer & Co. in Singapore. “A growing number of investors worldwide including Chinese investors are interested in combining their investment objectives with environmentally sustainable investments.”
Green industries are facing teething troubles. Shanghai Chaori Solar Energy Science & Technology Co. was the first company to default on onshore bonds in 2014 amid solar panel overcapacity. Asian clean-power investment slumped 41 percent to $70.1 billion in the first nine months as governments curbed subsidies, according to reports. Authorities are struggling to integrate this year’s 13 percent jump in production from such plants into grids, it said.
“China is playing somewhat of a catch-up game,” said Daniel Shurey, a New York-based BNEF analyst. “A lot of the proceeds have been used for refinancing. We have seen a slowdown in investment in renewable energy which suggests refinancing won’t be as big next year.”
Bank of China Ltd. may price three-year green covered dollar bonds, underpinned by “qualifying green” domestic notes, as early as today at about 115 basis points over Treasuries, a person familiar said. While Chinese issuers often simply state proceeds will be used for activities on the domestic Green Finance Committee’s endorsed-projects list, the notes’ annual progress reports will help “build awareness” of responsible investing, Shurey said.
“While there are some investors who are attracted to green bonds because of the eco-friendly nature of the investment, the vast majority of Asian clients invest because of the specific return potential, name recognition and credit fundamentals,” said Todd Schubert, head of fixed-income research at Bank of Singapore, the private banking unit of Oversea-Chinese Banking Corp.
Issuers can be confident of demand. Developer Modern Land China Co. plans a yuan green note after selling $350 million of similar dollar notes with a 7 percent coupon on Oct. 14. When MTR Corp., owner of Hong Kong’s mass transit system, raised $600 million selling 10-year green bonds on Oct. 25 it got orders for $1.4 billion.
“Green bonds are quite new in Asia and largely promoted by the Chinese government,” Ben Sy, head of fixed income, currencies and commodities at the private banking arm of JPMorgan Chase & Co. in Hong Kong. “Some institutional investors may have social responsibility mandates but I don’t see the awareness on the individual client level yet.”