Written by GCS Research Analyst Bosco Lee
Looking into the Chinese Green Bond Market, 2nd largest Green Bond Market in the World
What has happened?
On 29 July 2022, less than 6 months ago, China’s Green Bond Standard Committee (cooperation among PBOC, NAFMII, and CSRC, with private sector institutions participating) announced long-awaited China’s Green Bond Principles (China GBP).
The China Green Bond Principles (GBP) is a self-regulated framework that aims to achieve high-level harmonization among relevant Chinese regulators in the definition and requirements of green bonds. Based on the International Capital Market Association’s Green Bond Principles, the China GBP clearly outlines the four core components of green bonds and emphasizes the importance of the 100% use-of-proceeds (UOP) approach. The endorsement of the China GBP by the People’s Bank of China (PBOC) and the China Securities Regulatory Commission (CSRC) is notable, however, its adoption by the National Development and Reform Commission (NDRC), which holds higher authority in the regulatory hierarchy, is yet to be determined. With regards to green corporate bonds, the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE), under the supervision of the CSRC, have already started requiring the 100% UOP approach for new issuances and will revise related product rules accordingly. In conclusion, the China GBP promotes the 100% UOP approach and partially harmonizes green bond regulations in China’s domestic bond market, which is expected to address concerns among some international market participants and promote foreign participation in the Chinese green bond market in the long run.
Chinese Green Bond Market at a Glance
(1) Characteristics of Green Bond Issuance
The scale of green bond issuance is increasing and financial bonds have become the main issuer.
In 2022, 515 green bonds were issued in the domestic market in China, a year-on-year increase of 5.75%, with a total scale of RMB 87,201.16 billion, a year-on-year increase of 43.35%, and the proportion of the total bond market was 1.42%, a year-on-year increase of 0.43 percentage points. As of the end of 2022, the accumulated scale of green bonds in China was approximately RMB 263 billion, and the stock scale was approximately RMB 154 billion.
Financial bonds have returned to first place in terms of issuance scale, accounting for 38.87%, mainly due to the promotion of the issuance of green financial bonds by policies such as the “Guidance on Green Finance in the Banking and Insurance Industries”, and the large issuance scale of financial institutions. Asset-backed securities are second, accounting for 24.37%. Compared to the same period, the issuance scales of green financial bonds and asset-backed securities increased by 199.82% and 73.15% respectively and showed a fast improvement. The issuance scales of other types of bonds showed a downward trend. In terms of the proportion of green bonds to the total bond issuance, the proportion of green asset-backed securities is the highest, accounting for 10.63%.
Over 50% of the funds raised by green bonds are invested in the clean energy sector.
Of the green bonds issued in 2022, about RMB 7,297.58 billion of the funds raised can be traced, accounting for about 83.69%, of which about RMB 186.64 billion were used for supplementary working capital, and the rest were invested in green projects. Excluding green financial bonds without clearly specified projects, the funds raised by green bonds for green projects are mainly used in the clean energy sector, accounting for about 56.89%, followed by green transportation and sustainable construction, accounting for about 21.58% and 10.41% respectively.
The maturity of green bonds is mainly medium to short term, and the scale of 3-year green bonds accounts for over half.
Looking at the maturity, the scale of green bonds issued within one year, 1-3 years, and 3-5 years accounted for 17.86%, 61.06%, and 12.23% respectively, with a focus on the medium and short term, where 3-year green bonds had the largest scale, accounting for 52.80%. Compared to the same period last year, except for the 5-10 year green bond issuance scale that decreased, the other maturity green bond issuance scale all showed a growth trend, with the 10-year or above green bond issuance scale growing by 205.40%, mainly due to the significant increase in the scale of green asset-backed securities issuance.
The credit qualification of issuers is improving, with the scale of AAA-grade green bonds accounting for over 60%.
In terms of credit rating, the credit rating of green bond issuers is concentrating on higher levels, with the scale of issuance by AAA-rated entities accounting for 58.72%, a 1.91 percentage point increase compared to the same period last year, and the scale of issuance by unrated entities slightly increased, while other rated entities all showed a decrease in their scale of issuance. The credit rating of green bonds is mainly AAA-rated, with a scale of issuance accounting for 62.29%, an 11.96 percentage point increase compared to the same period last year, while the scale of issuance for AA+-rated and unrated green bonds decreased.
The green bond issuers are mainly state-owned enterprises, with the scale of issuance by central SOEs accounting for nearly 60%.
In 2022, 308 issuers issued green bonds, of which 262 were state-owned enterprises, accounting for 85.06%, a slight decrease compared to the same period last year, while private enterprises accounted for 7.47% and need to improve their participation. In terms of the scale of issuance, the central SOEs had the highest scale, accounting for 59.46%, while local SOEs was second, accounting for 24.17%. In terms of the number of issuances, central SOEs and local SOEs were equal. Compared to the same period last year, the number and scale of issuances by local SOEs decreased, while the scale of issuances by public enterprises significantly increased, mainly due to the increase in the issuance of green financial bonds by commercial banks.
Green bond issuers are mainly concentrated in economically developed regions, with Beijing’s issuance accounting for 40%.
In 2022, 30 regions participated in the issuance of green bonds, including 2 foreign issuers. Green bond issuers are mainly concentrated in economically developed regions such as Beijing, Shanghai, Guangzhou, and Jiangsu. Beijing’s issuance scale is far ahead, accounting for 41.67%. Among the top ten regions in terms of issuance scale, except Jiangsu’s scale of issuance has declined, the scale of issuance of other regions has increased. In terms of the number of issuances, Beijing, Guangdong, and Shanghai accounted for 19.03%, 12.23%, and 10.68% respectively, with a large number of issuances. Hubei’s number and scale of issuances have both significantly increased, mainly benefiting from China Yangtze Three Gorges Group’s active issuance of green bonds.
The green bond issuance scale in the financial sector accounts for nearly 50%.
Green bond issuers are mainly concentrated in the financial and public utility sectors. In terms of issuance scale, the financial sector has the largest scale, accounting for 49.47%, followed by the public utility and industrial sectors, accounting for 23.58% and 15.02% respectively. In terms of the number of issuances, the industrial sector has the most issuances, accounting for 31.65%, followed by the financial and public utility sectors, accounting for 29.13% and 26.21% respectively. Year-on-year, the financial sector has significantly increased both the number and scale of issuances, benefiting from the large issuance of green financial bonds by banks and financial institutions, while the public utility and industrial sectors have both declined the n number and scale of issuances.
70% of the green bonds are evaluated and certified by third-party institutions.
According to public records, of the green bonds issued in 2022, 362 were evaluated and certified by third-party institutions, accounting for 70.29%. The involved evaluation and certification institutions are 13 in total, with 11 registered with the Green Label Commission. Of the green bonds that were evaluated and certified, 200 disclosed their green ratings, accounting for 55.25%, with 195 of them receiving the highest rating.
Green bonds actively integrate with innovative themes and serve national strategies.
In 2022, regulatory bodies released several policies to drive innovation in the bond market, including new types of bonds such as transformative bonds, dual creation bonds, science and technology bills, and infrastructure REITs. Green bonds have deep integration with innovative themes, driving high-quality green development in specific fields. 19 green bonds support rural revitalization, with a scale of 11.65 billion yuan; 14 green bonds involve technology innovation/innovative entrepreneurship/science and technology bills, with a scale of 18 billion yuan; 4 green bonds are linked to the issuer’s sustainable development goals, raising funds of 7 billion yuan; 2 green bonds support the construction of revolutionary old districts, with a scale of 3.1 billion yuan; and 1 green bond involves energy security, with a scale of 2.5 billion yuan. Additionally, there are green bonds that support multiple themes, such as the Hydroancang River Hydropower Co., Ltd.’s 12th issue of green medium-term notes in 2022, which are labeled with sustainable, rural revitalization, and carbon neutrality bonds.
Chinese Green Bond Market Condition
In 2022, 984 green bonds participated in the transaction with a total transaction volume of RMB 118,278.83 million, an increase of 85.01% YoY. The transaction volume of mid-term notes and financial bonds was RMB 40,507 million and RMB 40,146 million respectively, leading to the transaction scale. Among them, the transaction scale of China Bank’s green financial bond (first phase) in 2022 was the largest, with a transaction volume of RMB 4.2992 billion. The transaction volume of asset-backed securities, short-term financing bonds, corporate bonds, and financial bonds increased by 609.05%, 473.16%, 287.97%, and 114.13% YoY, respectively, indicating an increased market recognition. In terms of bond trading activity, the proportion of green bonds traded in 2022 to the total listed green bonds was 57.24%, an increase of 8.49 percentage points YoY.
2023 Chinese Green Bond Market Outlook
The “double carbon” goal continues to lead, promoting the continued expansion of the green bond market. The 20th report indicated the need to actively and steadily promote carbon peak and carbon neutralization. The central economic work conference emphasized that monetary policy in 2023 should accurately support technology innovation, green development, and other fields, laying a solid foundation for the continuous development of the green bond market. The proportion of green bonds in the bond market is only about 1%, and there is still great room for development. The cost advantage and incentive policies of green bonds help to improve the issuers’ willingness to issue green bonds. In June 2022, the Central Settlement Company integrated to form a green collateral pool with a size of nearly RMB 500 billion. Market institutions can directly use the green bonds held by the Central Settlement Company as collateral, encouraging investors to allocate more green bond assets, reducing the cost of issuing green bonds, improving their liquidity, and helping the green bond market expand.
The market mechanism is further regulated to promote the high-quality development of the green bond market. In January 2023, Vice Governor of the People’s Bank of China, Xuanchang Neng, pointed out in a speech at the 8th China Bond Forum that the green financial standards will be improved, gradually realizing that all the funds raised from green bonds are used for green projects; gradually establishing a mandatory evaluation and certification system, regulating the third-party evaluation and certification market; and improving the quality of green bond environmental information disclosure in an orderly manner. With the release of the “China Green Bond Principles” and the revision of the exchange’s green bond issuance guidelines, in addition to green corporate bonds, all funds raised from green bonds will be used for green projects, and green corporate bonds may follow the adjustment of issuance rules. The Green Standard Committee strengthens the self-discipline management of the green bond evaluation and certification industry, which helps regulate the evaluation and certification market and improve the quality of green bonds.
Accelerating the transformation of financial standards research and implementation, the transformation of the bond market is worth looking forward to. In early 2022, the People’s Bank of China’s 2022 research work television conference pointed out that, with the support of green low-carbon development as the main line, continues to deepen the research of transformation finance and achieve the orderly and effective connection of green finance and transformation finance. With the launch of transformation bonds by interbank and exchange markets and the approval of the “G20 Transformation Financial Framework”, the consensus on transformation finance has increased internationally and domestically. The People’s Bank of China is organizing the formulation of transformation financial standards in the four major sectors of iron and steel, coal and electricity, construction materials, and agriculture. According to the principle of “maturing one item and launching one item,” the development of transformation financial standards is being promoted, providing financial support basis for more industries to transition to low-carbon. With the continuous establishment and improvement of transformation financial standards, transformation bonds are expected to enter the fast track of development, and together with green bonds, become the double pillar of financial support for the “double carbon” goal.
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