Communist green finance? China leads the world in green bond issuance

While the market for green financial instruments is under increasing pressure in the United States and, to a lesser extent, the EU, it is instead a growing part of China’s financial sector. This year, China has become the world’s largest issuer of these bonds for the first time.

According to the Financial Times, which analysed data from the London Stock Exchange Group (LSEG), a record $70.3 billion worth of “green” bonds have been issued in China this year. The bonds were either certified directly by the Chinese government or in cooperation with the international Climate Bonds Initiative (CBI). This year, the Chinese market accounts for around 17% of all “green” bonds issued, while the US accounts for just 3%, the newspaper reported.

What are green bonds?

So-called green bonds are simply bonds issued by companies or governments to fund investment in environmentally friendly projects. These can cover a relatively broad range of activities, from passenger transport (rail routes, metro systems) and power plants to nature conservation. They have become very popular over the past decade.

Their main users have been asset-management firms, which used them to “clean up” their reputations in terms of environmental, social and governance (ESG) criteria. Since Donald Trump took office, however, enthusiasm for these financial instruments has waned considerably in the Western world, and in the United States, ESG as a concept is also facing legal challenges.

In China, however, this is a growing sector. Following last year’s slowdown, standards for green bonds, loans and other financial instruments were harmonised in China this July. Among other things, the new standards allow these instruments to finance exports of sustainable technologies. This factor is also likely to further accelerate China’s current “green” export sector.

China’s central bank, the People’s Bank of China (PBoC), launched the market for these bonds about a decade ago. The reason was the difficulty of financing longer-term projects: some projects, particularly in infrastructure, require long-term funding. Banks, however, were wary of lending over longer time horizons.

“We decided to create a green bond market mainly because of the maturity mismatch problem in the banking system,” Ma Jun, a former chief economist at the PBoC and founder of the Beijing-based Institute of Finance and Sustainability, told the Financial Times.

One reason these instruments have succeeded in China is that the PBoC directly supports them, making them more attractive to investors. In Western countries, central banks have continued to avoid favouring some instruments over others despite various efforts, as they seek to maintain their political neutrality.

The future

Although this is a growing sector in China, it is worth remembering that most projects in the country are still funded through loans rather than bond issuance. The main reason is that many projects are built by smaller companies that lack credit ratings and, unlike larger players, the confidence of investors.

China is still trying to attract foreign investors to these bonds, but has largely been unsuccessful. Most investors are domestic Chinese institutions, mainly banks, insurers and asset managers.

Chinese officials nevertheless remain hopeful that this will change: China’s green taxonomy is now at the level of global standards, which should boost confidence among foreign investors. In the current geopolitical climate, however, demand for these instruments in the future remains uncertain.