China’s green bond regulation ‘most rigorous in the world’

China’s green bond market, the biggest one in the world, is “more orderly than you might think”, according to the Climate Bonds Initiative.

The regulation and structure of Chinese green bonds are among the most rigorous globally, wrote Sean Kidney, chief executive and co-founder of the green bond advocating non-profit, in a recent market overview. 

All proposed green bond issuances must be approved by regulatory authorities, he noted, adding that this was not pervasive across other markets. Authorities including the People’s Bank of China (PBoC), the China Securities Regulatory Commission and National Development and Reform Commissions have specific rules to determine what counts as a green bond and how it should be structured.

Over 93 percent of Chinese green bonds aligned with international green definitions have also received external reviews at issuance, compared to a global average of approximately 73 percent, Kidney pointed out. 

The PBoC requires Chinese banks to report on the use of green bond proceeds quarterly, a task corporate issuers must also complete annually or semi-annually. Kidney said these reporting requirements are mandatory and rigorous.
Many international investors have been hesitant to invest in China’s green bond market, fearing that the offerings may not be as green as they seem. Some of them do not recognise everything China deems ‘green’, for example ‘clean coal’ or gasoline generation.

As for differences in the definition of “green” across various jurisdictions in the world, Kidney said China is among those spearheading efforts in harmonising global standards. In March, the PBoC and the European Investment Bank mulled a joint green finance initiative to reduce discrepancies between Chinese and European rules. 

The global market relies on the integrity of the issuer and the sturdiness of verification processes, Kidney said. “In China, trust is a particular problem – possibly due to the barriers for international investors to enter the market.” 

“There also remain gaps in information and knowledge and possibly a lack of trust in Chinese issuers. Without long-term experience of investing in China, investors are inherently cautious about increasing exposure to the market,” said Kidney. However, he noted Chinese regulators are making steps to address these concerns by putting in place new regulatory frameworks for issuing. Investors also need to do more to bridge this information gap, he said.

Language can also be a barrier. Most reporting on local issuances is done in Chinese and distributed via different channels than the ones used elsewhere. Without Chinese-speaking staff, access to information is difficult, according to Kidney.

“Interest from banks and corporates in issuance of green bonds remains very strong and we expect green bond issuance to pick up in the second half of this year and interest rates to become more stable,” Kidney added.

China became the world’s largest green bond market in 2016, with issuance totalling 238 billion yuan ($34.8 billion; €31 billion), representing 39 percent of global issuance.