International investors wary of China’s ‘green bond’ market

Only 40% of the debt issued during Q3 of this year met international criteria on green finance.

International investors are shunning China’s booming green bond market as most issuances fall short of international standards and might be used to fund fossil fuel-related projects, an analyst from credit rating agency Moody’s told Infrastructure Investor.

“Many international investors do not purchase Chinese green bonds that don’t align with […] international definitions,” Matthew Kuchtyak, analyst of project and infrastructure finance at Moody’s Investors Service, said.

According to a report issued by the non-profit Climate Bonds Initiative, during the third quarter of 2019 only 40 percent of the $14.5 billion issued in green bonds was actually aligned with international standards.

“By amount issued, 63 percent of all excluded Chinese green bonds in Q3 allocated more than 5 percent of proceeds to general corporate purposes or working capital, with no disclosure if they finance green assets or projects,” according to the report.

“Aligning with international definitions around what constitutes a sustainable investment is one of the primary challenges to growing the international reach of China’s green bond market,” Kuchtyak said.

Despite this, the pressure to align Chinese standards with international definitions might not be strong, since most of the bonds are issued domestically.

According to the report, only four percent of China’s green bonds are issued offshore, while most debt is traded on the domestic interbank bond market and the Shanghai Stock Exchange.

China’s green bond market experienced a 70 percent increase from the same period in 2018, when the market totalled $8.5 billion, according to data from the Climate Bonds Initiative.

Low carbon energy transport had the highest percentage – 46 percent – of green bonds that aligned with international standards, followed by the water sector at 22 percent and renewable energy at 20 percent.

Kuchtyak pointed to “conflicting reports” on whether Chinese regulators would modify the criteria for the local green bond market, but declined to comment further. In September, the South China Morning Post reported that the People’s Bank of China was expected to include clean coal technology as a type of project that would qualify for funding by local green bonds.

The Climate Bonds Initiative did not reply to a request for comment.