Green bonds can help provide environmentally friendly transport, buildings, water supplies and sanitation
Tackling pollution remains high on the agenda for China. Premier Li Keqiang told the National People’s Congress in March that: “Environmental pollution is a blight on people’s quality of life and a trouble that weighs on their hearts. We must fight it with all our might.”
Premier Li’s remarks underlined the determination of China’s leaders to address the country’s environmental challenges. Work is underway. A new environmental protection law came into force in January. China installed more new solar power than any other country in 2013, according to the International Energy Agency.
The growth of an onshore green bond market in China, and its interaction with the offshore capital markets, could help to provide a much-needed source of sustainable finance
But there is more to be done if the country is to shift to a sustainable economic model. As well as investing in infrastructure and technologies to address pollution, China must ensure that urbanisation – a key driver of economic growth – happens in a sustainable way.
The proportion of China’s population living in cities could reach almost 70 per cent by 2030, up from 52 per cent in 2010, according to a report by the World Bank and the Development Research Center of China’s State Council (DRC). The increasing concentration of people in urban centres will create pressure on natural resources and already crowded infrastructure and services. New and growing cities will need environmentally friendly public transport, buildings and water supplies, sanitation and energy.
This will not come cheap. According to a report by the International Institute for Sustainable Development and the DRC, around RMB2.9 trillion a year will need to be invested in key green sectors in China between 2015 and 2020.
The central government set aside RMB10 billion in 2014 to tackle air pollution, according to HSBC Global Research. Local governments in cities such as Beijing and Shanghai are also planning to invest heavily in environmental protection.
But public money will not be enough. There are significant ways private capital, particularly in the form of debt financing such as green bonds, can help fund China’s efforts to improve its environment and invest in innovative energy, more efficient buildings, transport and industry, and water, land and waste management schemes.
Green bond conference
On 15 April 2015, HSBC hosted a sustainable financing conference in Beijing – the first of its kind in mainland China. Policymakers, regulators and green bond experts, issuers and investors discussed a range of solutions and the impact on business of growing a sustainable fixed income asset class – green bonds – to help China finance its growing environmental and infrastructure needs.
Green bonds work in the same way as traditional bonds, but their proceeds must be invested in projects that have environmental benefits. They are growing in popularity as investors incorporate sustainability into their investment decisions. Issuers include international financial institutions such as the World Bank, government agencies and municipal governments, and major corporates. HSBC expects green bonds worth USD100 billion to be issued worldwide in 2015.
We believe the growth of an onshore green bond market in China, and its interaction with the offshore capital markets, could help to provide a much-needed source of sustainable finance. However, this will only provide part of the solution to China’s infrastructure financing needs. Other initiatives, including government-sponsored green lending schemes via both private and public sector banks, will be needed.
China has already made significant strides towards opening up its financial system and developing its capital markets, including last year’s establishment of the Shanghai-Hong Kong Stock Connect scheme and a series of measures to encourage the internationalisation of the renminbi. But while it has one of the world’s largest bond markets, foreign participation remains low.
Further liberalisation would enable international investors to buy more Chinese bonds, provide greater investment opportunities domestically for China’s large pool of savings, and help the government to achieve its goal of diversifying funding for large projects away from bank lending and into capital markets. Continued education for both domestic and international issuers and investors would also help green bonds to enter the mainstream in China as the international market continues to grow.
China has been investing huge sums to smooth the path to sustainable growth. But more finance is required. A Chinese green bond market is one of a number of initiatives that could help boost the funding available for green infrastructure projects and tackling pollution – and contribute to the further development of deeper and more diverse capital markets.