China's Q1 green bond sales slump 46% as global rates stay elevated

High global interest rates dampened first-quarter green bond issuance in China, Asia-Pacific's largest green finance market.

Issuers sold $9.05 billion of internationally aligned green bonds in the January-to-March quarter, a 46% decline year over year and the lowest level in three years, according to data from Climate Bonds Initiative, a nonprofit organization that tracks sustainable finance. Total issuance fell 38.6% to $14.60 billion, the data showed.

The organization tracks two types of green bonds — those aligned with global definitions and those following a looser Chinese standard that permits a wider range of project uses. China seeks to increase the share of green bonds aligning with global standards to attract international investors.

"For the market to see an uptick in green bond issuance, it's likely that a decrease in the overall cost of funding for raising debt financing is necessary," said David Tsai, a partner at law firm Clifford Chance. "For example, a lowering of rates to encourage more corporate borrowing, combined with a policy focus on encouraging green financing from key industries, such as those from the three industries being championed namely, electric vehicles, lithium-ion batteries and solar cells."

Green goals

China aims to reach peak emissions by 2030 and net-zero by 2060. To combat greenwashing — the practice of creating a misleading impression of environmental friendliness to improve an entity's image — authorities are promoting internationally aligned green bonds.

High global interest rates, China's real estate decline and policies targeting leverage have reduced offshore debt market fundraising, Tsai said. This includes green bonds, previously popular with Chinese property developers.

Global interest rates remain elevated as central banks combat inflation. Though most economists believe the cycle may have peaked, further rate hikes are possible if inflation persists. China's easing bias contrasts this trend, aiming to support the world's second-biggest economy.

Schroder Investment Management (Hong Kong), in a note for clients, warned of "a 'no landing' scenario due to a series of US inflation surprises and a potential upturn in the global manufacturing cycle, which could bolster commodity prices." This could prolong high interest rates globally, the investment firm said.

Issuances slide

China's green bond issuance dropped to fourth place globally in the first quarter, behind the US, Germany and France, according to Climate Bonds Initiative data. Issuance also declined in Japan and India.

China's decline "is attributable to slower onshore green bond issuances and Climate Bonds Initiative's proprietary classification of internationally aligned green bonds, which may narrow the count," said John Hai, head of global debt finance at Citic CLSA. Despite a 7% drop in offshore environmental, social and governance bond sales by Chinese issuers, overall issuance fell 10%, indicating continued appetite for such bonds.

Green bond issuance could resume in Japan and India once overseas financial restrictions ease, Hai noted, saying both countries remain committed to green development, fostering a need for green financing.