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China's push for emissions reduction to boost green bond sales

China's green bond issuance in the April-to-June period rose to its highest point in almost two years as the world's biggest polluter pushes ahead with plans to cut emissions, with the goal to become carbon neutral by 2060.

Chinese companies sold $18.1 billion of green bonds in the three months ended June 30, the highest since the third quarter of 2019, when the volume was $18.7 billion, according to U.K.-based green bonds tracking agency Climate Bonds Initiative. A total of $35.8 billion of green bonds were sold in the first half of 2021, more than 60% of the record $56.3 billion issued in 2019. That potentially sets China for a new high in green bond sales this year.

"Given the expanding size of its production output and of its internal market, China will have a key, major role to play in the environmental transition [that] most developed countries are now trying to drive and all investors perfectly understand this," said Bertrand Rocher, Paris-based senior credit analyst and portfolio manager at Mirova, a sustainable investment management company affiliated with Natixis Investment Managers.

However, only about 53% of the green debt issued in the second quarter met international standards, versus around 55% in the previous three months. China allows companies to also sell bonds that align with its local definitions, such as allocating up to 50% of proceeds to general corporate purposes instead of designated green assets.

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Green agenda

Excluding bonds aligned only with the local definition, China was the world's third-largest issuer of green bonds in the second quarter after Germany and the U.S., according to data from Climate Bonds Initiative.

"China is focused on advancing its domestic climate agenda and this includes preparing its domestic capital markets to play a role in financing the country's net-zero transformation," Paul Lukaszewski, head of corporate debt, Asia and Australia at Aberdeen Standard Investments, said in an email to S&P Global Market Intelligence. "We would expect to see continued rise in domestic green bond issuance within China, given the breadth and scale of the challenge and financing needed for China to transition to a net-zero model."

President Xi Jinping in April reaffirmed the country's goal to reduce greenhouse gas emissions to net-zero by 2060. China has pledged to have its carbon emissions peak by 2030 as a part of its commitments under the 2016 Paris Agreement on climate change. Europe is aiming to become the first continent to become carbon neutral by 2050 under its "Fit for 55" emissions reduction plan announced on July 14. Other major economies, including the U.S. and Japan, are also pushing ahead with their climate goals.

"We believe China will continue its process of bringing its domestic green bond framework to more closely align with international frameworks," Lukaszewski said. "But in the interim, as domestic Chinese green issuance picks up in response to the government net-zero target, we think it is likely that non-aligned issuance will remain a meaningful part of the global green bond market," he said.

Tamami Ota, a senior researcher at Daiwa Institute of Research expects the mix between bonds that meet local and international standards to remain almost on par for years to come.

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New issuers

While financial institutions are usually a big driver for green bond issuance, more nonfinancial companies have issued green debt so far this year. About 59% of the green bonds were issued by nonfinancial companies in the first half of 2021, compared with roughly 26% for the full year 2020.

"One reason could be the Chinese government's net-zero ambition. A sizable amount of green bonds came from the transport sector," said Christina Ng, a researcher at the Institute for Energy Economics and Financial Analysis, or IEEFA.

Companies, mostly Chinese power utilities that plan to increase their renewable energy capacity, have sold more than $10 billion of carbon-neutral bonds since February 2021, Ng said.

China has taken steps to align its green bond issuance standards with the global market. For example, clean coal projects such as coal washing and carbon capture no longer qualify for green bond financing. But significant gaps between local and international standards remain.

Those gaps can narrow the investor base for China's green bond market, said Ricco Zhang, senior director at the International Capital Market Association, a trade association for capital market participants. While many Chinese norms now match international standards, the lack of a full alignment "will push away" some international investors, Zhang noted.

Even with a strong supply, Chinese investors may be less enthusiastic than their international peers toward green debt. "There is no green designated fund, and investors don't have a mandate in their hand to invest in green assets only," Zhang said.

The "ideal situation" would be to get international investors to invest more in China's green bond market, Zhang added. "But unfortunately, because the standards are not aligned, particularly the enterprise green bonds, that's not something the international investors feel comfortable to get into. So, there is just a gap."