Chinese green bond sales outlook improves amid falling interest rates

Green bond issuance in mainland China is poised for growth amid improving sentiment, declining interest rates and a national drive toward carbon neutrality.

Internationally aligned green bond sales rose 82% year over year to $17.86 billion in the June-to-September quarter, Climate Bonds Initiative data shows. Quarter over quarter, issuance increased by 25.5%.

"The outlook for green bond issuance in China remains positive in the coming quarters," said Andrew Chew, director of sustainable finance for Asia-Pacific at ING Bank.

In addition to low interest rates, mainland Chinese companies are expected to ramp up green bond sales to solidify the country's role as "a key supplier in the global value chain for decarbonization technologies," Chew said. Significant funding needs are projected for Chinese companies, with much expected to be met through bond issuance.

Mainland China rose to second place globally in green bond issuance, up from fifth in the previous quarter, according to Climate Bonds Initiative. The US retained the top position, with $20.34 billion in green bond sales for the quarter.

Nonaligned bonds

Issuance of nonaligned green bonds, which adhere to local Chinese standards, surged nearly 1.5 times from the previous quarter to a two-year high of $15.15 billion, data shows.

Nonaligned green bonds remain popular as the gap between domestic and international standards has narrowed, primarily regarding the use of proceeds.

About 62% of investment in China's green bond market comes from domestic investors, who are familiar with local standards and may favor nonaligned issuances, Chew noted.

The world's second-largest economy supports green bond issuance as part of its goal to reach peak emissions by 2030 and achieve net zero by 2060. To address greenwashing, China is also encouraging green bond sales aligned with international standards over domestic ones to mitigate overstated environmental claims and take advantage of lower borrowing costs.

Green commitment

China's outstanding green bonds total 2.2 trillion yuan, making its green lending and bond market "by far the largest in the world," Jun Ma, chairman and president of the Hong Green Finance Association, told S&P Global Market Intelligence on Oct. 9.

In the internationally aligned green bond segment, financial corporate issuances made up 40.33% of the third quarter total, a 14.99-percentage-point drop from the prior quarter, while nonfinancial corporates increased their share by 2.77 percentage points to 35.25%, according to Climate Bonds Initiative data.

China's surge in green bond issuance is fueled by policy support, including tax incentives, aimed at achieving carbon neutrality by 2060, and by global capital favoring environmental, social and governance-aligned investments, said Janessa Jia, head of CICC's international fixed-income team and managing director of investment banking.

A risk-on sentiment following US rate cuts and refinancing needs also drove primary market issuance higher, Jia noted. "As the regulatory framework continues to evolve, enhancing transparency and alignment with international standards, market conditions will continue to improve, positioning China as a key player in the global green bond market."

Interest rate cuts in China and abroad, which encourage both corporate and government capital raising through green bonds, are likely to boost issuance activity by Chinese issuers, onshore and offshore, Jia said.

As of Oct. 28, US$1 was equivalent to 7.13 Chinese yuan.