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European market may draw more Chinese green bond issuers

More Chinese green bond issuers might tap into the European market in 2018 due to lower financing costs and strong investor demand, according to panelists at the 2018 Green and Social Bond Principles conference in Hong Kong on June 14.

Ma Jun, chairman of the China central bank-supervised China Green Finance Committee, said he expected offshore issuance to rise, especially in Europe.

"Financing costs in Europe are lower, and China's interest rate [is] a bit higher. This is creating issuance demand overseas," he said.

In 2017, Chinese issuers sold US$6.6 billion of green bonds abroad, or 18% of the country's total green bond issuance of US$37.1 billion, a the China Central Depository & Clearing Co. Ltd. and the Climate Bonds Initiative, a London-based nonprofit body promoting environmentally friendly investment, wrote in a February report.

The People's Bank of China has modestly raised key short-term market rates in recent months while leaving benchmark rates unchanged. Meanwhile, the European Central Bank has said interest rates in the EU would remain at current low levels at least through the summer of 2019.

However, for offshore Chinese investors, the differences between Chinese and international green standards remain a challenge, some panelists noted.

"I think we should welcome [local authorities' efforts in developing local standards] because oftentimes they are followed by [the] leadership's encouraging issuance in their markets," Marilyn Ceci, managing director and head of green bonds at JP Morgan, said at the same conference.

One challenge is that some projects considered green in China but not elsewhere, such as retrofitting fossil fuel power stations, hydro projects of more than 50 megawatts and landfill waste disposal, according to Climate Bonds Initiative. Also, green bond issuers in China can use up to 50% of proceeds to repay bank loans or other financial commitments of any type, while international guidelines state that at least 95% of proceeds should be linked to green assets or projects, the nonprofit body added.

The Chinese central bank and European Investment Bank are in the process of developing a common standard, Ma said, adding that such projects are particularly complex given that there is no single standard in either jurisdiction, so local harmonization is also needed.