China is set to surpass both Europe and the United States in issuing green bonds in 2016.

 It has emerged from seemingly out of the blue over the past month, and is now planning to put four times more green bonds in the market in 2016 compared to what the U.S. did last year.

The Chinese government has worked out plans to raise 1.5 trillion yuan ($230 billion) worth of green bonds to support renewable energy and environment projects within the next five years. The goal is significantly higher than in 2015, when Chinese companies raised a mere $1 billion.

The People’s Bank of China, the country’s central bank, recently announced a quota system for banks and financial institutions to float green bonds and raise up to 300 billion Yuan (over $45 billion) in 2016. 

This is an implied directive to banks to raise part of their funds through this green financing option by tapping both the domestic and international markets instead of depending entirely on traditional routes.

Xu Nan, a senior policy analyst at the Research Center for Climate and Energy Finance under the Central University of Finance and Economics, has estimated that Chinese companies would be able to raise $46 billion through this instrument every year until 2020.

Intensive program

The interest in green bonds has grown as a result of President Xi Jinping’s participation in the Paris conference on climate change in December. Several policy initiatives--including one on green financing-- were announced.

 China so far has a unique advantage in rapidly scaling up clean technology for the market,Changhua Wu, Greater China director of The Climate Group, told ENR.

China’s advantage, she says, is that it has worked closely with “players from the developed world and also those from the developing world to deliver the scaling up,” she said.

Ambitious though it may seem, the $230 billion fund- raising plan will meet only half of the funds required for green energy programs over the next five years in China, according to the Financial Research Institute associated with the State Council, which is the country’s cabinet.

Action Plan

Last December, China’s central bank issued its first-ever ‘Green financial bond directive’, which outlines standards on how to use “green bonds,” where funds are exclusively applied to finance new and existing green infrastructure projects.

In fact, China is a late entrant in the area of green bonds. Green bonds have becoming more popular across the western world because they have some unique advantages.

Green bonds offer a cheap yet stable funding option for projects that usually require intensive capital investment upfront and bear long payback tails.

They are used to finance renewable energy and energy efficiency projects, public transit programs, water management and pollution control schemes, sustainable agriculture and forestry initiatives, and similar efforts.   

Sudden surge

The past few weeks saw Chinese banks raising $4.6 billion soon after the government announced a new program on green financing of projects.

In all of 2015, U.S. companies floated $10.5 billion worth of green bonds, while Europe led the way issuing $18.4 billion, according to the Climate Bonds Initiative.

“Actually I think China is nearly three years ahead of Europe right now,” Ulrik Ross, global head of public sector and sustainable financing for HSBC, said at a event in London late last year.  “China is clearly crowning the market this year,” he said.

The China Industrial Bank raised $1.52 billion through an instrument that offered a coupon rate of 2.95% and maturity of 3 years.

In another issue, the Shanghai Pudong Development Bank raised $3 billion offering the same coupon rate and maturity duration. 

Managers at the Shanghai Pudong Bank were surprised to find that the green issue had attracted double the expected capital because of huge interest in this form of investment.

The Chinese government is encouraging green financing because it is engaged in a grim battle against smog and air pollution, which is emerging as a political issue because of rising public resentment towards it. Beijing is trying to replace burning of coal with renewals, and needs green financing options to encourage their growth.

Implications and challenges

Issuing green bonds in the international market will have implications for China, Lu Zhengwei, chief economist at the Industrial Bank Co. Ltd., said at a press briefing in Beijing in early February.

“China’s efforts to protect the environment and cut emissions are put under the international supervision” of investors who will buy the bonds,” he said adding, “China will be the main battlefield for future energy saving and emission reduction”.

So far, 21 banks--including China CITIC Bank Corp. and Industrial & Commercial Bank of China Ltd.--have been engaged in financing green projects although they have not issued bonds.

Green bonds are expected to become a cheaper source of finance than traditional loans given by banks. For instance, Shanghai Pudong and Industrial Bank will both pay 2.95% interest on their bonds. This is much less than traditional loans because the central bank has set a benchmark interest rate of 4.75%, and banks charge more than that.