Green shoots of new bond market in China

Klaus Eklund, economist with the Swedish bank SEB. [Photo/China Daily]

Most green bonds worldwide are denominated in US dollars or euros, but last June the World Bank's private-sector arm, the International Finance Corporation, issued the first renminbi green bond in London. This was a milestone in adding a new currency to the global market for green bonds, and as the capacity for offshore renminbi bonds builds, that will also help to increase offshore renminbi liquidity.

The three-year bond raised 500 million yuan and was priced at a yield of 2 percent. It was listed on the London Stock Exchange and became a milestone for the internationalization of the renminbi.

Benjamin Powell, International Financial Corporation's head of funding, says that issuing the offshore renminbi bond has created an important signal in the market that it can be done, and he expects it may encourage other firms in the market to issue offshore renminbi bonds.

"From the transaction we have seen a great amount of investor appetite in the offshore renminbi market in London," he says, adding that the UK government's support for London to develop as an offshore renminbi hub also helped with International Financial Corporation's decision to issue this bond in London.

Powell says the proceeds of the offshore renminbi bond were swapped back to dollars to be used in International Financial Corporation's projects globally, although in the future it is possible that it could be kept in renminbi to fund green projects in China.

This would involve choosing specific green projects in China that have the same maturity as the bond issuance, and link the two, so the proceeds can be used in China projects directly, Powell says.

China has enormous potential to develop its green bond market because of the government's determination to build up green finance, and the scale of green projects available in the country, he says.

But at the same time the Chinese government needs to play an important role in ensuring the market for green bonds is as transparent and effective as possible, he says, adding that it can learn lessons from the international market on how to establish transparent processes, and ensuring that investors receive full disclosures on how the issuers manage the proceeds of the bonds.

"I think there is the scope for government endorsed verification agents to be established in China, so that the government gets behind an entity that is there to verify the green program of new issuers," Powell says.

The global market for green bonds has surged because there is a growing number of issuers both from the public and private sectors and multinational organizations, he says.

The growing number of green projects globally means there is an increasing number of projects ready to take on the proceeds of green bonds issuance.

"National agencies and corporates are all seeing the effects of climate change around them, and they are trying to push investments to mitigate the effects of climate change. The process started with public sector agencies creating products and frameworks so that other investors can build on it."

The importance of China's green bond agenda has attracted interest from governments such as the City of London Corp to work closely with China, lending its expertise in the bond market to help China grow its green bond initiatives.

When the then Lord Mayor of the City of London Fiona Woolf visited China last year, she spoke with representatives of the People's Bank of China about green finance. She said she believed it would be a great catalyst for further promoting China-UK green finance initiatives if a Chinese government issued a renminbi green bond in London.