Chinese financing for environmental transition
March 23, 2020 |
Recognized as the biggest greenhouse gas producer in the world, China’s domestic bond market is a major global player in pushing into burgeoning green finance.
Editor's note: We set out to cover green finance and COVID-19 caused an upheaval. The digital edition reflects what went to printing press just prior to the extraordinary measures western governments have put in place to fight this pathogen. While green finance remains a relevant topic, we ask that you keep in mind the comments given by experts in preparation for this edition were given as a reasonable reflection of the world prior to the novel coronavirus derailing, temporarily, the flow of everyday life.
Investing in China with an environmental mandate? At first blush, that seems a contradiction in terms.
Long recognized as the biggest emitter of greenhouse gasses into the atmosphere, China has quickly become the second largest market for the origination and sale of green bonds.
Efforts to further develop the second of these accolades, while curbing the first, should create opportunities for Latin American entities to diversify their base of bondholders beyond the Western hemisphere.
Special report: Green financing
1. Growing green finance
Sustainable finance gains momentum
2. What's next
The Latam head of Climate Bond Initiative examines at the outlook for green financing
3. Early adopters
The universe of green issuers expands, along with investors and projects
4. Chinese green
A look at China’s green panda bond market
A fledging market for the issuance of green bonds in renminbi by foreign organizations, so-called green panda bonds, is expected to draw ever more issuers as the Chinese government has enhanced regulation and created incentives for local investors to widen the presence of these sustainable securities in their portfolios.
Green panda bonds were created back in 2016. While the market is robust for domestic players, they have so far attracted few foreign companies as, until recently, doubts persisted about the issuance process and their ability to move the money raised out of Chinese accounts.
A series of rules published by China’s financial regulators in the past 15 months, coupled with the opening up of the asset management business to foreign companies, could create a surge of panda bond issuances, and those that are able to obtain a green certification have an opportunity to draw the interest of a wider base of investors.
Multinational companies have started to dabble in panda bonds to raise money in the Chinese market, and the governments of Portugal, Poland and The Philippines have also followed this route.
In Latin America, the Mexican government stated last year that a panda bond issue could be pursued in 2020.
Panama went as far as hiring a Chinese ratings agency to place the equivalent to $500 million with panda bonds in 2018, but the operation was not completed.
Other Latin American issuers could look at China as a source as liquidity, especially as a growing number of companies and governments increase their economic relationships with Beijing.
In this case, the green variety of panda bonds can help them tap into booming demand for environmentally responsible financial vehicles among Chinese investors.
With this potential in its sights, the Inter-American Development Bank (IDB) co-launched in November 2018 a guide to help Latin American issuers to navigate this new market.
The event, which took place in Shanghai, included the participation of 12 Latin American development banks, including Brazil’s BNDES and Mexico’s Bancomext.
“Demand for green bonds is huge in China, but supply is limited,” says Juan Antonio Ketterer, the head of the Connectivity Markets and Finance Division at the IDB. “Investors will welcome renminbi-denominated issues that are qualified as green of whatever kind.”
Local Chinese issuers have helped elevate the nation to be one of the biggest sources of green bonds. They have tapped the market to the tune of $53 billion in 2019, according to the Climate Bonds Initiative.
Of that number, $31.3 billion was issued under criteria that meet international green bond standards. It means that China closed 2019 as the second largest green bond market in the world, with a 12.1% of total issuances, only behind the United States.
Of all green bonds issued by Chinese issuers, 76% were sold onshore.
Demand has been boosted by measures implemented by the authorities to promote the purchase of green bonds by investors, both in the interbank market and in stock exchanges, and to make it easier for foreign investors to buy renminbi bonds in China.
CBI notes in a report that green bonds issued in the country in 2018 were on average 3.2 oversubscribed, compared to 2.5 times to vanilla bonds.
“We recognize that in China there is a lot of interest from investors in green projects,” Ketterer says. “We believe that bringing Latin American issuers to the Chinese market can help them raise funds at a cheaper rate.”
Green panda bonds issued by foreign entities still remain a rarity. In 2018, according to the CBI, only 1% of all green bonds issued in the local market were panda bonds. Not only that, but issuers of green panda bonds have so far been mostly Hong Kong companies or subsidiaries of Chinese companies based in the territory.
Regulators expect, however, that the asset class will develop with time, following the example of regular panda bonds, which took a while to take off since launching in 2005.
“China’s onshore bond market is more liquid and cheaper than offshore renminbi centres such as Hong Kong or Taiwan,” says Martin Maciak, the head of Asia Origination and RMB Internationalization, Americas, at HSBC.
There are precedents for companies using green panda bonds to raise money for projects in Latin America.
The very first such bond was issued in July 2016 by the New Development Bank. The five-year paper with a 3.07% coupon raised 3 billion renmibi (U$448mn) to fund, among other projects, renewable energy investments in Brazil.
The bond was three times oversubscribed and more than 30 investors participated in the bidding process, according to the CBI.
Although the promise of the first issue has yet to fully materialize, a set of reforms to financial and bond markets have been implemented by the government that could give the asset class a boost.
According to Loreta Calero, a Madrid-based partner at consultancy Crowe, the process of issuing a green panda bond is not necessarily more complex than what is involved in issuing a samurai or yankee bond, but it can be tricky to those who are not used to China’s financial system.
“A company must have a very clear idea of why it wants to issue the bond,” she says.
In Maciak’s view, the most obvious potential beneficiaries of green panda bonds are companies that have subsidiaries in China and want to boost their investments there while polishing their green credentials.
“Companies can raise money in China to fund their operations there, and then they can use those funds to redistribute their working capital,” he says.
Entities involved with projects linked to China’s Belt and Road Initiative (BRI) could also make use of the instrument. For instance, they can use the money they raise to pay back credit lines provided by Chinese banks that are participating in the funding of BRI projects.
“If issuers can position themselves close to projects linked to the BRI, they will make their bonds more compelling for Chinese investors,” says Ivy Lau, the general manager of CBI’s China Office.
She adds that, as the presence of China’s policy banks (China Development Bank, Export Import Bank of China, Agricultural Bank of China) is expanding in Latin America, they can help companies to raise in renminbi to pay down credit lines provided by Chinese partners.
Lau gave as an example Brazilian agribusinesses companies that export to China and are negotiating deals with Chinese trading companies.
The companies, she says, could explore the option of getting funding from the Agricultural Bank of China, and then raising renminbi in China to pay off the debt. The contact with the policy bank can help pave the way for an issuance of green panda bonds with this goal.
“These banks work in close alliance with other Chinese players in Latin America,” Lau says.