Green shoots of new bond market in China

By Cecily Liu (China Daily) Updated: 2015-06-01 08:29

Benjamin Powell, head of funding for International Financial Corporation. [Photo/China Daily]

"That would also be a big endorsement for London's capability as a key offshore renminbi center. It would make financial sense given that London's renminbi liquidity makes renminbi bond issuance easy and cost-effective.

"It will be a fantastic signal to London and the rest of the world that the Chinese government is taking the green agenda seriously. It could also unlock the potential for cities that struggle to raise finance from national governments."

Mark Boleat, policy chairman of City of London Corp, says London has a unique advantage in building up the green bond market because of the concentration of financial experts in the city, which already has a large bond market.

"Green bonds represent a new market, and one I think many people would find attractive. Our government has a strong commitment to improve the environment, and we have lots of expertise on bonds here in London, so all this makes London a natural center to grow the green bond market."

Despite the rapid growth of green bonds globally, there are still many challenges to growing the market globally and in China.

Eklund says a major challenge arises as to whether the standards of green bonds can be upheld. "There are many different kinds of issuers, and this is a challenge for the investors because there is no fixed international framework. Anyone who issues a bond can call it green."

In mature Western capital markets, green bonds are generally audited by an independent body to check that the proceeds from the bonds are indeed used for green projects. This has led to investor trust, and it is proven that the green credential of the bonds have made it easier for the issuers to raise the finance needed for projects.

However, in a market such as China, green bonds are not vetted by independent bodies or government departments, meaning there is a high risk that issuers are exploiting the market by falsely labeling bonds as green.

In China, the number of so-called green bonds is still small, and they are mostly issued by railway companies, although the green credentials of the projects are not guaranteed, Eklund says.

Eklund says one important thing is for China to try to emulate the green bond market of the West, meaning the market must be transparent, and there must be a standard check on what is said to be green.

Second, liquidity is needed in China's green bond market.

"This could be done by using regulations to incentivize existing banks or to create a green investment bank."

Finally, China should consider giving economic incentives to green bonds, or green finance initiatives, so as to give a good start to the growth of this market.