PGJ - Why Have China Green Bonds Thrived Amid Global Volatility?
Summary
- While global green bond markets saw a notable slowdown - particularly in Europe and the United States because of rising interest rate and geopolitical conflicts, China’s onshore green bond market sustained its momentum in 2022.
- Despite reaching the $2 trillion milestone in cumulative issuance in 2022, the global green bond market saw a decline in the second half of last year as central banks turned to tightening monetary policies.
- Despite being one of the largest green bond markets, seeking to navigate China’s green bond guidelines remains challenging for some international investors.
By Lily Chung, Manager, Fixed Income and Multi Asset Product and Research and Alan Meng, Sustainable Fixed Income Research Lead
While global green bond markets saw a notable slowdown - particularly in Europe and the United States because of rising interest rate and geopolitical conflicts, China’s onshore green bond market sustained its momentum in 2022.
The European market has been a key driving force in green bond development since its inception in 2007. However, despite China’s late entry in 2014, its green bond market has witnessed remarkable growth and has rapidly become one of the largest markets in the world. It has also survived global volatility. Despite reaching the $2 trillion milestone in cumulative issuance in 2022, the global green bond market saw a decline in the second half of last year as central banks turned to tightening monetary policies. While issuances from supranational remained unchanged, European and US green bond markets saw the most notable slowdown, with France down by 44.8% and the US down by 49.5%[i]. In contrast, China’s green bond market continued its momentum, posting a growth rate of 30% in 2022.
When it comes to performance, our analysis of index values of the FTSE Global Green Impact Bond Index (Global Green) and FTSE Chinese Green Bond Index (Chinese Green) over the past five years shows that the Chinese Green is notably less volatile than the Global Green.
Global Green is heavily influenced by macroeconomic conditions, with 64.7% of bonds denominated in EUR and 18.9% in USD. The U.S. Federal Reserve's ((FED)) aggressive cutting of interest rates between 2019 and 2020 served as a strong stimulus, leading to an increase in the value of all assets, including the Global Green, which rose 12% to reach 119.88. Nevertheless, the tide turned as geopolitical conflict persists and the overheating inflation forced central banks to raise interest rates across the globe. In 2022, Fed aggressively raised 425 bps in just nine months, causing Global Green to drop 18.6% compared to its peak in July 2021.
On the other hand, China maintained a relatively stable monetary policy, contributing to steady growth of China Green from 117.08 to 119.85, representing a 2.4% increase in 2022. China Green outperformed Global Green and showed strong resilience during the pandemic. Due to its lower volatility and low correlation with the Developed Markets, some investors prefer the Chinese fixed-income market for portfolio diversification.
Understanding the landscape of China’s domestic green bond guidelines
Despite being one of the largest green bond markets, seeking to navigate China’s green bond guidelines remains challenging for some international investors. The complexity stems from the fragmentation nature of China’s overall bond market regulations. Based on the issuer types and the bond characteristics, bond offerings are classified into different types and are under the oversight of different regulators. For example, Financial Bonds (bonds issued by banks and other financial institutions) are overseen by the People’s Bank of China (PBoC), and Corporate Bonds (bonds issued by non-financial corporates) are regulated by China Securities Regulatory Commission (CSRC). The ‘green bond label’ only serves as an addition to the basic bond features, and issuers in China’s domestic green bond market are still subject to the oversight of corresponding regulators. For example, Green Financial Bonds, just like all their vanilla counterparts, are still regulated by the PBoC.
There have been various green bond guidelines in China’s bond regulatory landscape (Exhibit 3). The key development in recent years, however, is the convergence of these guidelines and taxonomies, which have been seen in two areas. Firstly, the standardisation of green bond issuing and reporting rules has been reflected by the release of China Green Bond Principles (China GBP) As a set of voluntary rules that complement current regulations, the China GBP will help bridge the gaps between the widely accepted ICMA Green Bond Principles and various Chinese green bond guidelines. Secondly, there have been harmonisations of the eligible green project definitions with the update of the China Green Bond Catalogue and the release of the China-EU Common Ground Taxonomy, signaling a positive step towards further harmonisation both domestically and internationally.
In addition, while many Chinese green bonds address wider environmental issues such as air pollution reduction, the guidelines on issuing ‘Carbon Neutrality’ bonds rolled out by both NAFMII and Shanghai Stock Exchange reflect that Climate Change mitigation has become a key priority contributing to China’s Net Zero commitment.
Source: FTSE Russell. Past performance is no guarantee of future results. Please see the end for important legal disclosure.
What to expect next in China’s domestic green bond market?
China aims to peak its carbon emission before 2030 and achieve carbon neutrality by 2060. This requires rapid transitions in key industries such as in energy and manufacturing. It is estimated that China faces a funding gap of at least $14 trillion (RMB 100 trillion) over the next 30 years[i], creating a huge opportunity for climate change mitigation and transition finance in the form of debt financing.
The rising number of ‘Carbon Neutrality’ bonds (Exhibit 4) that are dedicated to mitigating climate change and the emergence of guidelines have highlighted the convergence of market demand and regulatory goals. As the market evolves, the standards for these bonds are expected to become more stringent and well-defined. This, along with advancements in taxonomy harmonisation and the increasing adoption of China GBP, presents new opportunities for fixed-income investors looking for decarbonisation opportunities with greater transparency.
FTSE Russell has launched the FTSE Chinese (Onshore CNY) Green Bond Index Series which measures the performance of the onshore Chinese yuan-denominated, fixed-rate governments, agencies and corporate debt issued in mainland China that are labelled green. The index series has comprehensive coverage with indexes available meeting China’s local definition of “green” as well as indexes that include bonds meeting internationally recognized Climate Bonds Initiative ((CBI)) standards. The newly launched FTSE 0+ Years Fixed Income Index Series tracks the universe of securities that meet the eligibility criteria through to maturity, allowing for a seamless transition for index users looking to better replicate their hold-to-maturity strategies. Alongside the market development, FTSE will continue to provide research and introduce products that reflect key features.
[i] Note: The US green municipal bonds have also saw a drop by 35% to from $20.6 billion achieved in 2021 to $13.2billion in 2022, according to Climate Bonds Initiative data.
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Why Have China Green Bonds Thrived Amid Global Volatility?