By Lily Chung, Fixed Income and Multi-Asset (FIMA) Product Manager and Alan Meng, SI Research Lead
Green bonds saw a big slowdown in European markets and the United States last year due to soaring interest rates and geopolitical conflicts. But China’s onshore green bond market-maintained momentum.
European markets have pioneered green bond market development since 2007 and are the major players. China joined the game late in 2014 and have since launched the inaugural national green bond guidelines issued by Chinese regulators at the end of 2015. China’s domestic green bond market has witnessed a growth from zero to hero and become the world’s largest market.
In 2021, China announced carbon dioxide peaking by 2030 and carbon neutrality by 2060. The strategic goal from top down facilitates to further the Chinese green bond market and its annual issuance boomed to $78.5 billion in 2021. Green bonds are becoming more and more popular both in China and globally.
The global issuance reached the 2 trillion milestone in 2022. However, the global sentiment went south rapidly in 2022. The high inflation rate forced central banks turning into tighten monetary policy. European and US green bonds market seems to have cooled down. While the yearly issuance size of German, Supranational and the Netherlands markets remain nearly unchanged, with France down by 42% and the US down by 52%, the Chinese green bond market remains momentum with a growth rate of 14%.
In terms of performance, comparing the index value of FTSE Global Green Impact Bond Index (Global Green) to FTSE Chinese Green Bond Index (Chinese Green) from the past five years, we can see the Global Green is much more volatile than Chinese Green. In Global Impact profile, there are 64.6% bonds denominated in EUR and 19.1% in USD, hugely affected by the global macroeconomic conditions. From 2015 to 2018, U.S. Federal Reserve (Fed) was gentle in hiking rates, preparing to return to normalcy.
The U.S. and China started a so-called ‘trade war’ in 2019, where Fed cut 75 bps interest rates as a 'mid-cycle adjustment’ and then cut further 150 bps in March 2020, leading the fed fund target rate range of zero to 0.25%, in response to Covid-19 recession. The strong stimulation did push up the value of almost all asset classes to its highest point, and Global Impact was up 12.0% to 123.3 high since the rate cut. Nevertheless, good time doesn’t last long, the geopolitical conflicts and overheating inflation forced central banks to raise interest rates across the globe.
In 2022, Fed aggressively raised 425 bps, just in nine months, costing Global Impact drops 9% from its peak. On the other hand, China maintained its monetary policy relatively stable, and we see the steady growth of China Green from 114.92 to 118.24 with a growth rate of 2.9% in 2022. China Green outperformed Global Green and showed strong resilience during the pandemic. Some investors are in favour of the Chinese fixed income market due to the lower volatility and low correlation compared to Developed Markets to hedge the portfolio.
Understanding the landscape of China’s domestic green bond guidelines
Despite China being the largest issuance country in the green bond market, international investors may often find themselves lost in the pile of Chinese green bond guidelines. This largely reflects the fragmentation of China’s overall bond market regulations. Based on the issuer types and the bond characteristics, bond offerings are classified into different types, such as Financial Bonds (bonds issued by banks and other financial institutions), Enterprise Bonds (bonds issued by non-listed state-owned corporates), and Corporate Bonds (bonds issued by listed corporates). As the ‘green bond label’ only serves as an addition to the basic bond features, China’s domestic green bond issuers have still to be overseen by corresponding regulators. For example, Green Financial Bonds, just like all their vanilla peers, are still subject to the regulations of the People’s Bank of China.
As a result of regulators’ intention to incentivise green financing, each of them released relevant green bond guidelines for the types of bonds subject to their regulations. The key development in recent years, however, is the convergence of different guidelines, which has happened in two aspects. Firstly, the consensus on overall rules about issuing and managing green bonds, and secondly, the harmonisation of definition of eligible green projects that can be financed by a green bond. As a result, we have seen the release of China Green Bond Principles - although it still serves as a voluntary rule that does not replace the current regulations - that have bridged the gaps between the widely accepted ICMA Green Bond Principles and various Chinese green bond guidelines.
The release of China-EU common ground taxonomy has sent a positive signal for further harmonisation on the green projects, assets and activities definitions. Although we have seen many Chinese green bonds focusing on a wider environmental issue 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.
What to expect next in China’s domestic green bond market?
China aims to peak its carbon emission before 2030 and achieve carbon neutrality before 2060. This requires rapid transitions in certain industries, especially in energy and manufacturing. It’s estimated that China needs at least $14.7 trillion (RMB 100 trillion) over the next 30 years to achieve the targets, leaving a huge opportunity for climate change mitigation and transition finance in the form of debt financing.
The rising issuance of Carbon Neutrality bonds which are usually dedicated to climate change mitigation and the release of relevant guidelines has reflected the appetite in the market and regulators’ ambitions. However, despite the ambiguity around the ‘Carbon Neutrality’ naming, we expect green criteria in certain areas are becoming clearer and tighter to further align with international definitions. For example, eligibility criteria for energy efficiency projects that may adopt stringent thresholds and to exclude those that may potentially be linked to any fossil fuel projects.
On top of it, China remains one of the largest powerhouses of the global green bond market despite a slight year-on-year slow-down. Although China GBPs are only adopted on a voluntary basis, and it does not replace the current quasi-mandatory green bond guidelines made by regulators, it is expected that more issuers will decide to embrace them. 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.
Alongside the market development, we will continue to provide research and introduce products that reflect key features. The newly launched FTSE Chinese (Onshore CNY) Green Bond Index – Carbon Neutrality covers a sub-type of green bonds whose use of proceeds are dedicated to projects that have carbon reduction benefits, aiming to provide a solution to help the client achieve their climate transition target.
For more, visit our page on FTSE Chinese (Onshore CNY) Green Bond Index Series or FTSE Sustainable Investment Fixed Income Indexes and subscribe to the blog.
© 2023 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, “FTSE Canada”), (4) FTSE Fixed Income Europe Limited (“FTSE FI Europe”), (5) FTSE Fixed Income LLC (“FTSE FI”), (6) The Yield Book Inc (“YB”) and (7) Beyond Ratings S.A.S. (“BR”). All rights reserved.
FTSE Russell® is a trading name of FTSE, Russell, FTSE Canada, FTSE FI, FTSE FI Europe, YB and BR. “FTSE®”, “Russell®”, “FTSE Russell®”, “FTSE4Good®”, “ICB®”, “The Yield Book®”, “Beyond Ratings®” and all other trademarks and service marks used herein (whether registered or unregistered) are trademarks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, FTSE Canada, FTSE FI, FTSE FI Europe, YB or BR. FTSE International Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator.
All information is provided for information purposes only. All information and data contained in this publication is obtained by the LSE Group, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as other factors, however, such information and data is provided "as is" without warranty of any kind. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the accuracy, timeliness, completeness, merchantability of any information or of results to be obtained from the use of FTSE Russell products, including but not limited to indexes, data and analytics, or the fitness or suitability of the FTSE Russell products for any particular purpose to which they might be put. Any representation of historical data accessible through FTSE Russell products is provided for information purposes only and is not a reliable indicator of future performance.
No responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for (a) any loss or damage in whole or in part caused by, resulting from, or relating to any error (negligent or otherwise) or other circumstance involved in procuring, collecting, compiling, interpreting, analysing, editing, transcribing, transmitting, communicating or delivering any such information or data or from use of this document or links to this document or (b) any direct, indirect, special, consequential or incidental damages whatsoever, even if any member of the LSE Group is advised in advance of the possibility of such damages, resulting from the use of, or inability to use, such information.
No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing in this document should be taken as constituting financial or investment advice. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any representation regarding the advisability of investing in any asset or whether such investment creates any legal or compliance risks for the investor. A decision to invest in any such asset should not be made in reliance on any information herein. Indexes cannot be invested in directly. Inclusion of an asset in an index is not a recommendation to buy, sell or hold that asset nor confirmation that any particular investor may lawfully buy, sell or hold the asset or an index containing the asset. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.
Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back-tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index.
This document may contain forward-looking assessments. These are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking assessments are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially. No member of the LSE Group nor their licensors assume any duty to and do not undertake to update forward-looking assessments.
No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group data requires a licence from FTSE, Russell, FTSE Canada, FTSE FI, FTSE FI Europe, YB, BR and/or their respective licensors.
