China green bonds: Macro tailwind is strengthening

  • 24 March 2022 (5 min read)

Green bonds have increasingly attracted the attention of investors engaged in the decarbonisation of their assets. As the green bond market grows, the list of issuers, regions and sectors is becoming increasingly diversified.

While China is among the later comers to ESG investing, the country started to catch up rapidly. Today, China is home to the world’s 2nd largest green bond market, which offers depth, liquidity, and many investment opportunities that worth looking into.

Four reasons we favor the China green bond market:

  1. The macro tailwind is strengthening: Last year’s power shortage and the current geopolitical conflicts have likely reinforced China’s desire to become energy independence. This matches perfectly with China’s long-term transformation towards a green economy, which the green bond market is developed to support. At the time when global investors are concerned about China’s policy and regulatory uncertainty, the green bond market offers an opportunity for global capital to ‘invest with’ China on a long-term development theme. The latter should ensure policy tailwinds, not headwinds.
  2. Demand for ‘green’ continues to rise: Over $120 trillion global AUM has signed up to the UN PRI, with Asia’s signatories increasing 3.4 times in the last six years. Increasing investor awareness and regulatory pressure have also led to explosive growth in ESG-focused funds in China, surging 3.5 times in past two years. The People's Bank of China (PBoC) now assesses banks’ green bond business as part of their performance evaluation in green financing. Local governments and state-owned enterprises (SOEs) are also encouraged to tap the market for their green transformation. China may be a later comer to stalling pro-green regulations relative to developed markets, but is moving lightning fast.
  3. Market too big to ignore: China has been among the top green bond issuers globally since 2016, and is home to the world’s second largest market today after Europe. For local currency bonds, the greater China region accounts for close to 90% of green bonds in emerging markets, while in the hard currency space, China (including Hong Kong) also dominates the Asian market. For investors looking for green bonds with yields, China cannot be overlooked.   
  4. Growing attractiveness of China bonds: Two common concerns of China green bonds: not green enough as an ESG instrument, and not competitive enough as an asset. On the former, the removal of all fossil fuel projects in the latest edition of China’s Green Bond Catalogue has led to a marked convergence in green bond standards between China and developed markets. For the remaining differences (concerning mainly the use of proceeds), there is adequate info disclosure that allows investors to screen bonds based on customized standards. As an investor under a more stringent green bond framework, we see no impediments to keeping ‘green washing’ risk low for our investment. As an asset class, China green bonds offer higher yields (2.8% vs. global peers at 1.7% and conventional Chinese bonds at 2.6%) and shorter duration (2.5 years vs. global bonds at 8.2 years), and have performed competitively compared to peers in recent years.

Index characteristics of China green bonds, China conventional bonds and global green bonds

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Source: FTSE Russel, Bloomberg, and AXA IM Research. As of Feb-2022

China green bonds outperform China conventional bonds and global green bonds

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Source: FTSE Russel, Bloomberg, and AXA IM Research. As of Feb-2022

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