19% of projects that are covered by Chinese local governments’ municipal bonds have the potential of being categorised as ‘green’, with a bond issuance size totalling of Rmb824.2 billion ($114 billion) in 2021, according to a study from non-profit organisation Greenpeace.
Greenpeace looked into over 8,000 local projects funded by local municipal bonds in China in 2021, and compared them with frameworks listed out by the International Capital Markets Association’s (ICMA) Green Bond Principles and a Green Bond Endorsed Projects Catalogue issued by the People’s Bank of China (PBOC).
Around 10% of the projects were identified as bearing ‘high green potential’, meaning that all of the proceeds were channelled towards green industry activities as listed in both taxonomies. Another 8.26% were labelled as ‘medium green potential’, with the detailed percentage of funds dedicated to green activities unknown.
The financing vehicles that showed potential of being labelled as green bonds were mostly in the eastern part of China and along the Yangtze River, with provinces including Guangdong, Shandong and Zhejiang being ‘the greenest’ in terms of municipal bond-funded projects.
“In provinces where there’s greater push in climate investing and financing initiatives, there tends to be more municipal bond issuances towards greener projects,” Wenjie Liu, senior analyst at Greenpeace East Asia, explained.
Liu told FinanceAsia that strong financial stability is the prerequisite for municipal bond issuance. Many local governments in China have been struggling with debt pressure arising from a gloomy property sector. The central government has been stepping in with a series of policy measures to help, including debt swap programmes. Last week, the PBOC issued Rmb300 billion of funding to help local governments buy unsold flats to turn them into subsidised housing for rent or sale.
Showing the priorities of local governments, green transportation and sustainable water resource and drainage management projects accounted for the majority of municipal projects, taking up 40.41% and 31.25% respectively of bond issuance, according to classification listed in Green Bond Principles.
Higher quality, less motivated
With detailed industry guidelines and the requirement of a stringent third-party assessment, Liu said that labelling a bond issuance as ‘green’ could greatly help with the disclosure process, helping projects move towards a more transparent and sustainable path. This would make a big difference to the infrastructure sector, and could also reduce funding costs in certain provinces.
Such standards will help bond issuers tap into a different pool of investors who focus on green finance, said Tokyo-based Liu.
However, local governments tend to shy away from disclosing more information about projects and adhering to higher green or sustainable standards, which means higher costs and requirements for managers, added Liu.
She said that many local governments are lacking awareness of the benefits of issuing green bonds compliant with green bond standards. Additionally, they face challenges in capacity and systematic support for originating such transactions.
Regulation is a major hurdle. Current guidelines ford green bond transactions are issued by the PBOC and the China Securities Regulatory Commission (CSRC), which regulated only corporates and financial institutions. While municipal bonds issuances need to be greenlighted by the Ministry of Finance and the National People’s Congress at several levels, adding to the difficulties of regulatory compliance.
Statistics from the Climate Bond Initiative (CBI) show that only around 1% of Chinese green bonds were issued by local governments in 2021. Sources predicted that the ratio had not changed much over the past two years.
On the other hand, most of current environment-related projects are carried out in public-private partnership (PPP) formats, Liu pointed out. The awareness of local governments to raise funds through green bonds remains low.
“Even if a local government is looking at issuing green bonds, it needs to prepare ahead during its annual financial planning process, before undergoing the review process,” she added. Top-down policy guidance is key.
“Governments’ roles are crucial in terms of pushing forward the development of green finance and initiatives,” concluded Liu, citing Japan’s government-led green transformation (GX) plan, part of which was a February-issued sovereign climate transition bond of ¥1.6 trillion ($11 billion).
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