With China home to a green credit loan market sized at Rmb30 trillion, with Rmb2.5 trillion ($346.3 billion) of green bonds outstanding, market participants are seeking ways, to leverage the potential of green finance in the world’s second largest credit market, including developing green standards, taxonomies and product systems.
Showing the potential momentum, data compiled by S&P Global Market Intelligence suggested that sales of internationally aligned green bonds in China totalled $21.8 billion in the last three months of 2023, topping the list of global green bond issuances by country, followed by the US with total sales of $12.9 billion.
International alignment is key, according to Jun Ma, chairman of China Green Finance Committee, and president of Institute of Finance and Sustainability, during the China Bond Market Forum, held by the International Capital Market Association (ICMA) in Beijing on March 20.
China has been working with the European Union in developing the common ground taxonomy (CGT), which has been applied to a number of issuances. Singapore and Brazil are also expected to acknowledge CGT in green finance, he said.
Ma revealed that the team is targeting the green labelling of over 250 outstanding bonds in the interbank bond market, also known as CIBM, as well as 500 bonds traded on stock exchanges. Many of these outstanding debts are qualified for green labelling both onshore and offshore in the international market, he said.
Another opportunity is transition finance, which helps fund transitional efforts by governments, industries and corporates in their pivot towards greener technologies and development models.
Ma said during his keynote speech that only 10% of the total economy activities in China fall into the category of ‘pure green’, leaving the other 90% in need for much more funding from transition initiatives.
“The challenges for transition finance lies in the fact that most issuers in this space would be corporates with high carbon emissions. Drafting comprehensive organisational transition plans is more difficult than doing so with a specific project in traditional green finance,” he explained.
Weitao Gao, vice president at China Chengxin Green Finance, emphasised during the panel discussion that it is important to test out transition financing, technology and projects on smaller scales. Moreover, transition activities depend largely on specific local contexts, taking into account a host of factors.
Local level
Late last year, Shanghai launched a transition finance taxonomy, covering six carbon-intensive sectors across water shipping; ferrous metal smelting and rolling processing; petroleum refineries; chemical raw material manufacturing; car manufacturing and aviation.
A similar local-level transition taxonomy was first issued in Huzhou, Zhejiang province, in 2022, which was updated last June, covering activities in nine industries that are supported by the government. For example, within the ferrous metal sector, firms are recommended to reuse scrap metal, consume renewable energy and increase electrification, among other measures.
Hebei province and Chongqing have also published taxonomies targeting certain sectors. In February 20204, the National Development and Reform Commission (NDRC) issued a notice on a list of green transition taxonomies for local references when drafting.
Gao told FA in a separate conversation that such transition taxonomy try-outs at local level would help pave way for nationwide rollouts.
“Local transition taxonomies are easier to develop and test in practice, taking into consideration of specific economic structures and development model in various regions,” he explained.
Hebei’s transition instructions on the steel industry were cited by Gao as an example – the northern province’s steel sector accounts for around 29.8% of total industrial revenue in the province. The experience gained from Hebei’s steel transition will be well positioned to be applied in other regions.
Challenges lie in the specific transition technology that will need to be adopted, Gao said.
Especially for investors looking at transition finance, huge funds will be required for research and development, in addition to the risks related to implementation. New technologies will continue to come out at the same time, disrupting the relatively long cycle of transition projects.
“We are slowly progressing, and adjustments are needed along the way,” he said.
