MNI INTERVIEW: Sino-EU Green Label to Drive Cross-border Flows

The addition of legacy Chinese green bonds to the China- and E.U.-led Common Ground Taxonomy (CGT) will drive greater cross-border capital flows, according to a prominent policy advisor.

China’s green-bond market could record significant offshore flow through channels including Bond Connect, Qualified Foreign Institutional Investors scheme and the China Interbank Market (CIBM Direct) should offshore investors recognise its existing debt under the CGT, Ma Jun, chair of the Green Finance Committee of the China Society for Finance and Banking and co-chair of the IPSF Taxonomy Working Group told MNI in an interview.

The IPSF working group, led by People’s Bank of China and European Commission, developed the CGT jointly, which bilaterally recognises green and sustainable economic activities. It was updated in June 2022 and includes 72 climate mitigation initiatives.

“Among the current book of over 1000 green bonds traded in China’s domestic market, several hundreds are likely to be aligned with the CGT and they will be more internationally accepted after receiving a CGT label,” Ma, who is the former chief economist at the PBOC, said. The IPSF working group will expand the CGT to cover more sustainable activities beyond climate and enhance the compatibility of taxonomies from different jurisdictions, Ma added.

Some Asian market participants have started to label newly-issued green financial products as CGT-aligned and several large Chinese banks have issued offshore green bonds based on the taxonomy. Deutsche Bank and Standard Chartered have also arranged syndicated loans and trade finance deals for Chinese renewable energy companies with the CGT.

The PBOC first introduced its green-bond taxonomy, the Green Bond Endorsed Project Catalogue, in 2015 which sets out standards for green bonds issued by financial institutions and corporates and updated the standards in 2021. Chinese borrowers issued CNY2.5 trillion of green bonds between 2016-2022, making it one of the largest green-bond markets globally.

“In China’s domestic market, green loans saw a boom last year with a 38% y/y expansion to an outstanding amount of CNY22 trillion by year end and green bond issuance jumped 50% y/y last year, raising as much as CNY870 billion for green projects” Ma continued. “In contrast, green-bond issuance saw a decline in the global debt market last year due largely to rate hikes led by the [US Federal Reserve].”

TRANSITION REGULATION

Chinese companies and financial institutions must prepare for tighter carbon-emissions regulation and ESG-related disclosures, but should also explore opportunities presented by energy transition, Ma commented.

Ma also co-chaired the G20 Sustainable Finance Working Group that produced the G20 Transition Finance Framework in 2022.

The PBOC will likely introduce a domestic transition-finance framework, including a transition-finance taxonomy, to encourage private sector funding for decarbonisation, he noted. China must accelerate its green-finance support to entice private funds into energy transition, Ma added. “The PBOC could consider launching a transition finance funding facility to provide cheap funds for transition activities after it introduces a transition-finance taxonomy,” he suggested.

China’s green transition will require about CNY16 trillion of investment per year and 90% of the funds will need to come from private investors, he continued. Equity financing tools and de-risking facilities are needed, together with policy incentives from the central and local fiscal authorities to leverage debt financing, Ma argued.

Hong Kong authorities are expected to adopt the International Sustainability Standards Board (ISSB) climate disclosure standards later this year. The standards require companies to report greenhouse-gas emissions they create directly and indirectly via supply chains. Ma said Hong Kong-listed Chinese firms should prepare for climate disclosures and develop the relevant infrastructure now.

He also warned Chinese exporters should prepare for Europe’s carbon border tax beginning 2026 on certain imported carbon-intensive goods. “Even though the levy will have limited impacts on China’s total exports to the E.U. in the first stage of 2026, Chinese firms should prepare their carbon accounting in case it expands by 2034,” he said.