The green, social and sustainable (GSS) debt market in China – where the government has pledged to achieve carbon peaking by 2030 and carbon neutrality by 2060 – has grown rapidly over the past six years reflecting its ambition to rapidly decarbonize its economy and enhance the resilience of its environment and society, according to a recent report.

In 2021, China has maintained its green momentum by launching into the domestic market several innovative sustainable debt labels, such as carbon neutral and sustainability-linked bonds (SLBs), with others for social and sustainable development in the pilot phase, states the Growing Sustainable Debt Market Report, published by Climate Bonds Initiative (CBI) and CIB Research.

As of H1 2021, the cumulative issuance of domestic labelled GSS debt was 3.3 trillion yuan (US$521.37 billion). The cumulative issuance of carbon neutral bonds reached 140.6 billion yuan by the end of June 2021, accounting for 57.3% of the total amount of green bonds issued in H1 2021.

Between 2020 and H1 2021, overseas green bond deals totalled US$9.3 billion, while social and sustainability bonds reached US$1 billion and US$7.4 billion respectively. Offshore issuance of SLBs was US$6.1 billion.

The report also highlights the rapid diversification of labels, noting that:

• The cumulative issuance of carbon neutral bonds reached 140.6 billion yuan by the end of June 2021, accounting for 57.3% of the total amount of green bonds issued in H1 2021.
• Blue bonds are still in the nascent stage. In 2020, the Bank of China and China Industrial Bank issued blue bonds in the overseas market, while Qingdao Water Group issued the first domestic blue bond.
• In H1 2021, the scale of local government special-purpose bonds issued specifically for green projects reached 45.4 billion yuan.
• In May 2021, the first batch of seven SLBs were successfully issued in China’s interbank market, totalling 7.3 billion yuan.
• As of June 2021, the cumulative issuance of China's special bonds for poverty alleviation was 282.6 billion yuan.
• By the end of June 2021, China had issued seven green rural revitalization bonds totalling 3.4 billion yuan.
• As of June 2021, the cumulative issuance of China's pandemic bonds reached 1.54 trillion yuan.

Supporting policies for green bonds have been launched across China, the report points out, including substantial incentives, such as discounted interest rates, guarantees and subsidies.

As well, the definition of green has been unified, and there has been increased China-EU collaboration on taxonomy. The latest version of the Green Bond Endorsed Project Catalogue, with an effective date of July 1 2021, achieves the unification of disparate domestic green bond standards and further alignment with international standards. And the Common Ground Taxonomy – Climate Change Mitigation report launched during COP26, the CBI-CIB Research report explains, adds clarity to the common ground on the definition of green between China and the EU, and will facilitate cross-border flows of green capital.

Overall, the long-awaited milestone of US$1 trillion in annual green investment is now in sight for 2023, the report states. “We also expect that the global GSS market is on track to reach record highs this year after a 2020 total of nearly US$700 billion,” it adds. “We are positive on the future of China’s sustainable debt market. Carbon neutral bonds have broad scope for growth; green local government bond issuance may accelerate; and transition finance has the potential to accelerate rapid portfolio decarbonization.”

Green bonds are a critical part of China’s efforts to drive its financial markets to better serve environmental objectives, shares Sean Kidney, CEO, Climate Bonds Initiative. “They also enhance financial stability,” he adds. “A notable feature of the market is its clear longer-tenor nature, in contrast to the broader bond market’s shorter-tenor profile. Longer-tenor bonds dampen debt market volatility and reduce the risks of instability.

“As credit transparency increases to improve capital allocation efficiency in debt markets, the enhanced predictability of green debt allows orderly change. [And] strong regulatory directions and international cooperation will allow demand to grow and more capital to flow towards net-zero investments. This market will see continued rapid growth in 2022.”