How to shift a supertanker: China Green Finance Rpt (PBoC+UNEP Inquiry) includes ambitious green bonds agenda: definitions, risk weighting, tax breaks + fast track issuance approval + first China green bond from Industrial Bank. 好酷喔 (that's cool!)

Since it was released late last month, a ground-breaking report, “Establishing China’s Green Financial System”, from China’s central bank, the People’s Bank of China (PBoC), released, has been getting a lot of media attention.

The report sets out an ambitious agenda for how China can green its rapidly developing financial and capital markets, using policy, regulatory and market-innovations.

It also details an impressive push for green bonds! (And yes, the Climate Bonds Initiative did have something to do with that.

The report is the outcome of a Green Finance Task Force - co-convened by the PBoC and the UNEP Inquiry into the Design of a Sustainable Financial System – which includes an impressive cast of 40-plus expert participants. The group spans regulators and government departments, financial market actors, and experts working on green finance and international experts (including Sean Kidney of the Climate Bonds Initiative).

Co-Convenor of the Task Force is the energetic Ma Jun, Chief Economist at the People’s Bank of China, whoannounced some exciting green bond policy developments in our workshop at the IMF/WB spring meetings in Washington last week.  The other convenor is the hyper-kinetic Simon Zadek.

The report dives into the details of green bonds proposals, which include: green definitions, incentives, an evaluation system for green and a fast track issuance approval system.

Official guidelines for projects and assets that be used for green bonds are being development

The PBoC and the CBRC (China’s banking regulator) have already started working together to develop Green Bond Guidelines. These official Chinese guidelines will be more like the detailed Climate Bonds Standard than the more general Green Bond Principles,

While the official Guidelines are being developed, the CBRC’s 2013 Green Credit Statistical Guidelines for green loans from banks will set the official boundary for green bonds’ use of proceeds in China.

But of course, guidelines are only useful if they are followed. Which is why the next proposed action is important:

Create an evaluation system to check allocation of funds and quantify environmental impacts of green bonds

"Regulators should identify specific requirements on the use of proceeds raised from green bonds, and set up an evaluation system to check compliance. The evaluation process would check the allocation of funds to green projects, as well as the environmental impacts of the investments over the lifecycle of the bond."

Create incentives for green bond issuance: risk-weightings, tax incentives and preferential interest rates

This is where China is really the front-runner for supporting a green bond market, offering specific proposals that are now entering a formal approval process:

  • For commercial banks issuing green bonds, exclude the loans funded by green bonds issuance from the loan-deposit ratios.
  • 75% preferential risk weighting and capital regulation requirements for financial institutions for green bonds.
  • Preferential risk treatments in capital-risk ratios for banks investing in green bonds, allowing a 50% downward adjustment on the risk asset for green bonds.

For those of you that have alarm bells ringing now, expecting green bonds to create, rather than alleviate, financial instability in China, you can rest assured: these are all conditional on the banks meeting certain risk management and capital requirements.

The report also proposes:

  • Tax incentives for institutional investors, giving interest income from green bonds the full tax exemption applied to treasury bonds (interest earned by domestic institutional investors on non-government bonds in China is otherwise subject to a 25% corporate tax and a 5% capital gains tax).
  • Using green bond issuance to fund preferential rate schemes for green local governments loans made to small enterprises funded by the green bond issuances

Quite an arsenal of incentives for both issuers and investors!

Streamline review and approval procedures for green bond issuance

Bond issuances in China typically have to go through a relatively lengthy approval process with both the PBoC and the CBRC. It’s proposed to streamline this process to shorten the approval time for issuance of green bonds compared to other bonds, allowing green bonds to more easily tap into optional market timing for issuance.

Having such specific policy proposals on the table from an authority like the PBoC is exciting stuff!

It’s interesting to note thematic bonds, that earmark proceeds for a specific policy priority area, is actually not a new venture in China. Since 2009, CBRC has supported the issuance of special bonds from commercial banks to support lending to small-and-medium enterprises as well as agriculture investments. Highlighting precedents can make it a lot easier to get all the market actors on board – nothing new about this guys, just repeating what you’ve successfully done before to push capital, just this time it’s for green.

The Green Finance Task Force report have a wide range of other recommendations that go beyond green bonds. Overall, the report proposes 14 specific recommendations for building China’s green finance system, and a step-by-step roadmap to move the recommendations from ideas to action. The main report is backed by 16 additional background papers, In addition to green bonds, the work includes green loans, green banks, green investment funds, green insurance, carbon trading and a green legal framework.

Of course, many of these separate workstreams are also strongly linked to the green bond agenda: green loans can be bundled into green asset-backed securities; green banks can be issuers of green bonds; green investment funds can allocate capital to green bonds and so on. It’s all a complementary basket of actions.

Green finance will be on the agenda in China’s upcoming 13th 5-year plan (to be finalised and launched in March 2016). The PBoC is in charge of drafting the financial sector development and reform aspects of the plan, and the Deputy Governor of the Bank, Pan Gonsheng, states clearly that: “green finance will be a key element of this plan”. The recently launched report gives an indication of the high ambitions the PBoC holds for the green finance space.

But, the green bond adventure in China will kick off big time before this proposed arsenal of policy mechanisms are implemented. The report states that Industrial Bank of China will be the country’s first official green bond issuer. Rumours are we can expect some headline grabbing announcements here in not too long… Stay tuned!

Our blogs are written by a team: Sean Kidney, Tess Olsen-Rong, Beate Sonerud, Kazutaka Kuroda, Rozalia Walencik and Justine Leigh-Bell.