At the end of last year we saw the tip of the Chinese green bond market iceberg surface with the first Chinese corporate green bond from Goldwind and first Chinese green domestic issuance from Agricultural Bank of China (ABC). The momentum built with the the People's Bank of China (PBoC) green bond regulations launched in December 2015 (look out for an upcoming blog explaining the guidelines).
Now, in 2016 China Industrial Bank (CIB) has already issued a green ABS deal, and a further two green bank bonds, approved as green by PBoC, have hit the market.
China Industrial Bank issues RMB 2.6 billion across 5 tranches
China Industrial Bank hit the market first in 2016 with a self-labelled green ABS. The bond was 2.5 times oversubscribed. The deal was split over 5 tranches with coupons ranging from 0%-4.39% and tenor 10 day – 192 days. Three tranches are rated AAA and one is rated A+ by China Cheng Xin International Credit Rating. The remaining tranche, the longest dated duration, has no rating.
(And yes, you did read the tenor right – max 6 months. China’s huge bond market is 93% interbank, and that’s dominated by short-term debt, very short-term in fact. Last time we looked more than three quarters of China’s debt was very short-term, vs less than a quarter in the US. That’s fine when it’s all very closely managed by the central bank, but as the government loosens the regulatory reins on banks in search of improved capital allocation in the economy (“market forces” vs bureaucratic decision making), then this short term feature will create volatility risk for the economy. Questions is whether there’ll be enough policy driven interest in green to see green bonds spearhead this shift.)
The bond is backed by 42 loans from 29 borrowers.
All the loans fit into the PBoC catalogue of ‘green projects’. As we will discuss in our upcoming blog, this catalogue has a lot of overlap with CBI’s own set of green definitions. However there are some differences; in particular when it comes to clean coal and fossil fuel in mass rapid transit, which our scientific working groups have ruled as not aligned with a transition to a 2 degree/low carbon and climate resilient future. But modest differences, and these bonds seem to be clean energy focused.
Another China Industrial Bank green issue – this time a green bank bond approved by PBoC totaling RMB 10bn ($1.5bn) (3yr, AAA, 0%)
China Industrial Bank issued its first green financial bond earlier this week. The RMB 10bn ($1.5bn) green deal has a 3 year tenor and zero percent coupon. The bond was rated AAA by Shanghai Brilliance Credit Rating (SBCR). The lead underwriter for the deal were Agricultural Bank of China, Bank of China, China Construction Bank and Industrial and Commercial Bank of China.
The bond is approved as green by PBoC meaning that its projects fit within the China Green Bond Endorsed Project Catalogue, which is published by PBoC in Dec 2015.
For its green financial bonds CIB provides a full list of 902 eligible green projects in its prospectus document. These green projects span only 5 categories of the vast Catalogue.
The eligible projects include industrial energy saving, sustainable building, clean public transport, new energy automobile, renewable energy, recycling and utilisation of solid wastes, and treatment of waste water and environmental management. The great news is that all these projects are aligned with the green definitions in the Climate Bonds Taxonomy.
Largest-ever Asian green bond issued by Shanghai Pudong Development Bank huge RMB 20bn, that's $3.5bn!
Shanghai Pudong Development Bank (SPD) issued the largest ever Asian green bond, though it narrowly misses out on the worldwide top spot currently held by Engie (formerly known as GDF Suez) 2014 $3.49bn green bond. Nonetheless this huge green bond has a 3 year tenor and 2.95% coupon. SBCR rated the bond as AAA. China International Capital, Guotai Junan Securities and Haitong Securities are the lead underwriters in the deal.
Similar to the CIB green bank bond, SPDB’s green bond was approved by PBoC and therefore use of proceeds are aligned with the main catalogue. SPDB narrows down which categories its proceeds will be used for to six.
The of loans included are for energy efficiency, clean transportation (railways), clean energy (wind, hydro, geothermal and marine), resource conservation and recycling (recycling and utilisation of biomass), and pollution prevention and control (mainly waste water treatment), and ecological protection and climate change adaptation. These projects all fit into the Climate Bonds Taxonomy.
Great work SPD!
It’s worth noting that CIB chose not to get an independent second review or third party certification document. This differs from the early overseas issuance by Goldwind, the first Chinese corporate green issuer, and Agricultural Bank of China, both of which did get second reviews. SPD, on the other hand, did get a second review from EY; however the document is not yet publicly available.
One potential reason for the lack of publicly available second reviews is that for the CIB and SPD bank green bonds the relevant bond prospectus document lists eligible green projects. Providing investors with this list enables them to make a call on the green credentials of the bond. Although it’s great to such detailed disclosure, the next step, which we expect to see in the near future, is independent verification of the green credentials.
So this is just the start of what China will be offering in the green bond space. PBoC has already approved a pipeline of RMB 100bn green bonds ($15bn). It’s fair to say, it’s going to be a ground-breaking year for Chinese green bonds!