GB Market Report: Burgeoning of Chinese Market: BAIC Motors issues 1st Green Bond from a State-Owned Enterprise ($387.5m, 7yrs); Two brand new Chinese green bond indices; and more issuances from development banks!

BAIC Motors Corporation issues the first RMB 2.5bn green bond from a State-Owned Enterprise (SOE) in China ($387.5m, 3.45%, 7yrs, AAA)

BAIC (Beijing) Motors Corporation made its debut in the green bond market with an issuance of RMB 2.5bn ($387.5m). The bond has a fixed interest rate of 3.45% on a 7-year coupon and is rated AAA by Dagong Global Credit Rating, a large Chinese rating agency.

BAIC has the option of a one-off interest rate adjustment or to repurchase the bond at the end of the fifth year. 

Haitong Securities and Industrial and Commercial Bank of China acted as joint lead underwriters.

BAIC Motors’ inaugural issuance marks the first green bond from a state-owned enterprise (SOE) in China and is part of a larger RMB 4.8bn green bond quota approved for BAIC Motors.  

 

Electric cars figure heavily in the ‘Use of Proceeds’

60% of the bond proceeds (RMB 1.5bn) will fund the construction of facilities for upgrading and manufacturing energy efficient cars and electric vehicles (EVs). The expected fuel efficiency of the former is 5.3 litres of petrol per 100km, corresponding to a carbon emission intensity of around 122gCO2/km.

The remaining 40% of the proceeds (RMB 1bn) will be used as working capital for R&D and the manufacturing of new energy cars. Presumably this will mainly be electric vehicles as BAIC has an ambition to make its entire fleet electric by 2020.

In a large country like China, where over 20 million passenger vehicles are produced each year, low emission cars will be crucial to achieving climate mitigation goals.

We’re glad to see that BAIC provides information on the fuel efficiency and emission performance expected from their energy efficient cars (a level of disclosure we are looking for), as it allows investors to better evaluate the climate credentials of their green bond.

 

Vehicle emission performance standards

Under the low carbon transport criteria of the International Climate Bonds Standard, any electric and fuel cell private passenger vehicles are automatically eligible under the standard. Hybrid private passenger vehicles must have carbon emissions lower than 87gCO2/passenger-km to be eligible in 2015, falling in 2020 to 75gCO2/passenger-km and falling again every five years thereafter until 2050.

BAIC’s EV’s would thus be automatically eligible under the standard. However, sufficient data isn’t provided at this stage on expected emissions per passenger-km to make a comparison for their energy efficient cars.

BAIC’s procedures for management of proceeds are robust. They have chosen to use ring-fencing, i.e. to segregate the proceeds in a special account held with the Industrial and Commercial Bank of China (ICBC).

The ICBC will monitor this account, and could refuse to pay if the proceeds are not going to be used as outlined in the bond prospectus.

As an additional measure, the company's internal auditor will check the use of proceeds with spot audits. 

We are also keen to learn more about how BAIC will report on the use of proceeds and environmental impacts throughout the bond term, as this is not mentioned in BAIC’s prospectus.

BAIC Motors did not seek a second party review or third party certification for their green bond issuance, although as we commented in a previous blog, the green credentials of green bonds from SOEs are reviewed by China Central Depository & Clearing Co, at the request of National Development and Reform Commission (NDRC), before being approved. This is in contrast with green bonds issued from banks, which are approved by the Peoples Bank of China (PBoC).

The green bond guidelines from the NDRC itself do not have clear requirements for external review, although the PBoC guidelines and Stock Exchanges in China have encouraged issuers to obtain second party reviews or third party certification.

We’ll be looking at approval processes in an upcoming blog about Chinese green bond regulatory frameworks. Don’t miss it!

 

China launches the pilot phase of its first two green bond indices

The pilot phase of China’s two inaugural green bond indices are to be launched by China Central Depositing & Clearing Co. (CCDC) and CECEP Consulting Co. Full launch of the indices is expected after the current 3 month pilot program.

 

The new indices are:

‘China Bond – China Green Bond Index' and

'China Bond – Selected China Green Bond Index'.

 

The selection of green bonds to be included in the two indices will be based on four sets of criteria:

  • The Green Bond Endorsed Project Catalogue published by the Green Finance Committee (GFC)
  • The Green Bond Issuance Guideline from NDRC
  • The International Climate Bonds Standard
  • The Green Bond Principles from ICMA

The use of proceeds of the bonds and/or the sector where the issuer predominantly operates will be checked against the green definitions from these four criteria for bonds issued after Dec 31 2009.

If the bond proceeds are allocated to green projects defined by the criteria, the bond will be identified as a green bond.

If there is uncertainty on whether the bond proceeds are used in green projects or not, then the issuer’s major product, business and/or revenues will be reviewed against the four criteria in order to decide whether the sector where the issuer is mostly operating is green or not. If so, the bond issued will also be considered as a green bond.

Any bond that meets one of the four criteria will be included as a green bond in the 'China Bond – China Green Bond Index’.

Those that meet all four criteria will be categorised as green bonds in the 'China Bond – Selected China Green Bond Index'.

Bonds that have been identified as green, either through certification by a third party, approval by regulators, or registration with self-regulatory organisations such as NAFMII, will be included in both indices without being checked against the above criteria.

As of the end of March 2016, 759 bonds from 349 issuers have been identified as green bonds under the ‘China Bond – China Green Bond Index’ for a total issuance amount of RMB 2.45trn ($377bn).

The more selective 'China Bond – Selected China Green Bond Index' includes 413 bonds from 169 issuers, amounting to RMB 1.85trn ($285bn).

The universe of green bonds identified by these two indices is much larger than the universe of green bonds that have been labelled as green at issuance in China to date: As of the end of April 2016, labelled green bonds in China amount to RMB 59.2bn ($9.1bn).

In fact, the indices point to a universe of green bonds that is significantly larger than the global labelled green bond market!

Internationally, the universe of labelled green bonds and unlabelled climate bonds amounted to $597.7bn (RMB 3.89trn) as of June 2015.  

Due to differing methodologies, this international figure is not directly comparable to the labelled and unlabeled green bond universe identified by the newly launched indices in China. Nonetheless, it serves a useful indication of the immense size and potential of the green bond opportunity in China.

Extending the universe of green bonds beyond the labelled universe is important as it increases market liquidity. High levels of market liquidity help reduce transaction costs and make it easier for investors to find investment opportunities and for issuers to raise capital at lower cost.

Green bond indices play an important role in growing the green bond market, as they make it easier for investors to identify green bonds and track their financial performance. Green bon indices also allow passive investors – the largest segment of the institutional investor pool - to gain exposure into the green bond market by investing in funds that track these indices.

It’s excellent to see China’s first two green bond indices getting ready to launch!

 

Development banks could give China green bond market a further boost

The Chinese green bond market took off this year with a majority of issuances coming from commercial banks, such as the China Industrial Bank, Shanghai Pudong Development Bank, and Qingdao. However, development banks could play an important role in further expanding China’s green bond market.

The Shanghai-based New Development Bank has been reported to be planning a green bond issuance of between RMB 3bn ($462m) and RMB 5bn ($769m) for renewable energy projects.

However, those figures are dwarfed by the potential for green bond issuance from China’s three national development banks (policy banks): China Development Bank (CDB), Agriculture Development Bank (ADB) and the Export and Import Bank of China already have extensive green assets within their existing portfolios and could easily issue green bonds to refinance these assets. These three policy banks are active issuers in the China bond market, issuing RMB 2.6trn ($400bn) worth of bonds in 2015.

CDB is the leading player in the green finance space, and the bank has large volumes of existing green loans on its books that could be refinanced through green bond issuance.

CDB is also the largest development bank in the world and has already invested $80bn in renewable energy projects alone. The bank also has a large amount of loans outstanding with railway, agriculture, forestry and water resources projects.

The Agriculture Development Bank of China (ADBC) has also invested in water infrastructure, agriculture and forestry and could participate in green bond demonstration issuances.

 

RMB 54.3bn ($8.3bn) green bonds issued so far in 2016 – but it’s only the beginning:  The Chinese green bond market is estimated to grow to RMB 300bn ($46bn) of issuances this year.

So far in 2016, the green bond issuance in China have consisted of two corporate issuances (Concord Wind and BAIC Motors) and bank based issuances from China Industrial Bank, Shanghai Pudong Development Bank and Bank of Qingdao.

 

To learn more about the China green bond adventure, check out our newly launched China Roadmap 2016 series.

Climate Bonds, in collaboration with IISD, has just launched the China Roadmap 2016 series of reports. These explore how to scale up green bond issuance and investment in China with versions in English and Mandarin.

More information and downloads are available here.

 

Upcoming blog: A guide to China’s different green bond guidelines

The first report in our China Roadmap 2016 series covers details on China’s different green bond guidelines. Have a look, and keep an eye out for a summary blog on the topic soon.

 

The Markets Team

 

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