China Urges ‘Market Forces’ to Fill Gap in Green Bond Program

Public finances will only cover a “fraction” of the green financing investment needed for China to achieve its climate-change goals so the market will be encouraged to make up the difference, according to People’s Bank of China Governor Yi Gang.

“It is therefore imperative to put in place sound public policy incentives to encourage market forces to fill in the gap,” Yi said in a speech in Beijing Sunday.

China is also working with its European counterparts to announce a common green taxonomy this year as it looks to raise hundreds of trillions of yuan to reach its goal of peaking carbon emissions by 2030 and achieving carbon neutrality by 2060, Yi said. The taxonomy issue, to define and classify green projects, will be discussed at the October Group of 20 meetings in Rome.

The nation’s recovering economy is allowing Beijing to resume a campaign to boost green financing to meet President Xi Jinping’s ambitious environmental goals. China is set to fuel an issuance boom with one of the country’s top brokerages expecting record sales of green bonds this year.

Chinese firms are expected to raise between 500 billion ($77 billion) and 800 billion yuan via such notes in 2021, accounting for about a quarter of the world’s total, Qingchuan Liu, head of China International Capital Corp.’s fixed income, commodities and currency department said in an interview. Green bond sales from China plunged last year to about 130 billion yuan amid a pandemic-induced slowdown.

Chinese borrowers have sold some $4.86 billion of these notes in 2021, a year-to-date record, Bloomberg-compiled data show. The issuance could see a boost from foreign-exchange reserves, which will invest more in green bonds while putting a cap on high carbon assets, Yi said.

Climate change also poses a threat to financial stability, Yi said.

“Green transition may cause the value of carbon-intensive assets to fall and sour the balance sheet of firms and financial institutions,” he said. “This will heighten credit risk, market risk and liquidity risk, and further undermine the stability of the entire financial system.”

China is asking some financial institutions to measure the carbon emission and climate risks of their projects.

“The financial system can play a key role in supporting green transition and managing climate-related risks,” the governor said.

In a move that may ease investor concerns about greenwashing, Yi said that China’s latest green bond project catalogue that removes fossil fuel projects will soon be finished. The use of some green financial bonds must now be reported on a quarterly basis and the PBOC plans to develop mandatory disclosure for all financial institutions.

©2021 Bloomberg L.P.

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