FORGET the 50 shades of grey. What counts in China’s world of finance are all the nuanced shades of green and an alarming lack of blue.
With smog choking the skies over many Chinese cities and Beijing once again shrouded in a pall of pollution last week, the government initiative to push investment in clean energy and environmentally friendly projects is gaining traction.
Under guidelines issued by the central government in late 2015, Chinese banks are encouraged to provide credit for green investments, private funds are urged to become involved in saving the planet and company bonds that are classified as green get higher priority in the approvals process.
China last year became the world’s largest issuer of "green bonds," accounting for nearly 40 percent of global issuance. The market value of those bonds swelled to US$36.2 billion from nothing a year earlier. Some market players described the growth rate as "zero to hero."
But that does raise some questions. What is green and what is now? It’s an area of considerable grey. The European Investment Bank and World Bank, which started issuing green bonds in 2007, drafted the Green Bond Principle in 2014 — setting forth criteria now used as a common global standard in defining "green" investment.
"The green bond market is like a baby," said Tzu-kuan Chiu, a professor at the Shanghai Advanced Institute of Finance, who studies the sector. "It will show great growth when it’s still young and small. But if you look deeper into the projects involved, you will find we still have a lot of work to do, starting with the definition of 'green.’"
That’s a pivotal point given the rapid growth in the sector. The global green bond market grew from about US$3 billion in 2012 to US$81 billion last year, with China as the main driver.
Ma Jun, chief economist of the research bureau at the People’s Bank of China, told a forum last month that the momentum of green finance will continue this year.
"China requires three to four trillion yuan of green investment annually to push the initiative," Ma said. "The central bank is the primary pusher."
Last year, 53 green bonds were issued by 33 different entities in China, including eight clean-coal projects issued by the Industrial Bank of China and two bonds involving the China Three Gorges Corp, operator of world’s largest power station.
"According to the global standard, large dam projects and chemical materials projects such as coal are not eligible to be labeled as green," Chiu said, "There’s no difference between clean coal and dirty coal to foreign investors. Coal is coal."
About a third of China’s green bond issues, or US$12.6 billion, doesn’t fit the global definition of green, according to the Climate Bond Initiative and the China Central Depository & Clearing Co.
The central bank’s Ma admitted that controversy over the definition does exist, but he said the standard here needs to be put in the context of realities in China. Coal, for example, accounts for two-thirds of China’s energy consumption.
"New energy technology is expanding very rapidly," Ma said. "In talking about energy saving and emissions reduction, we should focus on supporting clean coal technology. If we achieve a breakthrough there, we are likely to reduce the emissions of carbon dioxide and sulphur dioxide by 70 to 90 percent."
Companies wanting to issue bonds are naturally keen to adopt a liberal definition of green. They argue that projects need to be assessed on how they improve the overall environment.
"Many companies want to lift their environmental credentials by issuing green bonds to finance their conversion from polluting to clean energy factories," said Xu Ping, business director of the clean energy department at Q-TZG Leasing Co. "Others are just seeking a quicker channel for fundraising."
The demand for "green" certification in debt issues is spawning a booming business in third-party rating services. Major players include the big four accounting firms, think tanks and consulting companies.
Those services certified almost 87 percent of the green bonds issued last year, with Ernst & Young accounting for nearly half, according to data compiled by China Lianhe Credit Rating Co. That compares with about 60 percent of applicants in the global green bond market getting certification.
Adding to headaches for the green bond market is the wariness of some investors toward such investments.
For one thing, it is still not very clear how some long-term green projects will make money, especially when most banks and other investors prefer shorter-term products amid profit pressures.
"At the end of the day, a green bond is a financial product," said Yasumasa Shimizu, chief executive officer of Shanghai-based consulting firm Sustainable Technology of Ecology. "Investors won’t look too closely at how green it is, but they will assess its value as an investment and its return on profit in 10 years or 20 years."
The average yield of a five-year green bond is about 4.2 percent, up to 0.4 percentage points lower than other bond products of the same duration, according to a joint report by the Climate Bond Initiative and the China Central Depository and Clearing Co.
"Some projects have exaggerated their true outlook for financial returns because they are guaranteed by local or provincial governments for political reasons," Shimizu said.
Bank of China, the last big domestic green bond issuer, sold US$3 billion of green debt in three tranches, including one in US dollars and another in offshore renminbi. Other issuers include renewable energy companies, city transport systems, a local government financing vehicle in Anhui Province, automaker Geely, property developers and the government of the Tibet Autonomous Region. Chiu said green assets are more suitable for long-term investors, like insurance companies and pension funds. But in the Chinese market, investors aren’t likely to consider the value of social returns.
The central bank and the National Development and Reform Commission, which oversee the issue of green bonds, are striving to cultivate market appetite for such debt. The incentives include interest subsidies, lower-cost loans, the establishment of national green development funds and the promotion of emissions trading.
Will it work?
"Policies don’t make a meal if investors won’t come to the table," Chiu said. "There needs to be an appetite for green assets."
Still, money is expected to swirl around the sector for years as new instruments are designed to promote the green initiative.
Shimizu said one of the promising tools is asset-backed securities, whereby companies can use the first phase of a project as collateral to raise funds for subsequent phases.
Others say the green agenda should be expanded. For example, bike-sharing businesses might be counted as green.
"In terms of green investment, there’s a gap between financial and social returns," said James Chang, financial service consulting managing partner with PwC China. "It’s hard to satisfy both aspects at the same time."