
China has published a new green bond framework to address greenwash concerns. While more closely aligned with the International Capital Market Association (ICMA) rules, issues remain that may limit international interest.
China’s newly published new rules for green bond issuance refer to the principles issued by ICMA, aligning on the four core components for issuance.
Unclear requirements relating to working capital, however, may work to undermine the country’s efforts at reducing greenwashing risks.
Eliminating discrepancies with international standards will be an important step in attracting capital and enhancing China’s efforts towards international cooperation in green finance.
The new China Green Bond Principles have been issued by the China Green Bond Standard Committee, a self-regulating entity under the People’s Bank of China (PBOC), and have been approved by the PBOC and China Banking and Insurance Regulatory Commission (CBIRC).
As a step towards furthering the cause of financial cooperation, the new principles attempt to align with ICMA by identifying the same four core components for the issuance of a green bond – use of proceeds, process for project evaluation and selection, management of proceeds, and reporting.
The new principles require that 100% of bond proceeds are used in projects identified the green taxonomy. The criteria for eligible green projects are set by China’s domestic green taxonomy, the Green Bond Endorsed Projects Catalogue from the PBOC.
Discrepancy on working capital risks greenwashing claims
Discrepancies between Chinese guidelines and international standards include differences such to the amount of bond proceeds that can be allocated to general working capital – this may raise ongoing questions.
General working-capital requirements is the main area in which Chinese green bonds have diverged from international standards all along.
Global standards permit a maximum of 5% of bond proceeds to be used towards working capital, while guidelines by China’s National Development and Reform Commission allow up to 50% of proceeds to be used to repay bank loans and replenish working capital.
Further, these guidelines do not specify what type of working capital (green or not green) is eligible.
This discrepancy could undermine the improvement seen in alignment by issued Chinese green bonds with both domestic and global standards.
Burgeoning Chinese green bond market benefits from better standards
As the world’s second largest green bond market, China leads the Asia-Pacific region in total issuance. The increase in volumes have been attributed to government policies in support of reaching carbon neutrality by 2060, and peaking before 2030, as well as an update green taxonomy in 2021.
This has resulted in a large influx of both onshore and cross-border issuance from China.
China announced measures to facilitate foreign institutional investments in its bond market in May 2022, by opening the interbank and exchange bond markets. The joint taxonomy project with the EU is aimed at mapping similarities between the respective taxonomies to facilitate cross-border issuances.
With a higher proportion of hard-to-abate sectors than the west, and a potential lack of ‘green’ projects, China’s transition may not attract a lot of use-of-proceeds funding, and instead rely on sustainability-linked bonds.
Its carbon neutral goals and commitments will require funding for larger projects, which can benefit from international institutional investments, but will require closer alignment with international standards.