Developing A Green Bonds Market: The Case of China

A vibrant green bonds market is desirable for China because it promotes environmental protection and sustainability even amid rapid economic development. Over the past 40 years of reform, economic development in China has led to significant gains. However, consequently, China is also facing serious damage to the living environment. In recent years, the government has resolved to pursue environmental protection and sustainable development as an important national strategy and to mitigate some of the negative impacts brought by decades of rapid growth.

As a result, China proposed the national strategy of achieving ‘ecological civilization’ in 2015 and incorporated a green philosophy into the five major development concepts. It then began to explore reforms geared towards green and low-carbon economic development, becoming an active implementer of the climate control goals proposed by the United Nations Framework Convention on Climate Change, the Paris Agreement, and other related international conventions.

In September 2020, President Xi Jinping announced the ‘30/60 goal’ at the United Nations General Assembly, which aims to peak carbon emission by 2030 and reach carbon neutrality by 2060. To implement China’s ‘30/60 goal’, the 14th Five-Year Plan that started in 2021 aims to accelerate low-carbon development in China.

In this context, the establishment of the green bonds market assumes crucial significance and urgency. Accordingly, green bonds are considered by the Chinese government as an effective financial instrument to facilitate this economic transformation. In January 2016, the Industrial and Commercial Bank of China received approval to issue RMB10 billion green financial bonds in the Interbank Bond Market, marking the official launch of green bonds in China.

Despite its relative youth compared to its counterpart in the EU, China’s green bonds market developed at a rapid pace in the past few years. According to statistics from the CBI and China Central Depository & Clearing Research Centre, Chinese issuers issued a total of RMB 386.2 billion (US$ 55.8 billion) of labelled green bonds in 2019 in both domestic and international markets, making China the largest source of labelled green bonds. As of March 2021, China leads the world in the value of outstanding green loans at about US$2 trillion, making it the second largest green bonds market in the world, ranking only after the United States.

However, the government-led approach in building a green bonds market in China comes in contrast with the laissez-faire approach adopted in countries like the US. Meanwhile, the approach in the EU is somewhere in between government intervention and private ordering, demonstrated by the EU Taxonomy Regulation and the EU Sustainable Finance Disclosure Regulation.

These varying approaches beg the paradoxical question of what the limitations and drawbacks of industrial policies and centralized government strategies are. Against this backdrop, our recent article ‘Developing a Green Bonds Market: The Case of China’ (forthcoming in the European Business Organization Law Review 2021), takes a pioneering step to analyze how a transitional economy can develop a burgeoning green bonds market within a short period, using China as a case study. Our article aims to fill the literature gap of analyzing the green bonds market in China and provides a timely reflection of the desirability of government-steered green bonds market versus private ordering and their relative pros and cons.

To do this, three pressing questions need to be answered, all of which are of special importance to policymakers and legislators in countries looking to develop their green bonds market.

First, why and how is China able to effectively develop a green bonds market within a short period of time?

Second, what are some of the challenges in developing its green bonds market, and how might these be addressed through regulatory reform?

Third, which parts of this analysis are unique to the Chinese context, and which general advice is applicable to other growing markets?

Our article suggests that a government can help to develop a green bonds market by playing an instrumental but also evolving role.

First, at the emerging stage of this unique market, the government could play a more active role in designing a conducive regulatory environment through law and policy, providing necessary financial infrastructure and appropriate incentives for investors and green bonds issuers. Government intervention is warranted at this stage given the unique features of the green market, in particular, the desired positive externalities on environmental protection and climate change. In China, such a regime is implemented with a focus on inter-ministerial and central-local collaborations, centralized policy-making, and alignment of green goals with performance assessment of local officials.

Second, as the green bonds market matures with sophisticated market players and well-established institutional and financial infrastructure, the government should assume a limited role, providing funding and monitoring, and letting market forces play a greater role in achieving market efficiency. Unleashing the potential of market forces can mitigate several of the challenges faced by a top-down approach.

Lin Lin is an associate professor of law at the Faculty of Law, National University of Singapore.

Hong Yanrong is an associate professor of law at the School of Law, Peking University.