Can green bonds help finance a clean energy revolution in China?

The People’s Bank of China has been lauded as a powerhouse of renewable project financing having sold the world’s largest green bond for $3.03bn earlier this year. Julian Turner investigates issues of transparency in this growth market and asks whether capitalism can be used to fight climate change.


In her 2014 bestseller This Changes Everything: Capitalism vs the Climate, Naomi Klein argues that deregulated capitalism is incompatible with the fight against global warming and that environmental activism and the free market, with its insatiable appetite for profit and growth, cannot co-exist.

In the chapter sub-titled ‘The Disastrous Merger of Big Business and Big Green’, Klein suggests that the term ‘green economy’ is oxymoronic, and that the argument that climate change initiatives must translate into earnings, productivity and economic incentives for industry is fundamentally flawed.

Global warming and its symptoms, Klein concludes, is a civilisational wake up call, and a once in a lifetime opportunity to rein in corporate power, rebuild local economies and reclaim democracy.

“For a quarter of a century, we have tried the approach of incremental change, attempting to bend the physical needs of the planet to our economic model’s need for constant growth and new profit-making opportunities,” she states in the introduction to This Changes Everything. “The results have been disastrous, leaving us all in a great deal more danger than when the experiment began.”

So, when it comes to averting the catastrophe of global warming, is modern finance capitalism the problem or the solution? Recent developments in China suggest that the answer may well be ‘both’.

Eastern promise: the green bond market in China

At the 2016 World Energy Congress in October, senior delegates lauded the state-owned People’s Bank of China People’s for its visionary use of green bonds, fixed financial instruments issued by governments, multi-national banks or corporations to raise money for environmental projects.

Green bonds are viewed as particularly critical for China in order to scale up funding for pollution clean-up operations, particularly in the east of the country, and the transition to clean energy.

Most of mainland China's electricity is produced from fossil fuels, predominantly from coal – 73% in 2015 – with the economic loss due to pollution estimated by the World Bank at almost 6% of GDP.

"Most of mainland China's electricity is produced from fossil fuels, predominantly from coal – 73% in 2015."

It is also estimated that China needs at least 2 trillion yuan ($308.8bn) of green investment annually over the next five years to promote environment protection and reduce the effects of pollution.

In a report for climate change website chinadialogue.net, Xu Nan and Wang Yao of China’s Central University of Finance and Economics discuss the stellar growth of China’s green bond market.                                                                  

“In the first half of this year, Chinese-funded entities (governments, banks and companies) issued $11.2bn (75bn yuan) in green bonds, 33% of the global total during the period,” write Nan and Yao in the piece ‘China’s green bond market booms with more clarity in policy’. “The total value of green bonds issued or approved, including in offshore markets, now stands at 143.65bn yuan (around $21.5bn), making it the fastest-growing and most attention-grabbing player in the global market.”

Green bonds first appeared in 2007. Initially issued only by multilateral financial institutions such as the European Investment Bank and the World Bank as well state-backed financial institutions, their popularity has grown among private companies seeking environmental finance in their portfolios.

“In China, the market is driven by top-down policy to encourage state-owned enterprises, and the private sector, to pick up most of the huge cost of cleaning up pollution and equipping the country’s vast industrial sector with less polluting technologies and lower carbon energy,” say Nan and Yo.

The People’s Bank of China has announced that will invest $600bn annually in ‘green’ sectors over the next five years. In January, the Industrial Bank and Pudong Development Bank issued a total of 30bn yuan ($4.3bn) in green bonds, in addition to city-level commercial banks such as the Bank of Qingdao.

China’s vast economic planning ministry the National Development and Reform Commission, and the Shanghai and Shenzhen stock exchanges, have also issued green bond guidelines and the National Institution of Financial Market Institutional Investors now registers green financial instruments.

Growing pains: greenwashing and international finance

In November 2015, it emerged that China had been under-reporting its coal consumption, after a different set of statistics were revised, with the figure for 2012 alone going up 17%, or 600 million tons.

For green bonds to have environmental credibility and to avoid ‘greenwashing’ – the expression used to describe companies that spend more money claiming to be ‘green’ than actually minimising environmental impact – greater transparency, particularly around third-party certification from academic institutions, auditors, evaluation bodies and social responsibility consultants, is essential.

“Building trust in this market is viewed as highly desirable, maybe even essential if China and other countries are to raise the finance required for greener growth and low carbon transition,” confirm Nan and Yao. “There is currently an urgent need for better information disclosure.”

Internationally, regulation of green bond markets is gradually improving. In 2014 the International Capital Markets Association launched, in association with numerous financial institutions, the Green Bond Principles, the first widely accepted voluntary code of conduct on international markets.

In July, the People’s Bank of China sold the world’s biggest green bond to date. The three-part deal in US dollars, euros and yuan comprised two, three and five-year bonds that raised a whopping  $3.03bn.

That same month, the New Development Bank, an infrastructure-focused lender established by the BRICS nations, completed the sale of its first worldwide bond in China's interbank bond market.

Reuters reports that proceeds from the five-year, 3 billion yuan ($447.87m) deal will be used to fund eligible renewable energy, pollution prevention and sustainable water management projects. Tech giant Apple also raised $1.5bn earlier this year to slash carbon emissions from its global operations.

Clean break: can China lead the way to a renewable future?

At the breakthrough United Nations Climate Change Conference in Paris last December, the Beijing Government under Xi Jinping formally agreed that China’s emissions should peak by 2030.

A report in March by Fergus Green of the London School of Economics and economist Lord Stern suggests that goal may already have been reached, as the world’s largest emitter of greenhouse gases transitions from the low-wage, high-production model toward a higher-value economy.

According to China’s National Bureau of Statistics, coal use in the world’s second-largest economy fell by 3.7% last year compared with 2014 levels, following a 2.9% decrease in 2014. Overall, the fossil fuel fell to 64% of the country’s energy sources, from 66% the year before.

“We are seeing a larger infrastructural change in China,” Green told the Guardian, the result of policies and changing industrial conditions. He added that although there is a possibility that China’s emissions will pick up if its growth rate recovers, the reduction in emissions is likely to continue.

China’s rise was largely powered by cheap, dirty coal. There is now reason to hope that Naomi Klein may have been overly pessimistic and that with strict regulation, financial instruments such as green bonds can help ensure that the country’s future − and that of the planet − lies in renewable energy.