China has enormous potential for sustainable finance

As China embarks on the journey of trying to fund environmentally friendly projects through capital market measures, HSBC is acting as the sole lead manager for the first yuan-denominated offshore green bond. The bond was issued by the International Finance Corporation in London last June and is a debt instrument by which the proceeds fund green projects.

The bank has also set up internationally recognized green bond principles with other members from the International Capital Markets Association.

"As China continues to focus on how to mitigate the effects of rapid development and urbanization, the potential demand for investment in green projects here is enormous," says Spencer Lake, group general manager, global head of capital financing at HSBC.

"China has an insatiable demand for infrastructure investment, which will require innovative as well as traditional financing to succeed."

Last month HSBC held a one-day forum in Beijing on sustainable financing. It covered topics such as China's green finance market and how it can learn from international best practice. Lake says sustainable finance is not just about tackling environmental challenges, but also finding solutions for financing long-term investment and economic growth and supporting the necessary infrastructure and technology to make it happen.

"Green financing aligns with international interests at both the political and business level. We need to understand where this trend goes and where the money flows."

Ulrik Ross, global head of public sector and sustainable financing at HSBC, says China has the potential to become a global leader in developing the green bond market because of the scale of projects available in the country and the commitment of the Chinese government to grow this market.

There has been a high level of engagement from China's public and private sectors, he says, convincing him that progress in developing this market will happen rapidly.

"With the right incentive structures, China can mobilize a lot of scale in green financing, and that will have a transformational effect on the industry. If China becomes the first country to do so, others will follow."

To achieve scale, says Ross, it is important for China to establish transparent standards on green bonds and to establish a system of certifying that the proceeds raised from the green bonds are directed toward environmentally friendly projects.

The Chinese government has established a special green finance task force. It will help build an effective domestic green market, which includes defining green by looking to international standards and proposing an acceptable second opinion provider in China for verification purposes.

Ross expects China's green bond market to soon establish new regulations and frameworks that borrow from the successes of the international market, but at the same time are also suitable in the Chinese context.

Green bond markets in mature Western countries have primarily grown through a non-regulated model, and Ross expects China's green bond market to grow through a more policy-driven model, which will create scale for this asset class in the process.

The rapid development of China's capital accounts liberalization will provide Chinese issuers and investors the access to an already large and rapidly growing green capital market both domestically and internationally, he says.

"For me, though, it is the nexus between environmental sustainability, the development of China's financial system and the globalization of China's financial markets that I find so exciting. The internationalization of China's financial system has come on leaps and bounds over the last few years, and this is only set to continue."

cecily.liu@chinadaily.com.cn

(China Daily European Weekly 05/15/2015 page22)