Opportunities and challenges for China in green finance

Written by Kapronasia || April 01 2024

In the fourth quarter of 2023, China emerged as the top green bond market globally. Sales of internationally aligned green bonds in China reached US$21.83 billion in the final three months of 2023, up 131% on a quarterly basis, according to the Climate Bonds Initiative data. This was well ahead of the No. 2 market, the U.S., which had green bond sales of US$12.87 billion and No. 3 Germany, which recorded sales of US$7.14 billion.

Despite a marked economic slowdown in recent years, China’s green finance efforts have not been adversely affected. If anything, they have accelerated as Beijing looks to find new, more sustainable engines of growth.

In Nov. 2023, both China and the U.S. agreed to support the global effort to triple renewable energy capacity by 2030. Both countries intend to replace fossil fuels in electricity generation and substantially curb power sector emissions. In this endeavor, China has the advantage of being able to quickly marshal resources on a massive scale, though totally eliminating fossil fuels is unlikely for either country. "It is unrealistic to completely phase out fossil fuel energy," China’s special climate envoy Xie Zhenhua said last September.

However, given that the agreement is a major undertaking, it will require significant financing. China’s green bond market is likely to provide a large part of that funding. During the China Bond Market Forum on March 20, Jun Ma, chairman of China Green Finance Committee, said that “international alignment is key,” adding that China is working with the European Union on common ground taxonomy for different issuances, FinanceAsia reported. These include 250 outstanding bonds in the interbank bond market as well as 500 bonds traded on stock exchanges. 

There is also a transition finance opportunity, which involves supporting governments, industries and corporates as they move towards greener technologies and development models. Ma said during his keynote speech that only 10% of overall economic activities in China fall into the category of 'pure green," with the other 90% in need of much greater funding from transition finance initiatives.  

An ongoing challenge for China when it comes to green finance is greenwashing. Greenpeace said in Nov. 2023 that companies like PetroChina and CNOOC Gas and Power have signed long-term contracts with Shell to buy "carbon neutral" liquefied natural gas (LNG), which uses "forest offsets" to balance out carbon emissions. "For oil and gas companies in particular, carbon offsets are a smokescreen to obscure their continued, redoubled carbon emissions," Li Jiatong, project leader with Greenpeace in Beijing, was quoted as saying by Reuters. Though natural gas is cleaner than coal, anti-fossil fuel groups usually oppose any new gas projects. China began cracking down in greenwashing in 2022, but it is unclear to what degree those efforts have borne fruit.

Meanwhile, in February, China unveiled new ESG disclosure rules for its biggest companies. More than 400 firms, including those in key stock indexes, will need to publish sustainability reports by 2026, according to draft guidelines released this month by China’s three main exchanges. The rules should improve standardized reporting in China while reducing greenwashing risks for money managers.