China's boom in sustainable bonds lacks rigour, warns Fitch

Chinese companies and state-owned enterprises are increasingly turning to green and sustainable bond markets to finance China's national climate strategy, but the bonds often fall short of... |…

China's boom in sustainable bonds lacks rigour, warns Fitch

Chinese firms raised $186 billion through domestic green bonds in the first three quarters of 2022, a 20% increase on the whole of 2021, despite the global slowdown in sustainable debt issuance in 2022, Fitch said in a report published this week. The boom in issuance was driven by continuous policy support, rising demand to finance low-carbon activities, stable domestic interest rates and lower costs to fund green projects, Fitch said. Chinese companies are also increasingly turning to sustainability-linked (SLBs) and transition bonds to help meet de-carbonisation needs of sectors such as power, industrials, and transport.

Under most such bonds, issuers must pay higher interest rates if they fail to meet targets such as cutting emissions. However, Fitch said that ambiguous pricing structures, the lack of science-based transition pathways and an absence of credible transition targets raised questions about the discipline of China's domestic market and its ability to meet global climate goals. "It is not yet common practice to set interim emission reduction targets (for SLBs) or to align with internally recognised transition pathways and guidelines ...

in the onshore market," Fitch wrote. "This is because most of these bonds are held by domestic investors for whom international standards are less relevant than local regulations." Fitch's analysis found that the step-up in rates embedded in many of the Chinese SLBs do not appear to be structured based on the ambition of the target or the cost required to achieve it. The growth of sustainable bond issuance is expected to continue this year, Fitch said, helped by regulatory guidance on transition bonds published in May 2022, as well as a draft Transition Finance Taxonomy from the People's Bank of China.

(Reporting by Virginia Furness; Editing by Tomasz Janowski)