Developing a Green Bonds Market: The Case of China

Abstract

Since its launch in 2016, China’s green bonds market has amassed a significant size and is currently ranked as the second largest in the world. This paper 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. It concludes that the Chinese government plays an instrumental but also evolving role in this process. The carefully designed use of government mechanism in the context of unique government structures can constructively facilitate the growth of a green bonds market. At the emerging stage of this unique market, the government could play an 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 special characteristics 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, central-local and international collaborations, centralized policymaking, and alignment of green goals with performance assessment of local officials. However, as the green bonds market matures, this paper suggests a transition towards a market-oriented model where 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. This paper also examines the challenges that have surfaced in China, including low-quality information disclosure and under-utilization of green bonds financing by private enterprises. In response, several solutions are proposed to address these specific challenges.

Keywords: China’s green bonds market, role of government, sustainability, green finance, green bond standard, sustainability information disclosure