Handbook How to issue a green panda bond Investment in low-carbon solutions will Existing rules provide clear guidance to Chinese policymakers are keen on be essential for meeting global emission ensure market robustness facilitating investment in green assets reduction targets under the Paris Agreement Regulators in China have published guidelines As China accelerates the transitions toward on climate change. Given the projected on green bonds issuance procedures, criteria to a green and sustainable growth model, green climate volatility over the coming decades, define green assets and projects, requirements investment is expected to play a pivotal role. infrastructure, with its long life time, should on external review and verification, and In August 2016, China’s seven ministerial be designed as climate resilient. guidance on post-issuance disclosure. agencies jointly released the Guidelines for The rapid growth of the global green bond These guidelines provide clear guidance and Establishing the Green Financial System,3 making market has shown that capital markets for issuers on how to issue green bonds in China the first country to establish a policy provide a promising channel to finance China’s bond market, with a view to enhance framework for green financial system. climate investments. potential issuers’ capacity and market integrity. The Guidelines call for the securities market The booming Chinese green bond market For more details on green bond guidelines to promote green investment for institutional offers great opportunities and regulations, see Table 3 on page 4. investors (pension funds and insurance companies) to invest in green financial With total issuance of USD60.9bn as of Domestic investors have been supporting products; and investors to release green October 2018, China is now the world’s the growth of China’s green bond market investment responsibility reports. second largest green bond market. China’s Chinese investors could be a source of green bond market, with clear rules, active capital for foreign green bond issuers who Following the Guidelines, the Asset market players, and supportive investors are looking to diversify their investor base Management Association of China (AMAC)4 and policymakers, offers a great opportunity and increase their exposure in China. officially released the Green Investment Guide for foreign green bond issuers. (Trial)5 in November 2018. It encourages While more green investors or dedicated fund managers to voluntarily comply with This handbook provides an overview of the green bond funds are expected to come into published green criteria when screening regulations and guidelines applicable to play as the market develops, commercial investment opportunities. For the screening green bonds and panda bonds in China. banks are currently the largest investors criteria, investors can refer to existing in the Chinese domestic bond market, It seeks to support foreign issuers in guidelines and standards in China,6 as well accounting for approximately 85% of the issuing green panda bonds in China’s as international principles and standards bond deals overall. domestic market. including the Green Bond Principles and the That said, on the retail investor side, China Climate Bonds Standard. A green panda bond is a RMB-denominated is among the few markets leading the efforts bond issued in mainland China by a foreign RMB is being increasingly used for cross- in expanding public participation in green entity, with proceeds earmarked for green border settlement investment. For example, in September 2017, assets or projects. The issuance of a green The internationalisation of the RMB and China Development Bank issued a green panda bond needs to follow both the guidelines its inclusion into the Special Drawing bond partially sold to retail investors through for panda bonds and for green bonds. Rights (SDR) has increased the use of branches and the electronic platforms of RMB transaction settlement, in particular Industrial and Commercial Bank of China by countries associated with the Belt and What is a green panda bond? (ICBC), Agricultural Bank of China (ABC) Road Initiative (BRI). In 2017, BRI countries and Bank of China (BOC).1 handled over RMB1.36 trillion (USD196bn) There are active service providers in cross-border RMB settlements, accounting China’s green bond market for 14.7% of the total cross-border RMB China’s green bond market kicked-off in 2016, settlements.7 and over the past 2-3 years the number of China has been actively investing in various service providers has been growing other countries over the past decade. For Panda Bond + Green Feature = Green rapidly. There are 14 approved verifiers in example, over the 2010-2017 period, total Panda Bond China qualified to provide verification against direct investment in Latin America reached both China’s green bond guidelines and the Green panda bonds are essentially the USD91bn.8 To facilitate RMB-settlement, Climate Bonds Standard.2 same as other panda bonds (RMB- China has established RMB clearing banks in denominated bond issued in mainland Chinese underwriters are active in both Argentina and Chile. China by a foreign entity), except that: China’s and global green bond markets As China continues to invest abroad - e.g. (see underwriter league Table 4). They can • Issuer labels bonds as “green” directly in assets or through loans - issuers support the issuance application of potential could use the RMB-denominated capital • Proceeds are earmarked for green bond issuers. raised from green panda bonds to repay green assets or projects Market infrastructure organisations including Chinese lenders and/or to settle transactions • Issuer tracks and reports on the use of stock exchanges and clearing houses are also in RMB. proceeds to ensure compliance providing training on green bond issuance. Handbook: How to issue a green panda bond 1 Regulatory system for China’s bond market China’s bond market is primarily regulated departments carry out their own duties and the dominant of the three bond markets, by PBoC, CSRC and NDRC (see list of work together to tackle the problems in the accounting for over 90% of the outstanding abbreviations below Table 1). The regulations development and reform of the bond market, bonds and trading volume in China and cover bond issuance; listing, trading and including regulating issuance and trading boasting a liquidity far higher than the OTC information disclosure; clearing, settlement, behavior, enhancing cooperation for product market. and custody; market participants; and innovation and market infrastructure, etc. Regulation of bond clearing, settlement, relevant service providers including rating Regulation of bond listing, trading and and custody: Bond clearing, settlement, and agencies. information disclosure: This is achieved custody are primarily handled by clearing, Regulation of corporate bond issuance: through the self-regulatory measures of settlement, and custody companies, In order to strengthen the coordination marketplaces, which include the interbank mainly CCDC, CSDC, and SHCH (see list of between regulators, in 2012, PBoC, NDRC market, the exchange market, and the over- abbreviations below Table 1). CCDC is jointly and CSRC jointly established the ministry the-counter (OTC) market of commercial regulated by PBoC, CBIRC and MOF, while commission for regulating corporate banks, regulated respectively by PBoC, CSDC and SHCH are regulated by CSRC and bonds. Under this mechanism, the relevant CRSC, and CBIRC. The interbank market is PBoC, respectively. Table 1: Regulatory system for China’s bond market23 Classification Regulator Approval-based Treasury bonds and municipal bonds MOF and CSRC regulation of Central bank bonds: central bank notes PBoC product issuance Financial bonds Policy (development) bank bonds Special financial bonds24 Non-bank financial institution bonds Commercial bank bonds PBoC Securities company commercial paper Securities company bonds PBoC and CSRC Insurance company bonds PBoC Non-financial institution bonds Enterprise bonds25 NDRC Medium-term notes PBoC (non-financial institution bonds need to Commercial paper be registered with NAFMII Small and medium enterprise and are subject to its self- collective bonds and notes regulatory measures) Asset-backed securities PBoC and CSRC Convertible bonds CSRC Corporate bonds Bonds issued by international organisations such as the World Bank and the ADB PBoC, CSRC and MOF Regulation of Exchange market (Shanghai and CSRC marketplaces Shenzhen stock exchanges) Interbank market PBoC OTC market of commercial banks PBoC and CBIRC Regulation CSDC CSRC of clearing, CCDC PBoC, MOF and CBIRC settlement, and custody SHCH PBoC companies Abbreviations: MOF = Ministry of Finance; PBoC = People’s Bank of China; CBIRC = China Banking and Insurance Regulatory Commission; CSRC = China Securities Regulatory Commission; NDRC = National Development and Reform Commission; CCDC = China Central Depository & Clearing; CSDC = China Securities Depository and Clearing; SHCH = Shanghai Clearing House; NAFMII = National Association of Financial Market Institutional Investors. Handbook: How to issue a green panda bond 2 Regulation of bonds issued by foreign institutions in mainland China (“panda bond”) To further improve the internationalisation and non-financial corporates. They clarify ministerial agencies to enhance the of China’s bond market, in September 2018, the requirements, and application and accessibility of China’s financial market.