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ASIAN MARKET DEVELOPMENTS
On 24 September 2021, China’s Southbound Bond Connect arrangement was officially launched. Southbound Bond Connect enables Mainland institutional investors to invest in the Hong Kong bond market through a connection between Mainland and Hong Kong financial market infrastructures. Capital market regulatory Momentum in Northbound Bond Connectdevelopments in China
Northbound Bond Connect had been in operation for more than four years before the launch of Southbound Bond Connect. Over this time, Northbound Bond Connect became a crucial channel for overseas investors to access China’s domestic interbank bond market, offering optimized trading and settlement mechanisms. Northbound Bond Connect witnessed rapid growth in the number of investors, trading volumes, and outstanding bonds. As of the end of 2021, bonds outstanding of overseas investment in China’s domestic bond market had reached 4 trillion yuan (around Connection of the interbank and
exchange bond markets for international investors
In May 2022, PBOC, CSRC and SAFE made an announcement to further facilitate overseas institutional investors’ access to China’s bond markets. Effective from 30 June 2022, international institutional investors that already have access to the interbank bond market (CIBM) may participate in the exchange-traded bond market. Investors can either use their existing CIBM account to trade through the Infrastructural Connection Mechanism between the interbank and exchange markets or directly participate in the exchange bond market by applying for an Investor ID with CSDC. On 29 June 2022, CSDC jointly with Shanghai Stock Exchange and Shenzhen Stock Exchange also published the implementation rules for the direct access scheme for international investors to access the exchange-traded market.
Transition bonds piloted by NAFMII and SSE
NAFMII published a notice about piloting Transition Bonds in China’s interbank bond market on 6 June 2022. Issuers from eight traditional industries may issue transition bonds and should use 100% of the proceeds to finance projects that contribute to energy efficiency or reduce pollution and/or carbon emissions but do not meet the technical criteria of the China’s Green Bond Catalogue. Clean coal and natural gas are among the transition project categories. Issuers should also disclose their transition plan in their main business activities. Separately, Shanghai Stock Exchange also introduced low-carbon transition bonds for the exchange-traded bond market. Issuers of this type of bond are required to either use 70% of the proceeds for low-carbon transition activities or have sustainability-linked features with low carbon transition SPTs.
by Mushtaq Kapasi,
Ricco Zhang and Yanqing Jia
Futures and Derivatives Law
On 20 April 2022, China passed the Futures and Derivatives Law. It recognises close-out netting under master transaction agreements for derivatives for the first time at the legislative level and lays a foundation for regulating cross-border derivative transactions.
Subsequent to the publication of the PBOC rules for bond lending in February 2022, NAFMII published the Master Agreement for Bond Lending and Borrowing Transactions in the Interbank Market (2022 Version).
CBIRC green finance guidelines extended to cover insurance companies
CBIRC published its Green Finance Guidelines for the Banking and Insurance Industries in June 2022. The guidelines aim to encourage financial institutions (FIs) to provide funding to green and low-carbon efforts in the economy, improve their ESG risk management and FIs’ own ESG performance. The guidance stipulates high-level requirements for both banks and insurance companies on management responsibility, credit and investment policies and procedures, internal control, and information disclosure.
Launch of ETF Connect
CSRC and SFC approved on 28 June 2022 the inclusion of ETFs as eligible securities under the Stock Connect scheme. Effective from 4 July 2022, mainland China and Hong Kong investors may trade eligible ETFs listed on each other’s exchanges.
Contact: Yanqing Jia yanqing.jia@icmagroup.org
Green, Social, Sustainability and Sustainability-Linked Bonds in China: current practice and prospects
by Ren Qing, NAFMII
The concept of green and sustainable development has been generally acknowledged in China in recent years, and the debt capital market is playing an important role in guiding financial resources to low-carbon and transition sectors. Under these circumstances, Green, Social, Sustainability and Sustainability-Linked bonds (GSSS bonds) are developing rapidly and steadily. GSSS bonds are among the most important financial instruments to help achieve China’s “dual carbon goals” (peaking carbon emission by 2030 and achieving carbon neutrality by 2060). On the one hand, China has the arduous task of peaking carbon emissions and achieving carbon neutrality in a relatively short period. Unlike developed countries that hit peak carbon emissions as early as the 1990s or 2000s, China’s degree of industrialisation has not reached its peak yet. On the other hand, limited by the resource endowment of rich coal, poor oil and rare gas, China needs to make greater efforts to promote the transition of its energy structure to build a clean, lowcarbon, safe and efficient energy system. The realisation of the dual carbon goals requires a large amount of capital. GSSS bonds with proceeds used to finance or refinance green and social projects or activities, or structurally linked to the issuer’s achievement of sustainability performance targets to the coupon through a covenant, could make up for the capital gap. With support of ICMA and other international organisations, NAFMII has been actively promoting the adoption of international best market practices in the domestic markets, paving the way for swift growth in China’s GSSS bond markets.
Green Bonds
China with an aggregate issuance volume of about USD 56.4 billion in 2021 ranked second in global green bond issuance. The domestic green bonds standards have been continuously improved, on a path to increased consistency with global standards. The Green Bond Endorsed Projects Catalogue (2021 Edition) defines the scope of eligible projects for green bonds in China. The Operating Rules for Market Assessment of Green Bond Evaluation and Verification Agencies (Trial) could promote the healthy development of the third-party evaluation and verification entities. Efforts to unify the different green bond regulations in China into a single China green bond standard are ongoing and led by NAFMII.
In terms of incentives, the People’s Bank of China has included green bonds within the scope of qualified collateral for the central bank’s lending facility and will also introduce more measures in areas such as commercial bank credit assessment, deposit insurance premiums, and macro-prudential assessment, to promote sustainable finance. NAFMII also encourages more institutions to participate in the green bond
market by regularly publishing a list of green bond investors ranked by their investment size in Chinese domestic green bonds. Innovative products such as carbon neutrality bonds and green panda bonds have further enriched the spectrum.
Social and Sustainability Bonds
To support both environmental and social goals, in November 2021, NAFMII launched the pilot program to issue social and sustainability bonds in China and released the Q&As on Pilot Program of Social Bonds and Sustainability Bonds, based on ICMA’s Social Bond Principles and Sustainability Bond Guidelines. Modelled on international standards and Sustainable Development Goals (SDGs), the pilot program adopted the internationally accepted “four pillars” of the Principles,1 and also recommended that social and sustainability bonds use the “bond framework”. International development agencies have launched sustainable bonds with the framework, enriching the practice of sustainable financing in the interbank market.
Sustainability-Linked Bonds & Transition Bonds
To support the transition of the high carbon sector such as the energy industry in China, NAFMII launched guidelines for sustainability-linked bonds (SLBs) in April 2021, consistent with ICMA’s Sustainability-Linked Bond Principles. SLBs link bonds’ economic terms with the issuer’s sustainability performance targets. By regular verification by a third-party and variable coupon rate, SLBs provide an effective market restraint mechanism. Separately, NAFMII borrowed the concept of useof-proceeds bonds and launched a pilot program of transition bonds, to provide more financing tools to key carbon emission reduction industries.
ESG investment looms in China, which will promote and complement the development of GSSS bonds
Since the principles and standards of GSSS bonds generally match Environmental, Social and Governance (ESG) evaluation indicators, they have become a key component of ESG investment. Meanwhile, ESG investors can also provide a steady stream of medium-to longterm funds for the GSSS market. The two complement each other and indicate broad development prospects. Taking ESG wealth management products as an example, according to market statistics, China’s investment of wealth management funds in green bonds exceeds RMB 220 billion (USD 33 billion) in 2021. The outstanding volume of pure ESG wealth management products in China reached RMB 96.2 billion (USD 14 billion) as of the end of 2021, almost double the previous year.
China’s interbank market will continue to play an important role in supporting the sustainable development of prospects
China’s interbank bond market (CIBM) is an over-thecounter wholesale market for institutional investors. In recent years, the CIBM has promoted convergence of onshore market mechanisms with international practices and has sought to provide a level playing field to foreign participants. As a self-regulatory organisation in the CIBM, NAFMII will continue to play a guiding and facilitating role of marketisation and internationalisation, to further promote low-carbon transition and sustainable development in China, while also providing opportunities for foreign participants to support the global net zero goal through China’s capital markets.
1. So it reads: The Green Bond Principles (GBP), Social Bond Principles (SBP), Sustainability Bond Guidelines (SBG) and SustainabilityLinked Bond Principles (SLBP) are collectively known as the “Principles”.
