Perspectives

As China commits to an ambitious programme of sustainable development, it is inviting global capital to finance the green ascent. Climate impact and competitive yield unite to offer a historic investment opportunity

 At the UN General Assembly in September, Chinese President Xi Jinping caught the world by surprise with a bold plan to make the world’s second-biggest economy, its leading industrial engine – and top polluter – carbon neutral by 2060.

A month later came another significant move that underscored the swiftness of change: Five government ministries endorsed new guidelines1 to encourage foreign investment in green bonds and climate-friendly projects. Rather than a bolt from the blue, these developments are milestones in a green journey years in the making – and show why Chinese green bonds and ESG equity funds (which beat China’s equity fund market average in 2020) should command the attention of the global investor. 

Global capital flows into Chinese ESG-themed funds soared 464 per cent in 2018-2019, the highest rate of any region outside of Europe. Interest is spurred by a growing green consensus among Chinese stakeholders, and China’s continued rapid liberalisation of capital markets.

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China is the second largest green bond market, and it’s now opening its arms to global investment

Chi Kit Chai, Head of Capital Markets & CIO at Ping An of China Asset Management (Hong Kong)

“The changes are not just from the government. At all levels of society, there’s a consensus building that people don’t want the air they breathe, the water they drink, to be polluted. This adds up to a bullish picture for green investment.” 

In recent years, China has backed up lofty talk with concrete measures, such as new environmental reporting requirements2 and stricter standards for green bond eligibility3. That has rapidly driven Chinese companies to commit to ESG efforts: In 2019, 85 per cent of CSI 300 companies4 released official ESG disclosures, up from 54 per cent in 2013.

Such developments increasingly convince global observers that China is serious about the greening of its economic ascent. 

“China has made great strides towards greening its financial system,” according to Climate Policy Initiative (CPI)5, a San Francisco-based global climate think tank. “There is a broad shift towards sustainable investment supported by a high level of political buy-in.”

Riding China’s green wave of growth

China is home to some of the most ambitious green development projects in the world6, central to why the World Economic Forum7 says China has become a “clean energy superpower.”

Now China is on a mission to tap global capital markets to fund future mega-projects for carbon neutrality by 2060. Long on the sidelines,8 global investors promise to play a decisive role; a key factor will be the knowledge their climate dollars are making a difference.

                      

One dollar spent on green investment in China has much bigger impact than a dollar spent elsewhere

Chi Kit Chai, Head of Capital Markets & CIO at Ping An of China Asset Management (Hong Kong)

“From a green investment standpoint, one reason you want to spend in China is because you’ll have a far greater impact in solving climate problems than spending, for example, in Scandinavia.”

The impact is substantial. “The cumulative impacts of these (Chinese) green bonds as reported by issuers,” says Climate Policy Initiative, “are 52.6 million tons of CO2 reduced and 11.2 GW of installed clean energy capacity.”

The case for Chinese green investment

No doubt, green investment isn’t only about doing good. Investors seek yield alongside impact. China is one of the most promising places to seek superior ESG investment performance, due to a plethora of factors ranging from competitive green tech to a benign macro-economic picture.

Such factors contributed to a breakthrough 2020 for Chinese ESG equity funds even amid Covid pressures. Annualised return of pure ESG funds over the year reached 47.07 per cent; environmental theme funds 70.02 per cent; and pan-ESG concept funds 56.4 per cent. The annualised return rate of all ESG funds exceeded the average level of equity fund market of 42.22 per cent.

Peter Reynolds, Head of China at consultancy Oliver Wyman, points to a track-record that indicates a far-reaching investment story: “The green bond market in China is already huge, so I think that commitment is real. There's going to be endless discussions around what the right standard is for ensuring that things are green, but my sense is it does offer significant investment opportunities.”

According to Chai, one of the more powerful incentives to invest in China’s green ascent is its role as the fastest-growing eco-friendly infrastructure market in the world. Economic realities are driving an efflorescence in eco-tech that offers investors a clear narrative of green growth. 

Chinese green bonds moreover offer diversification advantages, due to a low correlation between China’s bond market and the global bond market. Amid near-zero (even sub-zero) yields elsewhere, China’s one-year loan prime rate (LPR) stands at 3.85 per cent, and its five-year LPR at 4.65 per cent9. That spills into higher yields for Chinese green debt.

As China’s industrial groups, including Ping An of China Asset Management (Hong Kong), become leaders in green innovation, China also offers market size that gives it the capacity to absorb global investment dollars. These factors add up to what Chai calls “a strong investment case” for China’s green bond market.

Climate Policy Initiative suggests the investment case is expected to grow: “Despite the recent economic downturn spawned by the global coronavirus pandemic,” CPI says, “the Chinese green bond market is expected to continue to expand in the years ahead.”

                        

Despite the global pandemic, China’s green bond market is expected to continue to expand (in the years ahead)

A guide to unlocking Chinese green alpha

As China moves to boost the share of foreign investment in Chinese green bonds from the current 1.6 per cent, a local partner such as Ping An of China Asset Management (Hong Kong) can play a vital role in helping overseas investors navigate a rapidly evolving market. 

Chinese authorities are busy rewriting the green investment rule-book to ensure greater clarity on eco-friendly standards, enforce stricter green compliance, and inject unprecedented energy into its sustainable development programme. 

Ping An of China Asset Management (Hong Kong) can pilot a course in this shifting environment, providing guidance on regulation, deal sourcing and local resources, while pointing the way to competitive yield and ecological impact. “China’s green revolution is for real,” says Chai. “A strong partner can enable global investors to ride the wave.”

1 https://www.bloombergquint.com/global-economics/china-seeks-big-money-s-help-reaching-its-carbon-neutral-goal

2 https://www.ft.com/content/427c0d9a-8eab-11ea-af59-5283fc4c0cb0

3 https://www.reuters.com/article/us-china-environment-finance-idUSKBN2350FW

4 https://www.weforum.org/agenda/2020/12/green-wave-of-esg-investment-is-breaking-in-china/

5 https://bit.ly/3nn4e3E

6 https://www.cnbc.com/2018/01/22/here-are-six-of-chinas-ambitious-mind-boggling-renewable-energy-projects.html

7 https://www.weforum.org/agenda/2016/06/china-green-energy-superpower-charts/

8 https://bit.ly/3nn4e3E

9 https://cnb.cx/34LdC9K

This content was produced by the commercial department of the Financial Times, in collaboration with Ping An of China Asset Management(Hong Kong).

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