Chinese Companies Borrow $992 Million in 1st Issue of Carbon-Neutral Bonds

Six Chinese state-owned utilities and infrastructure companies issued the nation’s first batch of carbon-neutral bonds totaling 6.4 billion yuan ($992 million) as part of China’s efforts to achieve President Xi Jinping’s pledge to become carbon neutral by 2060.

China has set ambitious goals for limiting carbon emissions, which contribute to global warming. Proceeds from the borrowings will be used to fund green projects to reduce such greenhouse gas emissions. The projects mainly include photovoltaics, wind power, hydropower and green buildings.

In the current tight liquidity environment, issuers of the carbon-neutral bonds obtained coupon interest rates that were better than expected. The bonds are sought by investors such as insurers, banks, wealth management firms, funds and securities companies, said Hu Kun, general manager of the investment banking and asset management department at Bank of China, one of the underwriters. Some offshore institutional investors also participated in the placements, Hu said.

Carbon neutral bonds, as a type of green bonds, require assessment and certification by third-party professional institutions to provide quantitative measurement of environmental benefits such as reduction of carbon dioxide emissions.

Among the 106 comparable green bonds issued in 2020, more than two-thirds obtained interest rates lower than the average rates of ordinary bonds of the same maturity and rating issued in the same month, with a cost advantage of about 43 basis points, according to the annual green bond report released by China Chengxin Credit Rating Group. A basis point is a hundredth of a percentage point.

China’s goals for reducing carbon emissions have created huge domestic financial need for green bonds, analysts from CIB Research said. Market demand for such bonds, with longer maturities and price advantages, is expected to increase in the future, analysts said.

The six issuers of the bonds were China Three Gorges Corp., China Huaneng Group, State Power Investment Corp. Ltd., China Southern Power Grid Co., Yalong River Hydropower Development Co. and Sichuan Province Airport Group, the National Association of Financial Market Institutional Investors said Tuesday.

Underwriters of the debt instruments are Industrial and Commercial Bank of China, Bank of China, China Construction Bank, Industrial Bank, Agricultural Bank of China and China Citic Bank. Bank of China underwrote three of the bonds totaling 3.6 billion yuan.

China produced 28% of the world’s carbon dioxide emissions in 2019, according to a report by the Global Carbon Project. At the 75th session of the United Nations General Assembly Sept. 22, 2020, President Xi Jinping pledged that China would achieve peak carbon emissions before 2030 and carbon neutrality before 2060.

Climate experts have called for China’s carbon emissions to peak by 2025, five years earlier than promised, for the country to be carbon neutral by 2060.

Contact reporter Denise Jia (huijuanjia@caixin.com) and editor Bob Simison (bobsimison@caixin.com).

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