Green finance reforms to attract private capital to finance municipal infrastructure projects

Context

• To meet the objectives of the 12th Five-Year Plan to assist China’s transition to a low-carbon green economy, the central government announced in 2013 plans to grow a corporate green bond market.
• Jiangxi Province of China was one of the pilot areas designated to boost green finance. It needed to finance its infrastructure investment in alignment with a green bond framework. This was the first green municipal special bond issuance in the country.

Problem

• China is the world’s largest issuer of green bonds, but commercial banks had dominated the green bond market, resulting in a narrow range of issuers.
• Green industry projects with relatively lower investment return had limited borrowing capacity at the municipal level, which resulted in low investment appetite.
• There was relatively slow progress in developing green sovereign and green municipal bonds with government credit, mainly due to a lack of common disclosure guidelines for banks and a limited legal framework for green finance.

Stakeholders involved

• Jiangxi Province of China
• Industrial and Commercial Bank of China
• China Merchants Bank

Innovation

• China established pilot zones for green finance reform and innovation in five provinces and autonomous regions to gain local experience to inform national green finance policies. Each pilot zone issued specific rules according to the overall plan to develop green finance.
• Jiangxi Province actively explored the framework of green finance policies and innovation in green financial products and services, and released the Issuance of Green Municipal Bonds Framework Research Report in the region.
• The ability to issue longer-term debt via bonds was important for green projects, as it reduced the maturity mismatch between project development timelines and borrowing timelines.

Timeline

Results and impact

• The first municipal bond in China bearing a ‘green’ label. In 2019, Ganjiang New Area of Jiangxi Province announced a plan to issue a total of RMB1.25 billion (USD192 million) green municipal special bonds. These bonds were issued in three phases.
• Use of proceeds to finance smart utility pipelines, managed by the municipal government and held for the construction of the Xingye Avenue Project, an intelligent urban underground utility tunnel project in Rulehu new town.
• High interest from investors. The green bond issuance in the first phase in 2019 generated high interest from investors and was oversubscribed by almost 12 times.

Key lessons learnt

• Regulation: It has been important to harmonise green definitions across the provinces, i.e. to have a single set of definitions for all user types. This is still currently in development in China.
• Financial markets: Local governments, such as the municipal level, formulated their own plans to develop green finance in their regions. Issuing municipal bonds reduced government financing costs, quickly raised a large amount of capital to invest in infrastructure construction, and accelerated the development of the local economy and public utilities.
• Governance: Chinese regulators have been encouraging issuers to give more information about their green bonds, including the use of proceeds and the progress and environmental benefits of the green projects. Key performance indicators for green bond monitoring should be adopted for investors to track and compare the impact of bonds.