Green bonds are emerging as a major theme in China’s bond market as the country accelerates efforts to reach peak emission levels before 2030 and achieve carbon neutrality by 2060. Regulators have been issuing notices and guidelines to improve the country’s performance on the environmental front, including promoting green finance.

“With the aim of achieving carbon neutrality, it will be one of the important directions for green finance development to encourage innovation in financial products that support efforts against climate change,” says Ma Jun, green finance committee chairman at the China Society for Finance and Banking.

The first batch of “carbon neutrality” bonds amounting to a combined 6.4 billion yuan (US$991.57 million) was recently issued by China Southern Power Grid, China Three Gorges Corporation, SPIC, Huaneng Power International, Sichuan Province Airport Group, and Yalong River Hydropower Development Company.

The demand for carbon neutrality bonds is expected to increase not only because of the green financing trend but also because of their long maturity and attractive pricing, according to a report by CIB Research, the think tank of China’s Industrial Bank.

China’s bond market, as a whole, is poised to attract more foreign capital this year amid the country’s robust economic recovery and a stable renminbi.

As of January 2021, foreign institutional investors held a total of 3.48 trillion yuan of bonds under the China Interbank Bond Market (CIBM Direct), up 222.8 billion yuan from a year ago, according to data from Bond Connect.

Bullish mood

Global investors have been building their positions in Chinese assets amid the coronavirus pandemic. Last year, net inflow of foreign capital into Chinese onshore bonds reached US$18.6 billion, according to the State Administration of Foreign Exchange.

The trend is expected to continue in 2021. Analysts say the current bullish mood in the market will support the strong performance of Chinese bonds, similar to what happened in 2015 when foreign capital flooded into China as Chinese bonds rode a robust stock market.

They predict that foreign investors with mid- to long-term objectives will seek more opportunities in the Chinese bond market, which offers better returns compared to many other assets.

FTSE Russell’s move to include Chinese sovereign bonds in its benchmark World Government Bond Index starting in October 2021 is likely to further stoke interest in the domestic debt market.

On the renminbi side, the market can expect an overall stable environment. “Several currencies including the renminbi had shown strength versus the US dollar last year, indicating that people are uncomfortable with what was happening in the US on the political front as well as the monetary front,” says Lei Wang, portfolio manager at Thornburg Investment Management.

Consequently, while China’s exports performed well last year, margins were hurt by a strong renminbi. “China’s central bank has probably realized that a strong renminbi is hurting exports. It will probably prefer the renminbi to stabilize from here rather than for it to continue to strengthen,” says Wang.