Growing Focus on Transition Finance in China as ESG Momentum Builds

China faces a significant challenge in setting its carbon intensive industries on the path to a low carbon economy. But several recent initiatives to spur growth in green financing, including for hard-to-abate sectors such as utilities, materials, industrials, and energy suggest progress is being made.

The growing Chinese onshore sustainable bond market has been consistently driven by continuous policy support, rising demand for the financing of low-carbon activities, and relatively steady domestic interest rates. That encouraging growth is reflected in the overall level of onshore green issuance rising by more than 20% in 2022 versus the previous year.

Several key sectors, including power, industrial, and transport, face financing gaps to decarbonise high-emitting activities in China. Last year, the People’s Bank of China initiated a draft Transition Finance Taxonomy to identify eligible transition activities. We expect to see a growing demand to finance transition projects as the regulatory framework to decarbonise high-emitting sectors gradually falls into place.

Sustainability-linked bonds (SLBs) and transition bonds have emerged to meet Chinese issuers’ growing need for capital in the onshore market. Following fresh regulatory guidelines from the National Association of Financial Market Institutional Investors (NAFMII) and Shanghai Stock Exchange in 2021 and 2022, issuance of SLBs has seen a sharp growth, rising by CNY33.3bn over the first three quarters of 2022.

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