China’s Green-Bond Market: Growing Issuance and Historical Outperformance

Blog post
6 min read
Joy Zhang, Jian Chen
February 24, 2022
  • China has become the world's second-largest issuer of green bonds, after the U.S.
  • Over the recent one-, three- and five-year periods, China's green-bond indexes have outperformed the country's broad-based bond indexes by 50 to 120 basis points.
  • The outperformance was driven by the green-bond indexes' longer durations and stronger credit, as well as by sector-specific factors.
China's green-bond market has grown rapidly in recent years and is now the second-largest in the world, after the U.S. As of Dec. 31, 2021, there were 1,643 green bonds in China, with a total balance of CNY 1,727 billion (or roughly USD 270 billion), with a three-year compound annual growth rate of 37.8%, as shown in the exhibit below.1 Understanding the reasons behind this market's growth and outperformance may help investors as they determine if and how to incorporate Chinese green bonds into portfolios.
Rapid growth of the Chinese green-bond market
China Green Bond Outstanding
Source: Wind
Higher relative returns from Chinese green bonds in recent years
Indexes of Chinese green bonds have outperformed both the broad Chinese fixed-income market and submarket indexes in recent years. For example, the ChinaBond China Green Bond Index returned 5.74% in 2021, beating both the broad bond index (ChinaBond New Composite Index, at 5.09%) and the corporate-bond index (ChinaBond Credit Bond Index, at 4.30%). Its one-year return lagged that of the ChinaBond Treasury Bond Aggregate Index by 11 basis points (bps), but its three- and five-year returns outperformed the government-bond index by 62 and 88 bps, respectively.
Chinese green bonds' recent outperformance

None

Compound Annual Returns

Compound Annual Returns

Compound Annual Returns

Index Name

1-Yr

3-Yr

5-Yr

ChinaBond China Green Bond Index

5.74%

4.76%

4.72%

ChinaBond New Composite Index

5.09%

4.21%

4.19%

ChinaBond Treasury Bond Aggregate Index

5.85%

4.14%

3.84%

ChinaBond Credit Bond Index

4.30%

4.22%

4.47%

Local-currency (CNY) return data, as of Dec. 31, 2021. Source: ChinaBond Pricing Center, MSCI
Factors that drove the recent outperformance
The outperformance of the Chinese green-bond index versus the broad Chinese fixed-income index and submarket indexes in recent years was driven by many factors:
Government-bond market's rally
The People's Bank of China loosened monetary policy during 2021, and Chinese government bonds rallied by around 23 to 40 bps across the term structure, as the exhibit below shows.
Chinese government bonds' rally over 2021
Source: ChinaBond Pricing Center, MSCI
Longer duration helped drive green-bond rally
As of Dec. 31, 2021, the ChinaBond China Green Bond Index's duration was marginally longer, by roughly 0.7 years, than that of the broad-based ChinaBond index — which drove part of green bonds' outperformance during the bond-market rallies in 2021.

Index Name

Duration

YTM

ChinaBond China Green Bond Index

5.24

3.20

ChinaBond New Composite Index

4.52

3.23

Data as of Dec. 31, 2021. Source: ChinaBond Pricing Center, MSCI
Diverging credit-spread performance between green-bond and broad-market indexes
The biggest driver of Chinese green bonds' outperformance was the relative performance of credit spreads. During 2021, the spreads for the ChinaBond Chinese Green Bond Index tightened by 14 bps, versus the 4-bp widening for the broad ChinaBond New Composite Index.
Diverging credit-spread performance between green-bond and broad-market indexes

Index Name

Duration

YTM

TSY Yield (Match Duration)

TSY Spread (Match Duration)

12/31/2020

None

None

None

None

ChinaBond China Green Bond Index

4.72

3.64

2.93

0.71

ChinaBond New Composite Index

4.16

3.52

2.90

0.62

12/31/2021

None

None

None

None

ChinaBond China Green Bond Index

5.24

3.20

2.63

0.57

ChinaBond New Composite Index

4.52

3.23

2.57

0.66

Source: ChinaBond Pricing Center, MSCI
The spread widening of the broad Chinese bond market in 2021 was mostly driven by the corporate-bond segment in 2021, as shown in the exhibit below. In fact, the ChinaBond Credit Bond Index's spread widened by 18 bps, while that of the ChinaBond Finance Bond Index tightened by 8 bps. The main contributor for the ChinaBond Credit Bond Index spread widening was the roughly 1,500-bp credit-spread widening in the property sector.
Diverging credit-spread performances between submarkets

Index Name

YTM

TSY Yield (Match Duration)

TSY Spread (Match Duration)

12/31/2020

None

None

None

ChinaBond New Composite Index

3.52

2.90

0.62

ChinaBond Local Government Bond Index

3.24

3.01

0.23

ChinaBond Finance Bond Aggregate Index

3.25

2.91

0.34

ChinaBond Credit Bond Index

4.73

2.58

2.15

12/31/2021

None

None

None

ChinaBond New Composite Index

3.23

2.57

0.66

ChinaBond Local Government Bond Index

2.98

2.72

0.26

ChinaBond Finance Bond Aggregate Index

2.83

2.57

0.26

ChinaBond Credit Bond Index

4.64

2.31

2.33

Source: ChinaBond Pricing Center, MSCI
Green corporate bonds were less affected by the recent credit crunch, however. For example, among the top 43 issuers — which account for 80% of the green-bond index, as of August 2020 — the largest group are six central-government state-owned enterprises (SOEs), followed by 20 local governments, 12 local SOEs and five financial institutions that are de facto SOEs. These issuers have generally been considered more creditworthy, especially in the recent credit crunch.2
Distribution of China's green-bond issuers
China Green Bond Outstanding (December 31, 2021)
Source: ChinaBond Pricing Center, MSCI
Government and investor support
The Chinese government has encouraged allocation of capital toward environmentally friendly projects and investment in green bonds.3 These policy supports have buoyed demand for green-bond investment — in both the primary4 and secondary markets. According to CCXI Green Finance, 72% to 78% of green bonds have lower issuance costs than normal bonds of matching issuance date, maturity, bond sector and credit rating. The transaction volume in the secondary market increased by 40% in 2021 compared to the previous year.5
Looking forward
The Chinese government has pledged to achieve carbon neutrality by 2060, which is estimated to require investment of CNY 104 trillion to 487 trillion over the next 30 years.6 This trend will likely drive further growth for Chinese green bonds. International investors have increased their holdings of Chinese fixed-income securities by about 30%, from September 2020 to September 2021, reaching approximately CNY 3.9 trillion (USD 0.61 trillion), as of September 2021.7 While the majority of these holdings are Chinese government bonds, as we've seen, Chinese green bonds have attracted more international interest and delivered for investors.
Further Reading
Chinese RMBS: A Way to Diversify Fixed-Income Portfolios? Green bonds: Growing bigger and broader Have corporate green bonds offered lower yields? US ABS: Strong Bounce Back, Uneven Performance Higher Agency Loan Limit: A Booster Shot in ARMS
Jian Chen
Jian Chen
Joy Zhang
Joy Zhang
Managing Director, MSCI Research

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1China’s definition of “green bond,” which differs from those in other markets, was issued last year by three Chinese financial regulators and closed some gaps between Chinese and international standards.
“Green Bond Endorsed Projects Catalogue (2021 Edition).” People’s Bank of China, National Development and Reform Commission, and China Securities Supervision Commission, April 21, 2021.
For a Chinese-language discussion of the difference between Chinese and international green-bond definitions, please see: “Interpretation of Green Bond Endorsed Projects Catalogue (2021 Edition).” IIGF, April 28, 2021.2For example, People's Bank of China Deputy Gov. Chen Yulu said last year that the quality of China's green financial assets is generally good: “Chen Yulu: There is no case of default in Chinese green bonds.” Xinhuanet, Oct. 21, 2021.3“Green bond investment welcomes major opportunities.” Shanghai Securities News, Jan. 10, 2022.4Research has shown that green bonds’ yields, at issuance, are often 1 to 2 bps lower than non-labeled bonds of comparable credit quality. “Roadmap for Financing China's Carbon Neutrality.” China Green Finance Committee, Sept. 25, 2021.5“2021 Annual Report of China Domestic Green Bond Market.” CCXI Green Finance, Jan. 11, 2022.6“Roadmap for Financing China’s Carbon Neutrality.”7“Bond Market Analysis Report.” ChinaBond, October 2021.

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