Green finance - HK primes the pump

Experts say SAR must act fast as financial hubs up the stakes in the green 'gold rush'

With regional rivals breathing down its neck in the race to be Asia's financial services doyen, Hong Kong is sparing no effort in the contest for another crown - in green finance.

The buzzword highlights a global investment theme combining the world of finance and business with an environmentally friendly touch that offers credit and special funds for a more sustainable, low-carbon and climate-resilient economy.

The urgency to meet the threat has been made the more relevant for Hong Kong as world financial centers, including cities on the Chinese mainland, rise to the occasion with investors scouring markets for "green funds".

While the SAR continues to sharpen its edge as a world-renowned financial hub, green finance - equally important as the much-vaunted financial technology (fintech) - stands as one of the fields where the city should strive to take the lead, says new Secretary for Financial Services and the Treasury James Henry Lau Jr.

Lau, who took office on July 1, stresses that Hong Kong must double its efforts to make both fintech and green finance a solid success.

With companies worldwide scrambling to go green and investors favoring green, he hopes to burnish the city's brand as a magnet not only for green bond issuers but also for green investors.

Financial experts agreed that Hong Kong must act fast. "For Hong Kong, it's really a race against time and other major financial hubs," warned Hannah Li Wai-han, a strategist at UOB Kay Hian (Hong Kong).

"Previously a niche activity, green finance today is becoming a mainstream part of the financial services world, luring many jurisdictions with the foresight to vie for a share," she said.

Among world financial pivots, London is one of the most aggressive to have joined the fray. In January, the British capital rolled out the Green Finance Initiative in its attempt to achieve an "early mover" advantage.

Shanghai, for its part, aims to turn Lujiazui - the nation's financial epicenter and powerhouse in the heart of the city's Pudong New District - into Asia's green finance hub, according to a low-profile announcement by the Lujiazui Financial City Management Board in April.

In a sign of Hong Kong's resolve to press ahead with green finance, the Financial Services Development Council, which has warned that the SAR would lose out if it fails to maximize its uniquely placed position as the region's leader in the field, unveiled a high-level study in May last year that set the tone for and shed light on prospects of issuing green bonds in the city.

The opening shot in the green finance race was fired in the arena of green bonds. Hong Kong went into the game in mid-2015 with the maiden issuance of $300 million worth of green bonds by wind energy company Xinjiang Goldwind Science and Technology. The issuance was five times over-subscribed and marked the first such move by a mainland enterprise.

A year later, property investment giant Link REIT became the first Hong Kong-based green bond issuer with a $500-million tranche. It was followed by MTR Corp, which issued its 10-year green bonds worth $600 million in October last year and pledged to issue more in the coming years.

"Basically, the huge appetite for the Chinese mainland's green investments is what Hong Kong's green finance ambition could gain momentum from," said Li.

Although shy of the government's $46-billion target, the world's second-largest economy raised more than $30 billion worth of green bonds last year, accounting for 31 percent of the world's total issuance and 65 percent of the global growth, says a research report by Bank of America Merrill Lynch.

China, which overtook the United States last year as the world's largest issuer of green bonds, is poised to be the predominant driver of the global green investment boom and "a good illustration of supportive governmental policy", the report noted.

"The emergence of China as a significant issuer has been a major milestone for the broader green bond market," said Beijia Ma, an analyst at Bank of America Merrill Lynch who tracks this emerging marketplace. "As the central government crystallizes its climate commitments, the country will continue to set the trend in 2017."

Although green bond issuance may slow down after a bumper year in 2016, the Chinese mainland is still projected by Bank of America Merrill Lynch to contribute to 30 to 50-percent growth of the global green bond market.

For the next five years, the country needs at least 2 trillion yuan ($295.5 billion) of green investment annually to pay for the war on pollution, Ma Jun, chief economist at the People's Bank of China (PBOC), estimates.

"With such a robust investment demand up for grabs, Hong Kong has no reason and cannot afford to miss the boat," said Jacob Zhou, a Hong Kong-based consultant at one of the "Big Four" accounting firms.

"Traditionally, Hong Kong has positioned itself as a major market for equities trading rather than bond trading. Now, riding high on the undertakings and goals of the cross-boundary Bond Connect and the mainland's green finance 'gold rush', Hong Kong may have a chance to rejuvenate its domestic debt market," Zhou noted.

"Not to mention the insatiable appetite for infrastructure-related bonds and the popular choice of sustainable investments along the Belt and Road route, the story is made the more promising."

In particular, as the ambitious Guangdong-Hong Kong-Macao Greater Bay Area plan reinforces the theme of regional cooperation and integration, Hong Kong may join hands with Guangdong province to jump on the green finance bandwagon.

The province on the mainland's southeastern coast, together with the nation's other four areas, stand as the testing ground for green finance, with the creation of five pilot zones in June.

The move puts Guangzhou, capital of industrialized Guangdong, on course to embrace a green finance revolution, fitting in well with the city's vision to diversify the regional economy in a greener manner, according to the PBOC.

The central bank's encouragement highlights the support for institutional investors from Hong Kong and Macao to take a share of the green private equity investment funds and green venture capital funds under the Qualified Foreign Limited Partner scheme within the pilot zone.

"All in all, at the heart of the green finance boom, policy support always matters," Ma reckoned.

"With governments in the Asia Pacific and Europe at the forefront in policies to develop the kind of sustainable infrastructure that green bonds are designed to fund, and to grow the green bond sector, you can see the market is being fueled by powerful, broader factors that will ensure the asset class remains vibrant," said Lorna Greene, director of debt syndicate and origination at National Australia Bank in Hong Kong.

"In the end, our goal is to set up a well established green finance ecosystem where opportunities could extend to green initial public offerings and green indexes. This cannot go without the collaboration of the public and private sectors," Zhou said.

"You can see the SAR government really feels the urge to put green finance and fintech on top of its working list. We may get off to a good start, but we really should speed up," Li observed. "With opportunities on the cards, the question is: Are we well prepared to catch the ball?"

sophia@chinadailyhk.com

(HK Edition 07/28/2017 page12)