China bonds with EU over green issuance and Pandas

Although EU leaders have mixed feelings towards China, both sides are advancing their partnership on green bonds and Panda bonds in several ways.
Chinese Premier Li Keqiang called for fair and open investment between China and the EU.
Chinese Premier Li Keqiang called for fair and open investment between China and the EU.

The European Union (EU) and China may not see eye-to-eye on a number of issues but when it comes to so-called Panda bonds and green bonds they do appear to be edging closer.

Despite testy negotiations, the two sides issued a joint statement on Tuesday when Chinese Prime Minister Li Keqiang visited Brussels.

At a press conference, European Council President Donald Tusk said, “Negotiations have been difficult, but ultimately fruitful.” Li, meanwhile, said China would provide fair and open access to EU investors, while calling on the EU to reciprocate.

The joint statement commits both sides to conclude “an ambitious” EU-China Comprehensive Investment Agreement next year. And a key plank of that is to reinforce cooperation on green finance to harness private capital flows towards a more environmentally sustainable economy.
Green bonds are debt instruments that help raise capital for projects seen having a positive impact on the environment and the biggest exchange for trading them currently is in Luxembourg, on the Franco-German-Belgium borders, followed by London, according to the Climate Bonds Initative
However, the Luxembourg stock exchange, which has been stepping up its partnerships in China, only ranks third for Chinese offshore green bond trading, behind Hong Kong and London, a second report by the non-profit market organisation shows. According to this, China accounted for 18% – or $31 billion – of global green bond issuance in 2018, not far behind the US market on $34 billion.
So it's not hard to see why the Luxembourg stock exchange to want to attract more business from the world’s second-largest national issuer, indicated Ricco Zhang, Asia-Pacific director of the International Capital Markets Association, a membership body of debt securities market.
And all the more so, probably, as rival London grapples with the UK's messy efforts to leave the EU and steps up its own efforts to forge increased financial ties with China.
On March 27, at the Boao forum in China, the Shenzhen Stock Exchange signed an agreement with the Luxembourg stock exchange to display green bonds listed in Shenzhen, making it easier for European investors to invest in them. This mirrors a similar agreement struck last year with the Shanghai Stock Exchange, which separately also agreed at this year's Boao forum to help with the eastward display of information.

Many Chinese offshore green bonds are already listed in Luxembourg, including Industrial Bank of China's €300 million ($338 million) debut international green bond and China Construction Bank's €500 million debut in November and September last year, respectively.

The Luxembourg stock exchange’s current position as the world’s leading trading exchange for green bonds is naturally attracting Chinese interest, Zhang said.

Other European exchanges are wooing Chinese green bonds too, not least London, which drew Industrial and Commercial Bank of China's blockbuster $1.58 billion-equivalent green bond last June.

Younger, more-specialised exchanges are also upping their game.

“Yes, we plan to follow the Chinese opening-up strategy and welcome more bonds from Chinese issuers. Especially the green bonds are a big topic with European investors,” a spokesman for the Frankfurt-based China Europe International Exchange (CEINEX) told FinanceAsia.

CEINEX is a joint venture between the Shanghai Stock Exchange, Deutsche Börse Group and China Financial Futures Exchange for trading China-related securities outside China.


That includes Panda bonds, which are renminbi-denominated bonds issued by non-Chinese entities in China.

“We can also feel rising interest from German and European companies to issue Panda bonds and are supporting them to do so,” the CEINEX spokesman added.

In March, two German carmakers, Daimler and BMW, issued Panda bonds.

On March 23, an Italian state-owned bank, Cassa Depositi e Prestiti (CDP), announced that it and Bank of China, one of the Big Four Chinese state-owned banks, had signed an agreement to support Italian firms in China. This agreement includes plans for the issuance of Panda Bonds.

The announcement coincided with Chinese President Xi Jinping’s visit to Italy from March 22 to 24, where he received a red-carpet welcome.

Ireland is also trying to get in on the act. Daryl Byrne, chief executive officer of Euronext Dublin, told FinanceAsia, “With China being the third-largest bond market in the world, we certainly intend to increase more ties with China on bonds.”

Euronext Dublin recently hired a Mandarin and Cantonese speaker to help boost its bond business from China and Hong Kong, Byrne disclosed.

Euronext is a pan-European stock exchange operator with a presence in Paris, Amsterdam, Dublin, Brussels and Lisbon. Its exchanges currently hosts three Chinese green bond issues totalling €2.3 billion from China Three Gorges, China General Nuclear Power Corporation, and Bank of China.

In late March, the Central Bank of Ireland approved Irish investment funds called Undertakings for Collective Investments in Transferable Securities (UCITS) and Alternative Investment Funds to trade Chinese bonds via Bond Connect, a Hong Kong platform which connects international investors with China’s bond market.

The EU “pursues a realistic and multi-faceted approach” to China, a European Commission press release stated on Tuesday. A European Commission report on March 12 described China as both “a cooperation partner” and “a systemic rival promoting alternative models of governance”.  

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