Trading climate opportunities in the Chinese bond market

48 minute read

The Chinese bond market is in focus in the midst of the Evergrande event and commitments to stop non-domestic coal financing. This note provides a practitioner's perspective on the market.

China has committed to achieving carbon neutrality within the next forty years. Meeting those long-term goals entails changes today, including directing capital towards cleaner sources of energy and constricting financial flows towards the ‘dirty’ segments of the economy. But there are some steep challenges.

Vast portions of the Chinese market remain highly illiquid and some remain difficult to access. And the infrastructure found in more developed markets – impartial credit rating agencies, default procedures, and strong legal protections for creditors, for example – are less sophisticated in China, if not entirely absent.

This transition presents opportunities for global fixed-income investors. For fixed income investors seeking to use financial flows to catalyse the climate transition in China, the question is whether the difficulties of participating in the Chinese market are sufficiently thorny to overshadow the opportunities. Our sense is that the Chinese bond market is not quite developed enough to allow the deployment of active climate-focused strategies, but with further deepening in the market and the development of more hedging options for international investors, it may soon be.

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