HONG KONG  - China could do with a little more viridescence. Beijing's rules for its green bond market are still too pliable: a refiner last week issued a note with the tag to pay for a petrochemical complex. A central bank review underway offers a chance to push guidelines closer to international norms.

Since 2016, China has been a pioneer: only the United States issues more green bonds. There has been plenty of innovation too - the People's Bank of China was one of the first to allow green bonds as collateral, for example. In 2018, the country issued a total of $43 billion, according to Climate Bonds Initiative. Only two-thirds of that, though, met international standards.

Opacity is one problem in a market jointly regulated by the central bank and the National Development and Reform Commission. That's partly because Beijing is managing multiple priorities: it needs a greener economy, but also an expanding one. As a result, the NDRC allows up to 50% of green bond cash to be used for working capital. That’s far above the limits elsewhere. So-called clean coal is also still allowed.

China's constraints are obvious: Coal still accounts for roughly 60% of energy generation. But fudging the rules smudges the whole effort. If the proceeds are used for non-green purposes, the financial instrument no longer encourages better behaviour.

Beijing has an opportunity to step towards a common framework. Companies that want to do good can lean on other forms of financing, even beyond loans. Issuers could follow Italian utility Enel, which sold a general purpose sustainability bond last month, which pays higher interest if it misses green goals but allows it to use the cash for anything. More importantly, improving standards would help attract more foreign investors - onshore green bonds are largely investment grade - and it would help keep prime issuers home too.

China has a strong incentive to step up: Ma Jun, chairman of China’s Green Finance Committee, reckons three-quarters of the country's water plus a fifth of arable land is contaminated, and will cost some $10 trillion to clean. Good reason to go a shade greener.

CONTEXT NEWS

- Oil refiner Jiangsu Eastern Shenghong has issued a green bond worth 1 billion yuan ($142 million) to fund a petrochemical complex, it said in a statement on Oct. 10. It is the largest single green corporate bond issued by a privately owned firm in China.

- The oil refinery funded by the proceeds will be capable of processing 16 million tonnes of crude per year.

(Editing by Una Galani and Katrina Hamlin; Research by Katrina Hamlin)

© Reuters News 2019