The Hong Kong Green Bond Trade-Off

    Stockholm (NordSIP) – Despite the last two years of political turmoil in Hong Kong, the government of the special administrative region of the People’s Republic of China has been making strides towards becoming Asia’s green finance hub. In its latest step in that direction, the government of Hong Kong issued a US$2.5 billion triple tranche green bond at the end of January. The bonds’ terms were relatively favourable and the transaction was awash with investor demand. However, given Hong Kong’s recent political troubles the true price of this investment may be non-financial.

    Buoyant Demand

    Hong Kong’s green bond issuance was split into five-, ten- and thirty-year tranches worth US$1 billion, US$1 billion and US$500 million, respectively. The five-year tranche was priced at 0.635%, 22.5 basis points (bps) over benchmark US Treasuries. The ten-year tranche was priced 1.414%, 37.5bps over ten-year US Treasuries. The thirty-year tranche was priced at 2.431%, 62.5bps over the benchmark US Treasuries. Demand was five times the final allotment for the five- and ten-year tranches and seven times the final allotment of the thirty year bond.

    “The success of the offering demonstrates investor confidence in Hong Kong’s credit strengths and economic fundamentals in the long term. The issuance will help catalyse further growth of the green and sustainable bond market, particularly leveraging on Hong Kong’s strengths as a leading green finance hub in the region,” Hong Kong’s Financial Secretary, Paul Chan, said.

    “Building on the momentum from the successful issuance of the inaugural green bond in 2019, we have set up the world’s first government Global Medium Term Note Programme dedicated to green bond issuances to demonstrate the continued commitment of Hong Kong in promoting sustainable development and facilitate the Government’s regular green bond issuance activities,” Mr Chan added.

    Who are the Investors?

    Sectorally, 34% of the Green Bonds were distributed to banks, 46% to fund managers, private banks and insurance companies, and 20% to central banks, sovereign wealth funds and supranationals.

    According to the Hong Kong Monetary Authority (HKMA), Asian institutional investors purchased 65% of three tranches, reflecting “the strong pick-up in Asian investors’ appetite for green financial products”

    However, another 20% and 15% of the total was allotted to European and US investors. “Worth noting is the strong preference of European and US investors for longer-tenor green bonds, with a combined allocation of half of the 30-year tranche,” the HKMA explains.

    Credit Agricole CIB and HSBC acted as Joint Global Coordinators, Joint Lead Managers, Joint Bookrunners and Joint Green Structuring Banks for the Green Bonds offering, and BNP PARIBAS, Citigroup, ICBC (Asia), J.P. Morgan and Standard Chartered Bank acted as Joint Bookrunners and Joint Lead Managers.

    The Price of Green

    For ESG investors and dealers, funding Hong Kong green bonds must require a degree of sustainability compartmentalization. After all, the enclave’s authorities effectively lost their autonomy in 2020. Following pro-democracy protests and a defeat at the ballot box, mainland China’s government simply decided to bypass the local Hong Kong legislative assembly.

    Instead, it promulgated a draconian national security law which was annexed to Hong Kong’s Basic Law, without the consultation of Hong Kong legislators. This act was widely considered a violation of the one country-two systems regime agreed with the UK when the city was returned to China in 1997 and created the judiciary means through which Beijing could stiffle democracy on the island.

    Since the promulgation of the national security law, all displays in favour of independence are forbidden and all opposition leaders have effectively been arrested. While investors may have gotten some green on their balance sheet, they certainly had to give up a little bit of social or governance concerns before cashing in.

    Image by Ben Davies from Pixabay

    Filipe Albuquerque
    Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

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