China's commercial banks inch towards carbon financing

[BEIJING] Chinese commercial banks are moving into the country's fledgling carbon markets, competing to deliver new financial products in order to help industrial clients hedge carbon trading risks and finance new investment in cutting carbon emissions.

China's Industrial Bank Co Ltd announced the launch of a yield enhancement product in Shenzhen on Thursday, the first of its kind in China to link interest rates to revenues generated from trading carbon.

The bank has received a 10 million yuan (US$1.63 million) deposit from the Shenzhen Huike Electronics Co Ltd, which participates in the Shenzhen emissions exchange.

The deposit will generate guaranteed interest payments of 1.9 per cent and could earn further yields of up to 2.2 per cent, depending on the firm's carbon trading revenues, China Business News reported.

The bank will also hand over at least 1,000 Shenzhen permits to the firm once the deposit matures, according to a press release from the local emissions exchange. "The product will help market participants to obtain stable incomes and improve carbon asset portfolio management, maximising profits for companies," said Liang Pingrui, general manager of the environment finance department at the Industrial Bank, at a press conference in Shenzhen.

In September, Industrial Bank loaned 40 million yuan to a firm trading on the Hubei Emissions Exchange, another of China's pilot carbon markets, using CO2 permits as collateral.

Two others - China Everbright Bank and China Construction Bank - have since made similar loans involving 400 million yuan.

In addition, China Minsheng Bank has also signed a contract with a local subsidiary of the Huadian Group, a state power firm, to issue a 2 billion yuan carbon bond on the Chinese inter-bank market.

The bond will use the company's Hubei carbon permits as the underlying asset, said Wang Hai, vice general manager of the Hubei exchange during a telephone interview with Reuters.

Shanghai Pudong Development Bank and the state-owned developer China General Nuclear (CGN) offered China's first carbon bond in May, linking a floating interest rate to CGN's revenues from selling offset credits (CCERs) in Shenzhen.

China has launched seven pilot regional carbon trading platforms in Beijing, Tianjin, Shanghai, Chongqing, Hubei, Shenzhen and Guangdong, and aims to launch a nationwide market in 2016. They traded nearly 14 million permits by October, 1 per cent of the total issued during 2013.

China only allows spot trading in carbon, and few banks have become involved, with the authorities restricting permits allocated to financial institutions amid worries about speculation.

REUTERS