China Property Crash Is Battering a Niche Pocket of ESG Finance

Posted On 15 Jul 2024

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China’s property downturn is weighing on yet another corner of financial markets: ESG-labeled securitized debt.

Chinese developers are issuing far fewer securities tied to climate or social objectives, resulting in only $2.8 billion being raised in Asia Pacific in the first half, data compiled by Bloomberg Intelligence show. That’s an 86% drop from a year earlier, and bucks a trend in both the US and the Europe, the Middle East and Africa region, which saw increases.

“This is definitely a bit of a setback,” after large issuance in Asia in 2022 and 2023, said Trevor Allen, head of sustainability research at BNP Paribas SA. As the housing market has cooled in China, there have been fewer loans to roll up into green securitizations, he added.

Commercial and housing property sales have continued to slump in China as consumers cut spending. Greater scrutiny of ESG labeling may be playing a part too, although the niche market is largely unregulated in Asia, unlike in the European Union.

Special purpose entities of developers China Jinmao Holdings Group Ltd. and Shui On Land Ltd., along with electric vehicle maker BYD Co. were among China’s top three issuers in 2023 though have either slowed down or are absent this year, according to the BI data.

Korea Housing Finance Corp., a major issuer of securitized debt aimed at affordable housing in recent years, has also been absent in 2024.

There have also been no sales by Chinese developers of commercial mortgage-backed securities with an ESG label in 2024, compared with a combined $4.3 billion over the past two years, BI data show.

Chinese developers have typically used the funding for energy-efficient commercial or residential buildings, although doubts have been raised about whether those projects end up being genuinely climate-friendly.

“Demand is still very strong from the investor side, but there’s no doubt that coming up with enough of the green-eligible mortgages, whether it’s on the residential or commercial side, has been a challenge,” said Claire Coustar, Deutsche Bank AG’s global head of ESG for fixed-income and currencies.

Securitizations are pools of assets such as home or auto loans that are packaged into interest-bearing securities. ESG investors in the products, which are often complex and opaque, also have to grapple with a lack of standardized definitions about so-called green attributes and limited data on the underlying loans.

With property developers on the sidelines, China’s EV producers have been the main backers of issuance in Asia so far this year.

Shengshi Rongdi Auto Loan ABS and Chang Ying Auto Loan ABS raised a combined $2.2 billion. The originator of the first is a unit of BYD, while a Great Wall Motor Co. entity is behind the latter.