Alicia Garcia-Herrero: «China is the Star of Green Finance in Asia»
China is the green finance leader in Asia and is expected to retain this position, according to a research note by Natixis Corporate & Investment Banking, due to several reasons impacting both supply and demand.
While Asia Pacific is responsible for 52 percent of total global emissions, only 30 percent of energy transition investment activities are financed by capital markets with fixed income being the preferred instrument, accounting for 80 percent of all deals. China contributes to 60 percent of the region’s green finance, or $200 billion, with Australia, South Korea, India and Japan being other notable markets with annual funding of around $20 billion each.
«Although underweighted compared to emissions, Asia’s green finance has been on a strong rise since 2024 thanks to China’s contribution,» said Alicia Garcia-Herrero, chief economist, Asia Pacific, Natixis CIB, in a research note.
«China is – and will remain as – the star of green finance in Asia.»
Worsening Green Tech Profitability
According to Garcia-Herrero, there are three reasons why China will retain its pole position in green finance. Firstly, the funding gap is growing in its green tech sector due to «rapidly worsening profitability».
«[I]t is hard to see corporate profits in the green tech industry recovering any time soon with the growing overcapacity stemming from irrational competition, especially as renewable firms are curbing capex to protect margins, which in turn, reduces the sector’s ability to self-finance and raises the demand for external green financing in China,» she commented.
Power Grid Investments
Secondly, China requires massive funding for its ramped up investments in the power grid.
«To mitigate the curtailment of renewable energy (in other words, intended time off when grid demand is low), the government has started a new round of ultra-high voltage (UHV) transmission construction on a mission to improve the functioning of the grid,» Garcia-Herrero explained.
«The huge construction costs have pushed up China’s green finance demand. A good example of this is State Grid Corporation’s bond issuance jumping 250 percent to $44 billion in 2024 and making it the world’s largest green bond issuer since 2021. As grid construction soars, China’s green finance, especially green bond, may stage an even stronger rise.»
Inclusion of Heavy Industries
Finally, Garcia-Herrero noted that China’s supply-first approach to the green transition «may need to change as resources dwindle» with reliance on subsidies and capacity targets becoming increasingly costly and inefficient.
«Most subsidies have gone to clean transportation while industrial decarbonization, despite its relative importance (32 percent of emissions), is lagging due to lack of funding, other than competitiveness reasons. As China moves to include heavy industries such as steel, aluminum and cement into national carbon trading scheme, these industries’ demand for transition financing will need to grow massively,» she said.
«All in all, the strong rebound in green bond issuance since 2024 is expected to continue in China. Given firms’ increasing demand for transition financing and pervasive lower returns in China, green finance may be the next sweet spot for debt investors.»
