China is – and will remain as – the star of green finance in Asia

The Asia-Pacific region is responsible for as much as 52% of total global emissions. In other words, Asia’s emissions are outsized relative to its economic share. In the same vein, while the region has been proactively cutting emissions as in the massive energy transition investment activities (especially in China), they are underfunded since only roughly 30% are financed by capital markets, the bulk of which happens in China. In this note, we analyze the landscape and outlook of green finance in Asia.Asia’s green finance is dominated by China, contributing to 60% of Asia’s green finance, or $200bn in value. The next relevant contributors, at a far distance, are Australia, South Korea, India and Japan with annual funding of around $20bn each. By financing type, fixed income is the preferred instrument, accounting for 80% of all deals. Although underweighted compared to emissions, Asia’s green finance has been on a strong rise since 2024 thanks to China’s contribution. We expect this process to continue for three reasons.Firstly, China’s green tech sector used to find it easy to fund its investment through retained earnings, but the funding gap is growing given the rapidly worsening profitability. As China drives 80% of Asia’s energy transition investment with only 60% of total green finance, one can only expect the latter to increase. Moreover, it 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.Secondly, China is ramping up its investment in the power grid, which requires massive funding. To mitigate the curtailment of renewable energy (in other words, intended time off when grid’s 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. 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% to $44bn 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.Finally, China’s supply-first approach to the green transition may need to change as resources dwindle. In fact, the reliance on subsidies and capacity targets is becoming increasingly costly and inefficient. Most subsidies have gone to clean transportation while industrial decarbonization, despite its relative importance (32% 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.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.