Green bond spread effect of unconventional monetary policy: Evidence from China

Abstract

The development of green bond market is of great significance to the low-carbon transformation of China’s economy. However, green bond financing costs have remained high. The People’s Bank of China has guided the market to actively participate in green bond investment and financing activities by including green bonds in the scope of qualified collateral for monetary policy instruments. Against this backdrop, the role of unconventional monetary policy in reducing the cost of green financing is a critical topic being discussed in academia. In this study, we examine the cost impact of unconventional monetary policy on green financing, particularly green bonds. Specifically, using bond market data from 2016 to 2020, we construct a difference-in-difference (DID) model to empirically test the effect of China’s unconventional monetary policy on the financing cost of green bonds. The results indicate that unconventional monetary policy reduces the trade spread of green bonds compared with non-green bonds in the secondary market. However, the effect on the spreads of primary market green bonds is insignificant. Furthermore, through sub-sample tests based on ownership and bond ratings, this study finds that unconventional monetary policy has a more pronounced impact on the transaction spreads of AA+ and AA rated green bonds, green bonds issued by state-owned enterprises, large-scale green bonds, as well as long-term green bonds in the secondary market. Based on the above conclusions, we put forward policy suggestions to improve the top-level design of green bond market and activate the enthusiasm of bond trading from two aspects: expanding the scope of green bond collateral of central bank lending programs and enhancing the issuance advantages of green bond in the primary market.