Since its launch in 2016, China’s green bonds market has amassed a significant size and is
currently ranked as the second largest in the world. This paper takes a pioneering step to
analyze how a transitional economy can develop a burgeoning green bonds market within a
short period, using China as a case study. It concludes that the Chinese government plays an
instrumental but also evolving role in this process. The carefully designed use of government
mechanism in the context of unique government structures can constructively facilitate the
growth of a green bonds market. At the emerging stage of this unique market, the government
could play an active role in designing a conducive regulatory environment through law and
policy, providing necessary financial infrastructure and appropriate incentives for investors and
green bonds issuers. Government intervention is warranted at this stage given the special
characteristics of the green market, in particular, the desired positive externalities on
environmental protection and climate change. In China, such a regime is implemented with a
focus on inter-ministerial, central-local and international collaborations, centralized policymaking,
and alignment of green goals with performance assessment of local officials. However,
as the green bonds market matures, this paper suggests a transition towards a market-oriented
model where the government should assume a limited role, providing funding and monitoring,
and letting market forces play a greater role in achieving market efficiency. Unleashing the
potential of market forces can mitigate several of the challenges faced by a top-down approach.
This paper also examines the challenges that have surfaced in China, including low-quality
information disclosure and under-utilization of green bonds financing by private enterprises.
In response, several solutions are proposed to address these specific challenges.