China embraces transition debt in push for green steel

Chinese transition investing has a new poster child – Hebei. By the end of 2025, the northeastern province had witnessed nearly $7bn being issued in transition loans. Much of it had to do with Hebei’s industrial mainstay – steel.

Some 10% of the world’s steel comes from Hebei, courtesy of six of the ten largest steelmakers being Chinese. Having introduced transition finance guidelines in December 2023, Hebei offers a glimpse into the growth of China’s transition debt market.

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New research from Climate Bonds Initiative tracks the rise of labelled debt as a financing channel underpinning China’s push for greener steel.

Green capex

For China’s steelmakers, the energy transition is a tall ask. The industry accounts for 15% of national emissions. With nearly 90% of production linked to blast furnaces, the capital expenditures required are visibly large.

By 2030, estimates put that figure at $18bn. Over 80% of that figure is aimed at hydrogen technologies. Some 45% of capital expenditure is expected to target hydrogen-based electrolysis with another 41% to be deployed in hydrogen-driven electric arc furnaces.

Wenhong Xie, head of CBI’s China programme says capex scale creates headwinds – particularly for smaller players.

“Most steelmakers, particularly smaller and private firms, still struggle to invest ahead of policy where low-carbon technologies require significant capex and green premiums remain limited”, she says, “leading SOEs such as Baowu and HBIS are further advanced, with climate targets, transition plans and green steel pilots including hydrogen-based DRI”.

China’s steel transition remains policy led. Xie points out key examples such as the 2025 inclusion of steel in China’s emissions trading scheme and the EU CBAM incentivizing exporters to decarbonise their operations.

Downstream demand could, at some point, become a powerful driving force. Even though it is early days, strong demand signals from large buyers, carbon pricing and trade-based emissions rules strengthen the investment case for decarbonising steelmaking.

Transition debt

In that regard, transition debt has tangible benefits. For smaller players, these instruments could lower their cost of capital.

“According to the Hebei Branch of the People’s Bank of China, steel transition-related labelled loans carry interest rates around 30 basis points lower on average than comparable conventional loans”, Xie told Net Zero Investor.

Larger companies typically have access to lower cost of capital. For them, transition bonds have the added benefit of long-term signalling.

“For large state-owned steelmakers, which already have access to relatively low-cost financing, the main value of transition finance may be less about pricing and more about funding long-term transition investment, demonstrating policy alignment and strengthening credibility”, she notes.

Labels also mean added investor expectations. Xie reckons credibility over use of proceeds, clear emissions pathways, companies meeting key milestones and capex alignment are all part of investor expectations around transition financing.

Lessons from Hebei

The benefits partly explain Hebei’s numbers. The $6.9bn in transition loans issued by the end of 2025 was a policy-led development.

The province introduced steel-specific transition financing guidelines in 2023. Then, a 2025 update extended their realm into scrap steel processing. It brought multiple components of the steel value chain within the reach of transition loans.

Banks in the region responded to the call. Bank of China removed steel sector loan growth restrictions for Hebei. Bank of Communications and the Agricultural Bank of China gave additional credit approval powers to their Hebei branches, Industrial Bank even extended $73m in interest subsidies for steel transition lending.

“Hebei illustrates the impact of clearer sector guidance”, Xie explains. The fact that transition financing rose significantly after 2023 offers crucial clues. “This suggests that clearer sector criteria can materially improve capital mobilisation for hard-to-abate industries”, she notes.

Moreover, the Hebei case might be a sign of things to come. If China’s steel transition debt market were to scale, investor appetite and confidence become critical questions.

“Chinese steel debt, investor confidence is likely to depend on clear eligibility criteria, credible emissions targets and capex plans, transparent disclosure and independent verification”, Xie says.

With transition investing rising up investor agendas elsewhere, China’s steel industry could attract attention. Converting interest into capital will be key to how the world’s largest steelmaking country manages its transition.