The International Finance Corporation (IFC) and Asian Development Bank (ADB) last week issued the first 'Panda' bonds — foreign issuers' paper sold in the Chinese domestic interbank bond market.
The deals should open the door for other issuers to access China's large investor base. The Japan Bank for International Co-operation and Germany's KfW Bankengruppe hope to follow soon, bankers said. Both institutions obtained final approval to sell renminbi bonds from China's State Council last week, but the IFC pipped the ADB to become the first Panda issuer.
The private sector financing arm of the World Bank placed Rmb1.13 billion ($140 million) of 10 year bonds via China International Capital Corp and Citic Securities. The bonds were priced at par to yield 3.4%, 24bp over the 10 year Chinese government bond.
The ADB followed last thursday, raising close to Rmb 3 billion of orders for its Rmb1 billion ($123m)10 year bond. Bank of China International led the deal, which yields 3.34%. Observers said the government bond yield had risen by Thursday and that the ADB had paid around 32bp over it.
The Chinese authorities stipulated that proceeds of bonds issued by international agencies must be used for lending to projects in China. But Nina Shapiro, treasurer of the IFC in Washington, told EuroWeek there was a wider purpose for the deals. "We are not doing these transactions to create a favoured place for IFC in the market. This is really about developing the market," she said. "This transaction is a first step for institutional investors in investing long term in a different credit and in starting to evaluate different credits; given the supras' high credit ratings, it is easier for investors to start with these credits."
Both institutions roadshowed their deals and built the books as they would have done a global deal, which they claimed would help to introduce international best practice to the Chinese market. The ADB tightened its price guidance from the 3.4% area to 3.35% area before pricing at 3.34% — an unusual move in China, where most bond issues are underwritten and guaranteed by banks and offered with a fixed yield.
The government is by far the biggest bond issuer in the Chinese market, with some $287bn of paper outstanding, out of a total of nearly $700bn, according to AsianBondsOnline. But Charlie Ye, a managing director at BOCI in Shanghai, said investors had warmed to a new kind of issuer. "It was not that difficult to explain the ADB to Chinese investors," he said. "This is the only international triple-A credit in China and investors understand that it is a better credit by far than local triple-As."
The ADB sold 39% of its deal to Chinese banks, 31% to the Chinese branches of foreign banks, 15% to insurance companies and the rest to fund managers, credit cooperatives and social security funds. Although the IFC emphasised the importance of market development over that of funding, Juan Limandibrata, assistant treasurer and head of the funding division at the ADB in Manila, was a little more circumspect.
Developing bond markets
"It's obvious that part of our mandate is to develop bond markets in the region. At the moment, our other objective is to raise cost-effective funds for loans. If that objective is not satisfied, then we can't proceed," said Limandibrata. Both Shapiro and Limandi-brata said they believed issuance by supranationals could help to open up the Chinese market to other types of issuer — particularly in the rapidly expanding infrastructure sector, where China's government alone spends $260bn a year.
"The Ministry of Finance and the Chinese government have been very deliberate in the process of opening up the market. We think that the government may now allow other types of credit to come in," said Shapiro at the IFC.
"There are key projects in China, including projects in the private sector, where it would make sense to borrow onshore. There is a lot of liquidity in the market and the Ministry of Finance has been strategic in developing a more efficient financial market."
Limandibrata at the ADB shared this point of view: "Using the bond market to finance infrastructure is clearly one of the key objectives of the government in developing the market."
Chinese regulators have been gradually liberalising the market throughout the year. In May, the People's Bank of China permitted Chinese companies to sell short term bonds to institutional investors and reduce their reliance on bank loans. Then, in September, it emerged that the PBOC was planning to allow banks to trade corporate bonds.
But what will come next is difficult to predict, said Ye at BOCI. "It's very hard to know exactly what the government wants in the future," he said. "But allowing supranationals to issue has implications. It suggests that they might allow other issuers to use the market."
Whether, or when, this might happen is not clear. Bankers say it is difficult to move funds in and out of the country. However, Shapiro said precedent suggested that allowing supranationals to issue was a first step towards greater liberalisation. "When we opened the market in Colombia, that was also a long process. We visited Colombia many times to work through the process with the regulators. After we had issued three or four times, others began to enter the market," said Shapiro. "We were able to use our structured finance instruments like partial credit guarantees and securitisation to partner with local institutions and introduce other financing possibilities to the market, especially to give access to more varied borrowers and longer term maturities. We hope to achieve something similar to this in China," she added.
Bankers added that one possible attraction to the Chinese regulators of allowing foreign private sector entities to borrow onshore was the fact that it could relieve upward pressure on the renminbi. Funding officials refused to comment on whether there had been any competition between the IFC and ADB to get into the market first, but Shapiro did admit: "It's natural that there should be interest among all supras in doing something like this."
The IFC will use the proceeds from its deal to lend Rmb 406 millio to Guangzhou Development Industry Holdings for power investments, Rmb 65million to Chindex International's United Family Hospitals and Rmb 650million to Anhui Conch Cement Co.
Shapiro said the IFC had no plans for another deal yet, but Limandibrata said he hoped the ADB would return before long. "We have long term objectives in China and it is our intention to maintain a regular presence in the market. Given the ADB's level of activity in China, I am optimistic we will issue sooner rather than later."