The International Finance Corporation and the Asian Development Bank last year became the first foreign issuers to sell local currency bonds in China.
The near-simultaneous sales of the so-called Panda bonds (IFC just squeezed in first) mark an important step for the world’s hottest market by proving that both regulators and investors have an appetite for foreign issuers’ paper.
The World Bank’s financing arm chose Citic Securities and China International Capital Corporation to manage the sale of Rmb1.13 billion of 10-year debt on October 10. The deal, yielding 3.4%, will be used to provide local currency funding for three Chinese companies.
The ADB used Bank of China International to arrange the sale of Rmb1 billion with the same term four days later. Initial pricing guidance of 3.4% was shaved to 3.34% as the issue was three times oversubscribed. Despite the small size of the deal and the fact that income from the bonds will be taxed, the return was set at only about 21 basis points above China’s tax-free, 10-year treasury notes.
“It’s a huge step: it introduces a new product in China, a new asset class and a new group of issuers. Everybody learned together,” says Cynthia Wang at BOCI’s fixed income department.
While the precedents set don’t yet open the market completely for foreign issuers because the regulations currently permit only sales by development banks, they do provide a crucial foot in the door. Both deals were accessible only to institutional investors, with the ADB mix being 39% 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.
In addition to opening the bond market, the process of arranging the deals has also led to permission from the government for interest-rate and currency swaps, according to the head of the ADB’s funding division, Juan Limandibrata.
“The ADB has a very good relationship with the Chinese government, so we successfully resolved all the issues to our satisfaction when we did the deal to set up the appropriate framework of bond issuance in China,” Limandibrata says.
The loosening of restrictions on the Chinese market, which has also seen permission won for short-term issuance, encouraged Moody’s to announce last month it was teaming up with local ratings agency China Cheng Xin International Credit Rating to establish a presence in the country. The IFC and ADB bonds are likely to provide important future benchmarks and will stand out as milestones on the road to a more developed local Chinese market.