Dim sum’s gone cold, so now what?
Offshore renminbi debt has struggled to gain traction this year, while the Panda bond market has shown encouraging development despite the absence of clear-cut rules. But if the Chinese regulators want to keep the RMB’s appeal as a long-term funding currency, they need to urgently make Panda issuance more user friendly.
Next year will mark the 10th anniversary of the first offshore renminbi-denominated bond — sold by China Development Bank back in July 2007. But while the dim sum market has achieved many a milestone since, it is not time to pop the champagne just yet.
Some 20 offshore RMB bonds, worth a total of Rmb35.8bn ($5.2bn), were sold since the beginning of this year, according to data compiled by GlobalRMB, a sister publication of GlobalCapital Asia. This represents a whopping 68% drop year-to-date. And to make matters worse, only about half of those deals were dim sum bonds sold internationally, with the rest being Formosa bonds sold into Taiwan.
For offshore investors, the weakening currency is putting pressure on returns, and issuers are unlikely to pay up to compensate. This is especially the case given the fact that most of the previous dim sum issuers were offshore subsidiaries of Mainland corporates, which have easy access to cheaper funding onshore. It can be as much as 100bp-200bp cheaper in the domestic market depending on the credit.
In addition, for foreign issuers looking to swap the proceeds back to dollars or other currencies, the cross-currency swap has become less favourable. For a typical CNH bond that has a three year tenor, the three year CCS has dropped below 3% in comparison to mid-3% a year earlier.
And with Donald Trump set to take up office in January 2017, the dollar is only expected to strengthen further putting pressure on the renminbi, which has dipped below 6.90 to the dollar.
All this shows that the prospects for dim sum bonds are diminishing. By comparison, Panda bonds have shown promise since the market was re-opened in September 2015. Issuance volume so far this year stands at Rmb113.6bn, according to GlobalRMB.
And the market has already shown its ability to attract international names with the likes of the Province of British Columbia, National Bank of Canada, Republic of Poland and Veolia Environnement selling onshore renminbi bonds.
From an issuer’s standpoint, the Panda bond market allows for bigger deals on the back of a significant pool of domestic RMB savings. And more borrowers would have priced transactions if not for lack of clarity around issuance rules.
And that is where the dim sum market still has the upper hand — for being more regulated, flexible and accessible, at least on paper. But if the Chinese authorities want to make RMB the funding currency of choice among international issuers in the long run, a new system needs to be put in place.
For starters, approvals for Panda bonds have been on a case-by-case basis so far. A registration-based application process will be the natural step to speed up approvals and move things forward more effectively.
Chinese regulators should also show some flexibility when it comes to accounting standards. Currently, only the PRC GAAP, HK IFRS/GAAP and IFRS are recognised, which makes issuing in the currency onshore more challenging for firms based outside of China, Hong Kong and Europe.
On top of that, for foreign issuers, the language barrier is a major drawback, given that documents can only in Chinese. And another grey area is the permission to move proceeds offshore, which is also judged case by case without any clear guidelines. These issues need to be addressed.
A revised version of a Panda bond framework from the National Association of Financial Market Institutional Investors (Nafmii) has been long overdue, and will give a much-needed fillip to the market. Whether it will address all the problems facing the Panda bond market is unclear. But the asset class has huge potential to grow and prosper. China needs to let it.