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Belt and Road Pandas finally come of age

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By Noah Sin
09 Jan 2018

DCM bankers often market Panda bonds as Belt and Road bonds, even when they have little to do with China’s landmark infrastructure plan. But in recent weeks, issuers with genuine needs for funding Belt and Road projects have started to tap the market. The change could open up a new frontier for RMB internationalisation.

Selling Panda bonds with a Belt and Road spin is nothing new. The marketing label can save the issuer from the trouble of reinstating its financials — as National Bank of Canada learned in 2016 — or win them approvals to use the proceeds offshore — as in the cases of Hungary and Maybank last year.

But take a closer look and these transactions seem superficial in their contribution to the China-led Belt and Road Initiative (BRI). Maybank raised a mere Rmb1bn ($154m) from its Panda, which is hardly a match for its ambition to fund utilities, mining and oil and gas projects along the Belt and Road. China Merchants Port (CMP) kept all of the proceeds from its April 2017 Silk Road Panda onshore. Even Rusal’s debut Panda last March, which had the blessings of the Shanghai Stock Exchange as a Belt and Road bond, drew no obvious link to the BRI.

Clear link

But CMP’s comeback deal is a different story. For once, the connection between the use of proceeds and BRI is unmistakably clear.

The Hong Kong-listed company is approaching investors in the Shenzhen Stock Exchange to help fund its purchase of the Hambantota port in Sri Lanka. The deal attracted plenty of press coverage as it sparked protests in Sri Lanka when it was announced in 2016, as locals feared the growth of Chinese influence.

But CMP braced the controversies and pushed ahead with the deal, revising the terms of the acquisition agreement. The motivation was clear. Hambantota port is a key node for the maritime Silk Road, the failure of which would hamper the success of the BRI, as CMP alluded to in its draft prospectus.

Global Logistics Properties (GLP), with its new Rmb12bn Panda programme, is another fine example of a real Belt and Road Panda issuer.

The proceeds will go towards the company’s recent acquisition of Gazeley — which despite contributing to GLP’s recent downgrade by Moody’s — will help build a distribution network and facilitate trade flows in western Europe at the other end of the Belt and Road.

The issuer was endorsed by the Shenzhen bourse and China Securities Regulatory Commission this week as the first Belt and Road Panda issuer in the publicly syndicated market.

Missing framework

Yet, while the emergence of CMP and GLP’s Panda proposals are encouraging signs, they are insufficient for the development of a sustainable Panda market.

Regulators must come up with a framework — a clear set of criteria which tells prospective issuers how and when they can move their cash abroad — instead of granting approvals on a case-by-case basis. GlobalRMB has spoken to numerous Panda issuers and underwriters in the past year, and concerns about China’s capital control regime remains the top complaint.

Given China’s ambition to make BRI a success, and the longevity of BRI projects — mostly focused on infrastructure — CMP and GLP will not be the last borrowers to knock on the Panda market’s door.

This gives the regulators an opportunity to lay the ground rules once and for all. They should start by defining which bonds qualify as Belt and Road Pandas. Secondly, they need to decide what perks issuers could get by issuing such notes, for example the freedom to repatriate capital or an exemption from having to reinstate financials in accordance with Chinese accounting standards.

This will also show that China is serious about using the Panda market to promote RMB internationalisation. This is a goal it has reiterated time and again but which, apart from approving some of the more symbolic transactions, it has done little to fulfil.

The rise of Belt and Road Pandas presents China a chance to give greater meaning to the still small Panda market. The country should take that chance.

By Noah Sin
09 Jan 2018