Panda bond issuance has so far been dominated by overseas-incorporated Chinese names. That bolsters volumes, but it does little to help the market fulfil its role of boosting RMB internationalisation. Policymakers have the chance to fix it — but only if they are bold enough to let markets play a bigger role.
The Panda market was launched in 2005 as an RMB-denominated fundraising channel that sat neatly alongside the offshore RMB bond market. Together, these two markets were designed to make the RMB a viable funding currency for companies around the world. But more than a decade after the first Panda deal, it seems the market needs a bit of internationalisation itself — the issuer base is overwhelmingly Chinese.
Some 73% of Panda issuers are Chinese companies incorporated in Bermuda, the Cayman Islands or Hong Kong, according to a January 25 report by Shanghai Brilliance Credit Rating. Of the small group of ‘real’ Panda issuers only those with onshore operations, such as Daimler, are visiting the Panda market regularly. Most issuers, and in particular the SSAs, are arguably tapping the asset class for political, rather than working capital.
Regulators are aware of this problem, and they are shaking things up by introducing a wider variety of foreign issuers to the Panda market. Since the beginning of the year, corporations, financial institutions and SSA issuers — including the first issuers from Japan and the Middle East — have all tapped the Panda bond market, raising Rmb9.6bn ($1.5bn) across six deals, GlobalRMB data shows.
But China can and should do much more.
For starters, regulators should lift all restrictions on the repatriation of proceeds from Panda deals, a limitation that has kept many potential issuers at bay.
While locking up Panda proceeds onshore could have been justified two years ago, when China was battling capital outflows and currency depreciation, permitting repatriation today would hardly give the country’s FX watchdog a headache. That is not only because the Panda market remains tiny, but also because overall outflows have subsided, as testified by the growing pile of FX reserves China sits on. These reserves were worth $3.14tr in December.
Other obstacles for issuers, such as differences in accounting standards, can be resolved through government-to-government co-operation. This was recently demonstrated by Japan, which agreed on a framework with Chinese regulators on exchanging issuers’ audit reports in the case of a default. The move provided more protection for Panda investors, and led to the debut deals from Japan by Mitsubishi UFJ Financial Group (MUFG) and Mizuho Bank at the start of this year.
Some market participants believe the upcoming Panda guidelines — which would clarify the rules on capital repatriation — are the silver bullet for attracting ‘real’ Panda issuance. Others reckon regulators could do more on the demand side by mobilising onshore investment flows into the asset class.
What the Panda market needs, however, is not another edict by regulators, but more market-driven growth.
For too long, the lack of clarity over policy has kept market participants away from Pandas. Issuers, investors and underwriters have been forced to play it by ear with regards to how proceeds could be used from any of the Panda deals in the pipeline. The timeline for approvals has also been slow and opaque, giving potential issuers little visibility over how much they can rely on Pandas to meet funding needs. Some issuers ended up doing roadshows half a year before actually issuing their bonds because of regulatory hold-ups.
Even with a new Panda framework coming, drawing up the rules will not be enough. Regulators will have to stick to them. Unless they keep their word and implement these guidelines, confidence in the regulatory regime would suffer, and ‘real’ Panda issuers will continue to shy away from the market.
In time, with a more diverse issuer base, the Panda market could transform into an attractive option for international investors seeking to diversify their RMB exposure.
A more liquid and truly international Panda market would offer a unique risk profile for domestic investors overwhelmed with Chinese supply. But it would also help bring in more foreign buyers. These bonds will be issued by names which foreign investors are familiar with, unlike the vast majority of bonds issued by local borrowers, the majority of whom are unrated.
It may take years, if not decades,
before the Panda market reaches that stage. But looking back at the market’s short history, it is clear that cutting red tape and introducing more market forces is the way forward for Pandas. A more market-oriented approach from regulators would allow Panda bonds to finally play the role they were designed for — helping make the RMB a global funding currency.