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New Panda bond framework: a missed opportunity

By Paolo Danese
28 Aug 2018

China’s impending Panda bond framework offered the country a chance to sort out a messy approval process that deters all but the most dedicated issuers. Instead, the country doubled-down on chaos.

China has made great progress in expanding market access for foreign investors. When it comes to cash bonds and equities, there is little that is not fully available to a global audience through the Stock Connect and Bond Connect schemes.

On the fixed income side, in particular, investors have been well looked after. Bond Connect launched in 2017 without any quotas attached and, more surprisingly, also did not place any limits on the different types of investors that could participate in China’s $11.6tr interbank bond market.

Foreign issuers are getting less of a welcome. Chinese authorities have kept a lid on the Panda bond market from day one. As a result, real Panda issuers — those that are not ‘red chip’ companies, firms headquartered abroad but are essentially Chinese — have been few and far between.

While bankers continue to boast about the huge potential of Pandas and the hundreds of names they claim are in the pipeline, the reality has been less exciting. But as GlobalRMB revealed earlier this week, Chinese regulators are finally preparing to formalise a set of rules.

That offered a glimmer of hope to bankers in the market, but those who have seen the final draft document said there is little new in the proposed framework.

Regulators are simply planning to crystallise the chaotic, confusing, unhelpful regime that is in place already.

Passion of the Chrysler

The Panda market could be so much more. Falling yields in China and rising yields in the dollar market have seen the two markets converge further, making onshore China a less expensive borrowing option. However, the idiosyncratic nature of the Panda market and its convoluted rules mean we are now in a place where one company has issued the vast majority of outstanding bonds.

According to GlobalRMB’s database of non-red chip Panda bonds, German automaker Daimler has raised Rmb43bn from the market, out of Rmb76.5bn from all non-Chinese issuers.

Is it possible that the carmaker is the only reputable multinational corporation that can pass the stringent scrutiny of the Chinese authorities? In a country that hosts the most Fortune 500 firms, in one form or another, that is highly unlikely to be the case.

What is instead clear is that an unreasonable application process has discouraged firms less dedicated than Daimler from diversifying their funding into onshore renminbi.

Perversely, the antics of Donald Trump made the chances of a smoother regime more likely. China has shown in the past few months that it is ready to make concessions as the US president increasingly rattles his sabre. Last Friday, China made a surprise announcement that it was dropping all limits on foreign-owned financial institutions in China ahead of schedule, the same day that low-level US-China trade talks concluded with little fanfare in Washington. Just a coincidence? Doubtful.

Panda bonds, which by their nature show China becoming more open to the world, could be another way in which China makes a symbolic concession to the White House.  However, the country’s regulators have chosen to stick with a tired old system — robbing China’s investors of the chance to diversify their assets while ensuring that only the most dedicated issuers will be able to clear the Great Wall.

By Paolo Danese
28 Aug 2018