The lowdown: Panda bonds
Panda bonds were thrust back into the limelight when the market was reopened by China in 2015 with many high profile issuers lining up to sell deals. But what are Panda bonds and why should you care? Here’s GlobalRMB’s quick guide to all you need to know.
What is a Panda bond?
A Panda bond is a renminbi denominated bond sold onshore in China by a non-Chinese issuer. The first Panda bonds were issued in 2005 by International Finance Corp and the Asia Development Bank. After that there was only sporadic issuance until the People’s Bank of China (PBoC) reinvigorated the market in September 2015. Since then nine issuers have sold Panda bonds (see table below) and the pipeline is growing fast.
Is it really that simple?
With China it is always a bit more complicated. At the moment there are no formal guidelines on Panda bond issuance so while issuers including South Korea and the Province of British Columbia have sold trades, so have Powerlong Real Estate Holdings and Shimao Property Holdings.
But aren’t the last two Chinese companies?
Yes. And no. Powerlong and Shimao are what is known as red chip companies — firms based in China but incorporated internationally and listed in Hong Kong. While technically they can issue Panda bonds and are foreign issuers, they have been coined ‘fake’ Pandas by some in the market. Not to mention that this is probably not what the Chinese authorities had in mind when the opened up their domestic bond market to overseas issuers.
So when will the formal rules be published?
Good question. It was meant to be in December 2015 or January 2016 but the feeling is that any guidelines will not now appear until after Chinese New Year as Beijing has been a little distracted by the volatility in the renminbi.
So far any issuer that has wanted to sell a Panda bond has needed to liaise with the regulator on their specific transaction. Approvals are made on a case-by-case basis as are decisions on whether borrowers can take the proceeds offshore or not.
Why can’t issues do what they want with the proceeds?
China has very strict capital controls in place for controlling the currency that comes in and out of the country. Many issuers that have sold offshore renminbi (dim sum) bonds had to get permission if they wanted to bring the renminbi onshore. Most of the recent Panda bond issuers have been able to take their proceeds offshore but GlobalRMB understands that Shimao was prevented. This could be an isolated case, but China is aggressively trying to stem the flow of money leaving the country in the face of the renminbi’s depreciation.
It’s worth remembering that China’s bond market is very fragmented. It is divided between the interbank bond market and the exchange market. The former is regulated by the PBoC while the latter is governed by the China Securities Regulatory Commission.
The types of bonds available on each exchange are different as well with the interbank bond market mostly made up of government bonds, central bank notes and financial bonds. The exchange market, on the other hand, houses mostly non-financial corporate bonds and is slowly gaining traction.
So British Columbia and Bank of China Hong Kong have sold their Panda bonds in the interbank market, while the red chips have sold there’s in the exchange market.
And as always there is competition between the regulators but so far the PBoC has been leading the charge.
So what does this mean for dim sum bonds?
Dim sum bonds have been in the doldrums since Q4 2015 but that has more to do with the fact that the currency is depreciating and Chinese monetary easing means it is much cheaper to issue bonds onshore (the majority of dim sum issuers are Chinese). Also the basis swap doesn’t look that favourable for issuers wanting to swap renminbi into dollars or euros.
But the market could come back if funding conditions improve. It has advantages over Panda bonds including the fact there’s no need to seek approval from Chinese regulators if you want to issue a dim sum bond. And waiting for sign off is one of the problems holding back Panda issuance.
So how big could this market be?
Well in January 2016, Deutsche Bank predicted issuance of Rmb20bn ($3bn) in 2016 and Rmb150bn by 2020.
If only I could read more about Panda bonds.
Luckily GlobalRMB can help you out with that:
BOCHK pips HSBC to the post as both price Panda debuts