Credit reforms needed as Panda bonds celebrate birthday
The Chinese Panda bond market is enjoying plenty of attention, having just passed the one year anniversary of its comeback in September 2015. However, while market participants expect the exuberance to continue, they have called for credit reforms to diversify the investor base.
In the 12 months since its reopening, the Chinese Panda bond market has recorded 45 deals worth a combined Rmb97bn ($14.5bn), according to GlobalRMB data.
While this is tiny relative to the overall size of China’s domestic bond market, which as of June had Rmb45.9tr outstanding, it is still impressive considering the short time Pandas have been in action.
Bank of China Hong Kong and HSBC restarted the asset class on September 29, 2015 when they raised a combined Rmb2bn. The market has not looked back since with sovereigns, financial institutions and corporates all rushing to issue the renminbi-denominated notes in China.
“Panda bonds tick a lot of the right boxes for issuers, especially those who are looking to diversify their funding sources, given that it is already the third largest bond market in the world,” one head of north Asia DCM syndicate said.
Market participants that GlobalCapital Asia's sister publication GlobalRMB spoke to agreed that Panda bond issuance will only continue to grow — a view backed by a Deutsche Bank survey released on September 30.
The German lender contacted fixed income investors with an estimated total $14.5tr of assets under management and nearly half of them said they might invest in Panda bonds within the next 12 months. A further 38% expect to invest in Panda bonds within one to three years.
This was welcome news for the syndicate head, as based on the deals he has worked on this year, he has had huge difficulties finding global accounts willing to put money in.
“Outside of sovereign Pandas, for which you will obviously get central bank and sovereign wealth fund participation, most of the other notes sold in the interbank bond market have ended up in the hands of Chinese banks and, on some occasions, the underwriters,” he said. “I’ll be more than happy to see some global investors participate just so we can start moving away from club deals.”
Deutsche's research estimated that foreign investors’ share of domestic interbank holdings was only about 1.52% in August — a severe under allocation especially given the size of China’s bond market.
The challenge investors most frequently cited in relation to onshore RMB bonds was access to liquid hedging instruments.
Half the respondents also flagged the absence of onshore RMB bonds from leading indices as a limitation, although 82% expect their inclusion in a major emerging market fixed income index within the next two years.
But one Hong Kong-based DCM banker said while he was encouraged by the survey, a Chinese bond inclusion in major EM indices is unlikely to have much impact on diversifying the investor base of Panda bonds because most global bond indices only track government bonds, which means little for Pandas.
As things stand, the DCM banker said roughly more than 80% of Chinese onshore bonds held by foreign investors are government bonds or policy bank notes.
While he conceded that there have been big improvements to the Chinese fixed income market in recent years, in particular with access to the CIBM, he said much more work is needed for the interest to filter through to the credit market. The Province of British Columbia and Poland are the only two sovereign Panda bond issuers this year.
“Investors are not so much worried about the strength of an individual issuer but rather how risks, in general, are being priced in China,” he said. “The relative lack of defaults, secondary market liquidity and proper disclosures mean China does not yet have a fully functioning credit market, which is why foreign interest has remained predominantly in risk-free assets such as government bonds.”