The People’s Bank of China reopened the Panda bond market in September to the usual mixture of excitement and scepticism that tends to greet new initiatives from China.
The restoration of Panda debt, which allows non-Chinese issuers to sell renminbi bonds onshore in China, came at a time when markets were still reeling from a surprise devaluation in the currency.
Add to that, the lack of official guidelines or a framework and the prospect of Panda bonds brought with it as much uncertainty as it did opportunity.
But progress has been steady. Since Bank of China (Hong Kong) and HSBC sold Pandas on September 29, issuers have raised Rmb12.9bn ($2bn), according to data from GlobalRMB.
Issuers have included the governments of South Korea and the Province of British Columbia and more controversially red chips names — Chinese companies incorporated internationally and listed in Hong Kong — including real estate firm Country Garden and China Gas.
As a result of the activity so far, market observers are upbeat about the prospects.
Yan Yan, chairman of China Chengxin International Credit Rating (CCXI), forecast earlier this year that issuance could reach over Rmb300bn by 2020, as CCXI has over 100 Panda bonds waiting to be rated.
Meanwhile, Deutsche Bank wrote in a report in January that it expected Rmb20bn of Panda bonds this year. “Since the beginning of 2016, we have seen an explosion of interest in issuing Panda bonds from both corporate and public sector issuers,” said Jinny Yan, chief China economist, China Markets Strategy at ICBC Standard Bank. “I would say at this stage we also have interest from the public sector and financial institutions in Africa.”
“European blue chips that have a big presence in China do have real RMB demands, especially those which have dim sum bonds maturing in the next few years. Given the additional onshore accounting and legal requirements, corporates with a maturity requirement beyond six months will have a high demand to tap this new market.”
Borrowers that have expressed an interest in selling onshore renminbi debt include DBS, Export-Import Bank of Korea, Hungary, Intel and Sri Lanka.
Unconvinced investors
But while there is plenty of buzz, Panda bonds face some fundamental problems. Not least of which is that Chinese investors are less than enamoured by foreign issuers.
It may seem strange that Chinese onshore investors are not keen to buy foreign names, even those that are internationally rated triple-A, but several bankers and sales people who worked on the British Columbia Panda trade told Asiamoney that potential buyers asked questions that included: “Where is British Columbia? Is it in the UK? What do they do?”
The fact the British Columbia is a regular issuer of bonds globally and has the highest rating from Moody’s, Standard & Poor’s and Fitch carries little weight with domestic Chinese investors.
“Why should I invest in the names that I’m not familiar with when I already have tons of bonds to choose from back home, with the issuers’ names that are super well known domestically?” said a fixed-income asset manager based in Beijing.
While the asset manager bought one of the Pandas issued last year, he said the only reason was because “the issuer’s name is well known in China and is our shareholder”.
“The Chinese investor base is very different from what they have in the offshore market. The China market has been closed for a long time, and a dominant number of the onshore investors don’t even have an internal credit line to allow them to buy these foreign names,” he added.
And he is not alone. His views were echoed by other sales people and investors that spoke to Asiamoney. Other concerns include how to model the default risks of a Panda bond.
“Even though names like the Korea government or Daimler are no strangers to Chinese investors, it is obviously much harder for us to keep up with all the news related to these two issuers,” said another investment manager with a big bank in China.
“It is very likely, the most up-to-date information about these two issuers will be in the news in their own language, and this puts Chinese investors in an unfavourable situation if they want to exit an investment.”
Several bond traders are also concerned about how to contact a foreign issuer if a default were to happen.
“Who knows where the representative office of British Columbia in China is?” said one of the traders.
Regulatory roadblocks
Getting the Chinese investor base onboard is key if this market is to grow beyond being a niche product. But while that it is likely to happen over time and alongside the ongoing opening up of China’s capital markets, Panda bonds suffer from more pressing problems in regards to regulation, specifically those related to accounting standards, and the remittance of proceeds.
“Some concerns for potential issuers are indeed on the regulatory side. There is still not enough transparency on the eligibility or requirements for Panda bond issuance. A set of regulations are really needed from the international issuers’ perspective,” said Kennis Wong, head of Greater China debt capital markets at Mitsubishi UFJ Securities (HK). While there are no official guidelines, any borrower wanting to sell a Panda bond must provide financial statements in a format recognised by regulators. Those are People’s Republic of China Generally Accepted Accounting Principles (PRC GAAP), Hong Kong GAAP or the European Union’s International Financial Reporting Standards (IFRS).
This is already causing problems for some of the issuers who would be most keen to sell debt onshore.
For example, Asian Development Bank and International Finance Corp — the two issuers who sold the first ever Panda bonds in 2005 — will not be able to make a quick return as they file their financial reports under US GAAP.
Both have previously received waivers from the Chinese Ministry of Finance, but neither has been granted an exception for future issuance. That said, talks aimed at solving the problem are ongoing, according to officials from both supranationals.
Given that it would be quite difficult for the many issuers who use US GAAP to change their accounting standards, it is hoped that the People’s Bank of China and the Ministry of Finance will consider relaxing the requirements for the sake of the market’s long-term development.
There is also a great deal of uncertainty about the ability of issuers to move proceeds offshore. At the moment it is on a case-by-case basis but there seems to be no pattern to the approvals. The problem is complicated by the fact that China has spent a lot of this year trying to stop capital leaving the country following volatility in the renminbi. The result is that some issuers have come up with innovative ways to get the money out of China.
In February, China Gas used its entity in Shanghai’s Free Trade Zone to remit the proceeds.
While some market participants believe the ability to freely move proceeds cross-border would act as an incentive to issuers, others argue it would accelerate capital outflows as there is still a high expectation of further RMB depreciation.
“So whether they remove the accounting barriers or allow more flexibility to move the proceeds in and out of the country, it would probably take some time for the Panda bond market to be taken seriously by foreign issuers,” said an onshore DCM banker.
Onshore vs offshore
Notwithstanding the problems, most market participants believe Panda bonds are here to stay. For now they are benefiting from the low interest rate environment in China and could get a boost if Chinese bonds are included in global indices. Moreover, they offer some advantages over offshore renminbi (dim sum) bonds.
“Dim sum bonds are very susceptible to liquidity changes in offshore renminbi as well the issuing costs of euros and dollars,” said ICBC Standard’s Yan.
“In contrast, we are confident that onshore RMB liquidity will remain abundant in the long term and that the low interest rate conditions in China are likely to last.”
Meanwhile, MUFJ Securities’ Wong points out that Panda bonds also offer diversification benefits to issuers.
“If you look at the issuance of some big frequent borrowers such as the Export Import Bank of Korea or Korea Development Bank, you will find that they’ve tapped many currencies because their strategy is to diversify their investor base,” she said.
“In that case, the Panda bond market certainly presents a good option to them as they have large funding needs.”
Ultimately she believes the offshore and onshore renminbi bonds markets are complimentary much like the Eurodollar and domestic US dollar debt markets.
“I believe dim sum and the Panda bonds can coexist. While the dim sum bonds are like the dollar Reg S market with more simplified disclosure and issuance requirements, the Panda bond market is similar to 144A issuance that taps into domestic liquidity and follows onshore regulations,” she said.
“When the RMB becomes fully convertible, issuers can then choose whether to go through a more stringent issuing procedure but access the deeper investor pool that Pandas offer, or to choose an easier way with dim sum instead.”
