SDR bond shows way through China accounting roadblock
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SDR bond shows way through China accounting roadblock


Incompatible accounting standards could soon be a thing of the past for foreign issuers looking to tap into China’s onshore bond market with the World Bank’s upcoming SDR trade providing a template on how to get around this long standing issue.

One of the main problems for foreign issuers looking to venture into China’s domestic bond market has been the difference in accounting standards.

Apart from PRC Generally Accepted Accounting Principles (PRC GAAP), Beijing only accepts Hong Kong Financial Reporting Standards (HKFRS) and International Financing Reporting Standards (IFRS).

This creates a problem for issuers adopting US GAAP as it is not recognised by Chinese authorities and a lack of formal guidelines has left issuers without clarity.

As GlobalRMB has previously reported, this accounting requirement is one of the reasons the Asian Development Bank (ADB) and International Finance Corp (IFC) have not returned to the Panda bond  market despite pioneering the product back in 2005. Both issuers use US GAAP but were given exemptions for their market opening deals as well as their subsequent returns in 2009 and 2006, respectively.

Since then, Beijing has declined to grant exemptions but the upcoming Mulan bond from the International Bank for Reconstruction and Development (IBRD) suggests the authorities are open to allowing another solution.

While the IBRD also uses US GAAP, the supranational has been allowed to go ahead with the transaction after publishing an extra document that outlines the major differences between US GAAP and PRC GAAP.

This practice is commonly seen in other, more developed financial markets such as the US but is the first time it is being adopted onshore in China, according to one Beijing-based lawyer.

For example, Chinese companies that sell bonds into the US, still publish their financial statements in accordance with PRC GAAP but have to provide extra documentation detailing the differences in terminologies as well as calculations.

“This is a major breakthrough because IBRD has shown that it is possible for companies, which are unwilling to go through the trouble of having to switch to a new set of accounting rules, to get deals done in China,” the lawyer said.

One Hong Kong based head of fixed income agrees that this is a major breakthrough although he remains sanguine as all issuance still needs to be approved by Chinese regulators.

“I think this has the potential to be very big but only if China decides to allow all subsequent foreign issuers to get the same treatment,” he said. “There are a lot of unknowns at the moment because there is a chance that this is only an exception for Mulan bonds and the IBRD.”

“I don’t think even the Chinese know what they want because the market is still developing and everybody is still trying to find the way that works best for foreign issuers and China.”

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