After hibernating through the first half of the year, the Panda market woke up roaring over the past seven days with Rmb9bn ($1.33bn) of issuance, making up 25.3% of total volumes so far this year. Although red chip real estate issuers made up most of that amount, true Panda issuers , such as Hungary and Maybank, have also marched into the arena.
But look closer and there is reason for alarm. Only one out of 23 tranches of Panda bonds this year had a tenor longer than five years, compared with 13 three year and seven five year tranches, according to GlobalRMB data.
The market is so focused on the short end that some issuers have given up on raising long-term funding from Pandas.
Maybank, which claimed in its prospectus that it wants to raise funds for utilities, mining, oil and gas Belt and Road projects in and outside China, sold investors a merely one year long Rmb1bn note. How a one year bond will help hold up this long-term, infrastructure-focused initiative — described by president Xi Jinping as the project of the century — is anyone’s guess.
But issuers such as Maybank are not to blame for sticking to the short end. That is where investors are focused, as has become increasingly clear from recent dual-tranche deals.
Longfor Properties was hoping to raise Rmb2bn from its debut Panda on July 20, split equally between a three year and a five year tranche. But investors gave the issuer the sharp elbow, pushing it to shift 35% of the deal towards the shorter-term notes. Another real estate issuer, China Resources Land, also had to move Rmb300bn from its five year notes in a similarly structured deal four days later.
This lays bare the fundamental weakness of not just the Panda market, but the entire Chinese bond market — there has always been a distinct lack of long-term institutional investors.
More than an insurance
Take insurance companies as an example. They often serve a crucial role in bond markets globally, as they have demands for long-term investments to match their liabilities, such as life insurance contracts.
But even insurers are in for a quick buck in China’s short-term market. The country’s biggest insurance houses, from AnBang Life to Sino Life, are more exposed to equities than to fixed income.
This creates a vacuum for commercial banks to fill. As of May 2016, banks held 62.84% of all onshore bonds, according to Deutsche Bank, compared with just 5.28% held by insurance companies. Banks also made up 67% of the Chinese government bond market, whereas insurance companies only got a 3% slice.
If banks’ dominance in Chinese bonds may be problematic, their interdependence is potentially catastrophic. China has long needed to step up its efforts to carve out a true, price-setting institutional investor base.
To be fair to the regulators, they are well aware of this danger and have already moved to tackle it. In December 2016, China Insurance Regulatory Commission placed a blanket ban on insurance companies to have more than 30% of their asset made up of equities.
With the recent launch of Bond Connect, regulators can be hopeful that foreign institutional investors, including foreign pension funds and insurance firms, could step in to fill this vacuum, at least in part.
But there is another hurdle facing the development of these long-term investors. The yield curve in China is extremely flat, with five year Chinese government bonds trading just 3bp above their three year counterparts as of July 26. This is hardly an incentive for burgeoning insurance companies considering whether they should move to longer-term bond investments.
The good news is that such a phenomenon often does not last long. In China’s case, the curve has already improved from being inverted a month ago. For now, the government should go ahead and continue trying to push long-term investors into the game.
Should volatility return in the foreign exchange market, we are likely to see Panda issuers fade into the background once again. But once long-term investors gain a foothold, they will be the catalyst that allows Pandas to really come of age.