Panda bond is the commonly used name for renminbi-denominated notes issued by foreign entities in China’s onshore bond market. It came into being in 2005 when the Asian Development Bank and the International Finance Corp raised a combined Rmb2.23bn ($350m) through a pair of 10 year notes sold in the country’s interbank bond market.
But since then, the development of the market has been slow to say the least. The same two issuers revisited Pandas in 2006 and 2009 respectively, while German car maker Daimler sold a Rmb500m 5.2% one year private placement last year.
The scant issuance however was not down to a lack of interest, but rather an extremely stringent screening process.
When the People’s Bank of China (PBoC), the Ministry of Finance, the National Development and Reform Commission and the China Securities Regulatory Commission drew up rules for Panda bonds in 2005, issuance was limited to multilateral institutions.
This was only relaxed in 2010 to allow bilateral or regional developmental financial institutions to also sell such notes.
But now that BOCHK and HSBC have been given the nod by the PBoC to issue Panda bonds, participants are confident the market could soon open up to a much larger issuer base, including banks and corporates.
“The central bank's approval for one of the first issuances of its kind by a foreign financial institution could signal the opening-up of an alternative source of funding for global borrowers,” Helen Wong, CEO for Greater China, HSBC, said in a written statement. “Accessing China's onshore market could be a natural next step for multinationals which have issued in the offshore RMB bond markets.”
Money in, money out
HSBC has the go ahead to raise up to Rmb1bn, while BOCHK has received approval for up to Rmb10bn.
Both banks have announced their intentions to start bookbuilding on September 29 for a pair of Rmb1bn three year bonds with the former to be led by Citic Securities and HSBC itself, while the latter will be run by Bank of China.
But market observers reckon that the deals by themselves are not the main focus. Instead, one local currency syndicate banker said all eyes are on how China intends to use these transactions to open up its capital account.
A huge clue can be found in the two prospectuses as proceeds raised will be for offshore general working capital purposes. This, according to the banker, is key since it means China could soon be easing restrictions on cross-border capital movement — one of the big bottlenecks for foreign issuers.
“We have tried in the past to bring foreign issuers into the domestic bond market in China but unless they have a natural funding need onshore, it’s pointless for many of them since transferring onshore proceeds offshore is almost impossible,” he said.
But now that BOCHK and HSBC have said they will be using the money offshore, the banker said the impact could be far-reaching.
“The PBoC hasn’t said anything else apart from that brief statement, so we’re still not sure whether repatriation approval is going to be case-by-case, for banks only, or across the board for all foreign issuers,” he said. “If it’s the latter, then I could really see the Panda bond market take off.”
Apart from mentioning that BOCHK and HSBC have been approved to issue, the statement said the pair of deals will enlarge the interbank bond market’s issuer base, expand funding channels for commercial banks, speed up the liberalisation of the domestic bond market and improve cross-border utilisation of the renminbi.
Testing the water
For that to happen, however, Chinese regulators need to first publish a formalised framework for Panda bonds.
“Issuance in the past used to be done in a very case-by-case basis manner with no formal guidelines for potential issuers,” said Agnes Tsang, consultant and China DCM specialist at law firm Allen & Overy, which is advising on both deals. She added that the lack of a clear framework was one reason for the slow issuance.
However, Tsang believes the official rules will come once the BOCHK and HSBC deals have been successfully completed.
This is because the regulators are planning to use these transactions to identify any hurdles Panda bond issuers could face in the future.
“The obvious ones would be translation since all the documentation would have to be done in Chinese, which can be complicated for some foreign issuers,” said Tsang. “Issuers will also have to look at disclosure requirements and understand the differences between onshore and offshore market practices, and comply with the domestic accounting standards or those that are recognised by the MoF.”
Onshore advantage
If, and when, the onshore bond market opens up to more issuers, the future of the dim sum market would be at stake, reckons one Hong Kong-based strategist.
That’s because offshore renminbi bonds lose out in terms of both liquidity and cost of funding when compared to onshore issuance.
While the onshore/offshore price discrepancy is negligible for investment grade credits, the same could not be said for high yield issuers. Firms with an international rating below BB, for example, are typically able to save as much as 300bp-750bp by issuing onshore instead.
“I doubt China will be keen to introduce foreign high yield issuers straight away [into the Panda bond market], but a lot of single-B Chinese property developers, for example, are rated AAA onshore,” the strategist said. “It’s all speculation before the rules are formalised, but either way the dim sum market will be hit for sure.”
That is also the view shared by one Singapore-based DCM banker, although he believes the dim sum market will still have an important role to play.
This is down to the fact that the make-up of both markets is different, which means the need for investor diversification will always be there.
“I wouldn’t see it as a one market opens, one market immediately closes sort of situation,” Allen & Overy’s Tsang added. “As part of the internationalisation of the RMB, offshore RMB deposits have also been growing exponentially, so there is still demand for offshore RMB products from foreign investors.”