Trying to understand China’s debt capital markets is an uphill task. There are many different regulators and industry bodies, who in many instances oversee the same areas but often with conflicting rules.
If that is not enough, China has also adopted the slightly confusing practice of allowing deals to price before official rules are put in place.
The National Association of Financial Market Institutional Investors (Nafmii), for example, has yet to release the revised version of its Panda bond framework but we’ve already seen five issues in the interbank bond market this year worth a combined Rmb15bn.
While the lack of rules has not really affected the outcome of those Pandas, it has, however, created a muddle about a deal that was not classified as a Panda – the NDB bond.
The NDB notes are officially classified as green financial bonds as they were issued under the People’s Bank of China’s (PBoC) December 2015 guidelines for green bond issuance in the interbank bond market.
But here's where the confusion begins.
NDB is a supranational, so calling the notes financial bonds is already somewhat misleading. In addition, NDB is technically a foreign issuer even though it is based in China – meaning the bonds should also have been classified as a Panda bond. In fact, technically they are the first green Panda.
But the formal explanation from NDB as to why the bonds were not given the Panda tag was because of the lack of a definitive framework for the asset class. As a result, they can only brand the notes as green, which does benefit from a proper set of rules, even if the notes are a Panda in all but name.
The only problem with this explanation is that it undermines all the Panda issuance since the asset class was brought back to life in September 2015. Based on the same rationale, none of those should be considered Pandas either.
Panda puzzle
The China Foreign Exchange Trade System (CFETS), which contains the offering documents of all interbank issuance, was clearly in two minds. When it first uploaded the offering documents for the NDB notes on July 13, they were put into the financial bond section.
But on the day of bookbuilding (July 18), they were moved to the supranational section, which also houses the Panda bond offering documents of Asian Development Bank and International Finance Corp. It was still there when GlobalRMB went to press.
Whether an offering is called a green financial bond or a green Panda bond really shouldn’t have much impact on a transaction. Investors put their money in based on risk returns not gimmicky names, or at least, that is the theory.
However, this particular event does point towards a deeper issue within China’s capital markets, which is the uncertain nature of the regulatory environment.
None of this would have been an issue if a Panda bond framework was in place. While it does take time for a regulator to formulate practical and workable rules, it has taken far too long for new Panda bond guidelines to be published. To refresh memories, the rules were first expected to launch last year. The word around the street is the holdup is now with the Ministry of Finance, not Nafmii.
Hungary, Poland and Exchange-Import Bank of Korea (Kexim) are just some of the names waiting for clarity on the rules and you have to wonder how the treasury officials feel about the endless wait. Thankfully, all three are looking at Pandas as a diversification exercise rather than as a core funding market.
As GlobalRMB has written before, Beijing really does need to work on its market communication. It would surely make market participants feel more assured to provide some sort of progress report on the rules.
Even better would be for China to start looking at its long list of regulators and industry bodies. Consolidation has been talked about for a long time but if Beijing is serious about reforming its financial markets, this will need to start happening soon. After all, what hope is there for the rest of us if even China is confused?
