Since its birth in 2005, the panda bond market has grown older, but not much bigger. The silence in the panda bond market contrasts with the vibrancy of the dim sum bond market which, despite its shorter history, is looking increasingly attractive as a funding platform for foreign issuers because they are relatively easy to issue and the proceeds can often be repatriated to China. As demand is outstripping supply, the coupon of dim sum bonds is decreasing.
Dim sum and panda bonds are both renminbi-denominated debt, the former issued in the offshore market and the latter onshore.
The panda bond market remains tightly controlled and the cost of issuance is relatively high. The government has made few significant steps in developing panda bond market. Occasionally there are rumours that China is liberalizing the onshore bond market for foreign issuers and that the number of issuances is tipped to grow. However, not that much has actually happened, except for a few benchmark issuances.
Nurturing a baby panda
Strictly speaking, panda bonds only refer to onshore bonds issued by multilaterals and supranationals, which are raising renminbi proceeds for their developmental projects in China. Introduced in 2005, the International Financial Corporation (IFC) and Asia development Bank (ADB) marked two inaugural panda bonds issuance during the year, with the proceeds being used within China. The two organizations issued their second panda bonds in 2006 and 2009 respectively, an effort to support the development of China’s domestic bond market as well as the growth of targeted domestic companies.
On some occasions though, panda bonds refer more broadly to onshore renminbi bonds issued by any foreign names, both locally incorporated and foreign entities. Debt capital market bankers insist though that those onshore renminbi bonds issued by locally-incorporated subsidiaries of foreign-owned companies are not panda bonds proper as these issuances comply with domestic rules and as the issuance procedures are similar to those for domestic Chinese companies.
A number of foreign companies, both financial institutions (such as HSBC and Standard Chartered) and non-financials (such as Uniliver and Walmart) have expressed interest in issuing onshore debt through their locally-incorporated subsidiaries. It is not entirely clear whether the interested parties either have not yet submitted their applications or have had their applications rejected by regulators. The difficulty in securing an approval and the cumbersome application process go some way in explaining why actual deals have been rare, in spite of the level of general interest. Notable are: the 2010 issuance by Bank of Tokyo-Mitsubishi UFJ (China) of a two-year onshore renminbi bond; and the two billion renminbi panda début of Bank of East Asia (China) in March 2011 when it issued a two-year senior bond – under part of the five billion renminbi quota approved by the People’s Bank of China (PBoC) – priced at 4.39% and assigned AAA ratings by China Chengxin International Rating.
Dim sum, a natural choice
“Whereas for offshore renminbi bonds, basically no regulatory approval is needed, to issue onshore renminbi bonds, foreign issuers need to go through a lengthy application process. As China’s domestic bond market is still developing, it is a gradual progress for the regulators to open up this market,” remarks Steve Wang, head of fixed income research at Bank of China International (BOCI).
The approval process can take up to one year. While there is a regulatory framework for issuance, all approvals are reviewed on a case-by-case basis. To issue onshore renminbi bonds, foreign issuers need to file documentation to either the MOF for multilaterals, or PBoC for financial institutions, or CSRC for non-financial corporations.
Foreign issuers issuing onshore bond need to obtain at least one rating by a domestic rating agency on top of an international rating. Some understand that issuers are still required to prepare financial reports under China’s accounting rules (ADB and IFC were exempted). “It would not be a major problem for foreign issuers to apply for domestic rating as the cost is much lower. And locally-incorporated subsidiaries would have no issue in complying with local accounting rules as they are operated just as other domestic Chinese companies,” says John Sun, executive director, fixed-income trading, CITIC Securities International.
On the other hand, the yield of a dim sum bond issued by an investment-grade issuer is only 2% – or slightly above 2% – which is about 200bp to 300bp lower than an onshore debt with similar rating. “It is indeed the lower cost of issuing dim sum bonds that makes more economic sense for foreign issuers than panda bonds, Sun points out. “In multilateral organizations, there are highly sophisticated funding teams to calculate the cost of funding. They will weigh the costs of different funding options, in which panda bond is one of the options,” says Sun.
Tee Choon-Hong (鄭俊峰), managing director, regional head of capital markets for Northeast Asia at Standard Chartered agrees that the current market environment is favourable for dim sum bonds. “People should be talking more about dim sum bond market in terms of accessibility and the relatively cost. For example, Volkswagen’s recent five-year offshore renminbi bonds are priced at 2.1% and are widely distributed outside Hong Kong. For the same credit within China, you are talking about 2% higher.”
When given the choice of issuing renminbi bonds either onshore or offshore, issuers will naturally choose the dim sum bond market because of its accessibility and cost benefits. “A flourishing dim sum bond market has, to a certain extent, limited the development of the panda bond market,” opines Sun.
Repatriating proceeds
Fund repatriation for issuers of dim sum bonds has been an issue as such remittances have to be approved by PBoC on a case-by-case basis, although the bond issues itself does not require regulatory approval. Sun says that fund repatriation is becoming less of an issue as the Chinese government has speeded up the approval process. “In general, if foreign issuers are not in sectors which the government implements tightening policies such as real estate, the possibility for that company to receive approval for repatriating proceeds from the offshore bond issuance back into China is relatively easier. Some cases can be done as quickly as four to six weeks and the government is looking to standardize the process,” explains Sun.
Beyond economics
However, some bankers believe it is more than just economics that guide the decisions of foreign issuers. “The more fundamental question is: Why are foreign issuers issuing bonds in China? Will they be taking the money out? Or will they use the proceeds within China? If money needs to be repatriated, you are talking about cross-border issues,” observes Tee. Before issuing panda bonds, foreign issuers may need to clarify whether the governing law will be Chinese law or common law.
Besides the economic reasons, there is speculation about political reasons behind the slow uptake in panda bonds. “China has agreed to accept international financial reporting standards (IFRS) for panda bond issuers, but it has requested that the international community led by European Union recognize China’s accounting standard when Chinese companies do capital market transactions,” according to the source, noting that the panda bond issued by multilaterals are being regulated by MOF, which is leading the negotiations. “Given the complexity of this issue, the issuance of panda bonds has slowed down,” says the source.
To date, no pure foreign entity has issued onshore renminbi debt yet.
Uncertain future
Views are mixed on the future of panda bond and onshore renminbi bonds by foreign companies. “Once the renminbi becomes freely convertible, the concept of panda bond will gradually phase out. My take is that dim sum bond will dominate over panda bond,” says Sun.
Some believe the panda bond market will open up and grow at its own pace.
“The onshore and offshore are two different markets. The domestic market is older and bigger. The offshore has just opened last year and is much smaller. I think it is not the question of subordinating one over the other. They have different investor bases and different market sizes,” comments Tee. “If I look at the market environment right now, it appears that the offshore funding cost is more competitive – as the parent company has a better credit than the subsidiary onshore.”
Others think that the two markets will eventually merge. “In the longer term, we believe the differences between the dim sum and the panda bond markets should fade as China’s cross-border capital controls continue to be relaxed. One day, we may find there is no need to use various kinds of labels to divide the renminbi bond market into segments,” says BOCI’s Wang in a research report.
Wang also believes the expected launch of international board should complement the development of the country’s domestic bond market. “If the international board is launched, it will only be natural for foreign issuers listed on the international board to tap the onshore bond market.”
Already a first grader
The panda bond legislation was promulgated in February 2005. The Provisional Administrative Rules on Issuance of Renminbi bonds by International Development Institutions (國際開發機構人民幣債券發行管理暫行辦法) were jointly issued by the People’s Bank of China (PBoC), Ministry of Finance (MOF), National Development and Reform Commission (NDRC) and China Securities Regulatory Commission (CSRC). The scope of issuers was expanded to policy banks later.
On September 30 2010, the regulators jointly released an amendment to the rules, allowing issuers to convert renminbi proceeds from panda bond issues into foreign exchange – with the approval of the State Administration of Foreign Exchange (Safe) – and remit such foreign exchange out of China. This is seen as a remarkable step for China to open up the market. It is also seen as a move that can help release the pressure on the renminbi to appreciate.
