September 21, 2015 / 3:54 AM / 4 years ago

Panda bonds set to multiply, as China opens up market

* China mulls new rules to open onshore market to foreign issuers

By Ina Zhou

HONG KONG, Sept 21 (IFR) - China is stepping up efforts to encourage more foreign borrowers to issue renminbi bonds onshore, known as Panda bonds, in a key move to open its domestic capital markets.

The People’s Bank of China has solicited opinion on draft changes to its Panda bond rules in the past few months, and regulations allowing a broader range of international issuers are expected to follow later in the year, foreign banking sources in Shanghai say.

Bankers say a pipeline of potential overseas issuers is already building, underlining the appeal of the vast mainland market at a time when onshore yields are falling.

The draft rules under discussion target international corporate and financial issuers, as well as Chinese companies with businesses registered overseas, the sources say. Bankers hope the likes of Alibaba, for instance, could be drawn to the market.

Crucially, the new rules are expected to allow international issuers to use proceeds for both onshore and offshore purposes, in line with a central bank notice last year on cross-border settlement for foreign bond issuers. Until now, restrictions on the use of proceeds have been a major disincentive for foreign groups.

The renewed focus on the Panda market reaffirms China’s commitment to liberalising its currency and financial markets, and could open an alternative source of funding for global borrowers.

It comes as fears of a Chinese economic slowdown have sent yields soaring in recent months on offshore renminbi bonds, dubbed Dim Sum bonds.

At the same time, China’s monetary easing has squeezed returns on domestic bonds, making the onshore market far more attractive for potential borrowers. One-year renminbi bonds from the Chinese government yield 2.29 percent onshore, versus 3.23 percent in Hong Kong, according to Thomson Reuters Eikon.

In addition to international companies, several sovereign borrowers including Russia are actively seeking to issue Panda bonds this year, according to banking sources.

“Broadening the Panda market from sovereigns and development banks is a significant move for China,” said one debt banker in Hong Kong. “The onshore market will be especially attractive to multinational companies who are frequent Dim Sum issuers.”

False starts

The Chinese bond market has remained largely closed and the arrival of new international issuers would bring significant change. Since Panda bonds were introduced in 2005, there have only been three issuers: International Finance Corporation, Asian Development Bank and Daimler. They raised around 9 billion renminbi ($1.41 billion) in total.

Foreign investors hold only about 2 percent of outstanding paper in the vast 30.5 trillion renminbi onshore bond markets, but the PBoC is keen to encourage foreign participation as it pushes for the renminbi to be recognised as a reserve currency in the International Monetary Fund’s basket of Special Drawing Rights.

In a June report on the internationalisation of the renminbi, the PBoC said it would support the issue of onshore renminbi bonds by overseas institutions, broaden the types of foreign institutions allowed to invest in Chinese bond markets and gradually increase investment by foreign institutions. Foreign central banks and sovereign wealth funds were granted unlimited access to China’s interbank bond market in July.

“As more international names come to the domestic bond market, it will add to the attractiveness of the Chinese bond market to international investors, which is also in line with Beijing’s commitment to open up the capital market,” said a Beijing-based bond analyst with a securities firm.

Test drive

As a case in point, Daimler registered a Rmb5bn bond issuance programme in late 2013 and announced its debut in China’s interbank bond market in March last year with a private placement of one-year 500 million renminbi bonds at 5.2 percent. The German car manufacturer has returned twice since then and has used up its Rmb5bn quota in full, most recently with a 3 billion renminbi one-year bond on April 9 2015.

Mainland analysts say funding costs and disclosure requirements are the main hurdles for other issuers. Currently, the European market is still cheaper than the Chinese market for Western borrowers, said a Shanghai-based bond analyst at a foreign bank.

“Daimler’s debut appeared to me to be like a branding act,” the analyst said. “5.2 percent back then was by no means a good price compared to the borrowing cost in the European market. It was even higher than coupons on many one-year domestic bonds.”

On top of that, the Panda bond issuance process may require extra work for foreign issuers, unless regulators waive the need for local ratings or disclosure. Daimler avoided much of the pain by opting for a private placement, which allowed it to issue without publishing earnings in Chinese as required for public offerings, or obtaining domestic credit ratings. However, Daimler had to pay a higher price for a private placement, which is not something all international companies would like to do.

“You either end up paying more with private placement, or go through more hassles like synchronising publishing the financial statement in China and in the international market if you want a public offering,” said a Shanghai-based bond underwriter. (Reporting by Ina Zhou; editing by Steve Garton and Daniel Stanton)

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