Panda on the rebound

After a dismal 2017 for panda bonds, the renminbi-denominated bond market is showing signs of a revival

The panda bond market is showing signs of a revival. The issuance of panda bonds – securities foreign entities issue in China to raise yuan – had been robust, so far this year. Data from Thomson Reuters show issuance in 2018 is seen nearly doubling from last year in terms of value. Financial institutions like Mizuho Bank as well as sovereigns like the Republic of the Philippines, and international corporates such as Air Liquide have been active in the issuance of panda bonds this year.

Finance experts at a recent bond market summit in Shanghai highlighted the resurgence of the panda bond market. They were also in agreement that more work needs to be done to further expand the market.

Panellists cited the importance of making the documentation process simpler for issuers. "This market offers great potential for the future and Chinese policy makers now need to apply their minds on how they can smoothen out the regulatory processes," says Leslie Maasdorp, vice president and chief financial officer at New Development Bank (NDB).

Back in 2016 NDB generated 3 billion yuan from onshore investors with its debut panda bond. NDB said it has plans to raise 5 billion yuan more in the near-term to support some of its projects.

"We just got approval from our board of governors for a medium term programme. Over the next two years we will raise 10 billion renminbi in the Chinese market. That is because we have sufficient demand for renminbi funding onshore," shares Maasdorp.

The need for an improved and efficient panda bond application process was echoed by Flora Dai, treasury director at Air Liquide. "We would expect that one day Chinese regulators would allow us to simply submit an English version of the documentation just to avoid the workload of translating everything into Chinese," highlights Dai. "It's not a preventive issue. It's just time consuming." In March, Air Liquide issued its debut 2.2 billion yuan panda bond.

Another issue discussed in the panel was around the use of panda bond proceeds especially if it involves cross-border repatriation. Since China's foreign exchange reserves started dwindling in 2015, the Chinese government has been hard-pressed to prevent capital flight. This mentality has been an obstacle for foreign issuers looking to use panda bond proceeds for offshore purposes.

"The Chinese government has ramped up the limitation of capital repatriation and also ramped up the limitation of outside investment. However, in 2018 we are seeing that the Chinese government is relaxing capital controls," observes Weifeng Li, assistant general manager, sovereign department at China Lianhe Credit Rating.

"We have continuous growing capex in China, having both our revenue and costs in renminbi. It is natural that the group is seeking renminbi funding," says Dai, citing Air Liquide's plan to issue long-term panda bonds.

For NDB, the repatriation of proceeds was never an issue given that the bank has a number of financing projects slated for China. "In China there is a strong demand for local currency financing. It would make sense for a project or borrower to want to borrow from us in renminbi," explains Maasdorp.

Panda bonds are also seen as a funding source for projects of China's Belt and Road initiative. Maybank last year sold 1 billion yuan in panda bonds, earmarked for Belt and Road projects. "The Belt and Road initiative will improve the volume of issuance for panda bonds. Shanghai and Shenzhen have already carried a pilot bond for the Belt and Road initiative," says Li.

 

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