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China's Panda bond market leaves foreign issuers unimpressed

[HONG KONG] The enthusiasm over last year's opening of China's Panda bond market has given way to frustration as regulatory delays have limited access to just a handful of foreign issuers.

China last year for the first time authorised public offerings of onshore yuan bonds by foreign entities, expanding a funding channel previously limited to a pair of multilateral development agencies.

But the main beneficiaries of the move have turned out to be overseas-incorporated Chinese companies, while potential foreign issuers continue to wrestle with policy uncertainties and documentation hassles.

As a result, foreign borrowers are renewing their interest in the offshore yuan, or Dim Sum, market, where yields are stabilising after a volatile start to the year.

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The Republic of Hungary last week issued a 1 billion yuan (S$209 million) Dim Sum deal, ending a near five-month drought. "Foreign names are still interested in Panda bonds, but most of them don't have the time and the resources needed to go through all the process," said a banker with a foreign bank."They will have to look again at the Dim Sum market."

The unexpected advent of "fake Pandas" from Chinese issuers defeats the purpose of expanding the access of international issuers to the onshore bond market and frustrate the ambitions of foreign banks looking to Panda bonds to unlock onshore underwriting business.

Months of fruitless meetings and documentation work are also leaving a sour taste.


In the onshore interbank market, supervised by the People's Bank of China (PBoC), no Panda bonds have been launched since British Columbia made its high-profile debut in late January.

However, China Resources Land and Semiconductor Manufacturing International Corporation, two Chinese companies incorporated in the Cayman Islands, last month registered Panda bonds with the National Association of Financial Market Institutional Investors (NAFMII), a unit of the PBoC.

By contrast, in the stock exchange market overseen by the China Securities Regulatory Commission (CSRC), overseas-incorporated Chinese companies have issued 11.5 billion yuan of Panda bonds between late December and the end of March, according to China Cheng Xin International Credit Rating. Of the total, about 43 per cent was from Chinese developers, including Hong-Kong listed Country Garden, Powerlong and Shimao Property.

The livelier deal flow of the Panda bond market under the CSRC regime is a reflection of its more relaxed rules.

CSRC does not set any thresholds for overseas-incorporated companies to issue Pandas in the form of private placements, market sources say, but it prioritises AAA rated non-property developers for the time being.

This is little comfort to banks, foreign or domestic, as only securities firms are allowed to underwrite bonds in the stock-exchange market. As a result, foreign banks without joint-venture securities firms are not able to bring international issuers to market.


Apart from difficulties arising from incompatible auditing standards, which the Ministry of Finance still has to take a stance on, capital controls are the other major obstacle to the development of Panda bonds.

Many would-be issuers want to use cheap onshore funds to repay offshore debts, invest in offshore markets or swap into other currencies, but stringent scrutiny over the use of proceeds by Chinese regulators complicates the task. "We submitted a Panda bond plan to CSRC for a client that intends to use the proceeds offshore, but it has gone nowhere as the regulator repeatedly raised questions over the use of proceeds," said an underwriter at a Chinese securities firm.

So far, only two issuers of Panda bonds in the exchange market have received the approval to use the proceeds offshore, according to two persons familiar with the matter.

"You cannot tell regulators the proceeds are for general corporate purposes like you do in the international market. You have to tell them specifically what projects, if you have, you want to use the money for," said an official at a Chinese company that was successful at bringing proceeds offshore. "They surely don't like the idea of arbitrage between the onshore and offshore markets."

Others pointed out that regulators in different localities appear to have different approaches, with those in Shanghai and Beijing stricter and those in Shenzhen and Guangzhou more flexible.


Regulators are aware of market frustrations and are advising market participants to show patience and pragmatism.

"We also want to bring genuine foreign names into the market and we welcome foreign banks to bring in such issuers, but we need to work together with them to sort out issues like use of proceeds, adaptation of financials as there are no prior examples to follow," said a source close to the interbank regulators. "If public offerings in the interbank market are not viable for some foreign issuers, can they do private placement instead? We are very open to such discussions."

Germany's Daimler recently registered a 20 billion yuan Panda bond programme with Chinese regulators to prepare its return to the onshore market. However, private placements in the renminbi market usually mean issuers have to pay a higher premium than with public offerings.