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Panda bonds capture foreign interest

Foreign interest is building in China's Panda bond market ahead of potential rule changes that bankers expect to encourage more offerings.

[HONG KONG] Foreign interest is building in China's Panda bond market ahead of potential rule changes that bankers expect to encourage more offerings.

Monetary easing from the People's Bank of China have dragged onshore renminbi bond yields below their offshore equivalents, raising the appeal of so-called Panda bonds to foreign issuers.

Only one company has sold Panda bonds, the name for a bond from a foreign issuer in China's domestic market, since regulators opened the format in 2010.

But bankers say rule changes could allow others to issue debt in Shanghai. "Some issuers are very reluctant to issue Panda bonds," said Vincent Wong, head of greater China debt capital markets at ANZ, at an ASIFMA conference this week. "GAAP is a major issue. But the latest word we hear is that the regulator could come to some kind of compromise related to the Shanghai Free Trade Zone and enable some companies to issue Panda bonds there."

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Other bankers said they had been involved in discussions with Chinese regulators about a potential easing of restrictions on capital movements and accounting standards for entities based in the Shanghai Free Trade Zone. "It would be a huge boost to the Panda bond market, because at the moment it's just too difficult for it to become a meaningful market," said a Hong Kong-based DCM banker with knowledge of the situation. "If they made accounting and capital movement easier, it could be a huge step forward."

In March 2014, German carmaker Daimler became the first and only foreign firm to issue a Panda bond. It sold a Rmb500m (US$81.3m) one-year bond at 5.2 per cent.

The only other issuers have been supranational agencies, such as the International Finance Corporation and the Asian Development Bank.

Corporations have complained about an onerous regulatory framework and have said the lack of currency convertibility has prevented them from tapping the market.

China's strict capital controls mean foreign issuers face great difficulties in repatriating money offshore.

In addition, rules on accounting standards have made issuance difficult as the Chinese Government requires three years of financial statements in its own version of the GAAP standards. Bond issuers in China must produce audited accounts, adding to the cost of documenation for potential foreign issuers. They also need extensive regulatory approvals and a local credit rating.

Chinese regulators have these rules in place mainly on concerns that opening the capital account too quickly could subject the country's economy and markets to substantial volatility.

Tough domestic rules have helped fuel the rapid growth in recent years of Dim Sum bonds, which are denominated in renminbi but are issued offshore. The overseas format gives issuers more flexibility in their use of proceeds, and is typically issued under familiar legal documentation through international MTN programmes.

Waning global appetite for the currency, however, has pushed offshore renminbi yields higher. Since China cut reserve ratio requirements in November, offshore five-year China sovereign bonds have jumped 55bp to 3.55 per cent. In the same time, the onshore benchmark has fallen 11bp to 3.29 per cent.

The impact of a surge of Panda bond sales on the Dim Sum market is unclear, as reforms in China still have a long way to go.

Some bankers dismissed the idea that it would mean the death of Dim Sum. They argued that certain issuers might be more comfortable with the regulatory regime in Hong Kong or other centres than with regulators in mainland China.

They added that unrated Chinese issuers could not access the US dollar market, but could access foreign investors via the offshore renminbi market.

However, if Dim Sum yields remain higher than onshore bonds, other bankers warn that more liberal Chinese regulations could could make a serious dent in the offshore market's viability.

"I think we're a long way away from Panda bonds catching up to Dim Sum, but it's clear that the onshore market will gradually become more liberalised," said a Hong Kong-based syndication banker. "If it becomes fully liberalised, particularly without the capital controls, it will easily dwarf the Dim Sum market and Dim Sum bonds would really struggle to justify themselves."