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Panda Bonds see robust growth

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Onshore renminbi bonds saw record issuance in 2023, as the market continues to develop

China's Panda bond market is gaining momentum and attracting new issuers, thanks to lower funding costs and a policy push.

Issuance of Panda bonds by offshore borrowers in China's interbank market reached Rmb111.7bn (US$15.3bn) in the first nine months of 2023, a record for the period, according to data from the National Association of Financial Market Institutional Investors (NAFMII). The amount has already exceeded the full-year total of Rmb80.5bn in 2022.

Landmark deals include the first African sovereign Panda bond, from the Arab Republic of Egypt, as well as a debut offering by German carmaker Volkswagen.

Timothy Yip, Director, Head of Debt Capital Markets, China, HSBC, said a myriad of factors contributed to the growth in issuance, but the removal of regulatory uncertainty over the use of proceeds is an important one.

"Previously, there was a degree of ambiguity regarding what the funds could be used for. There was a question mark whether they can be used offshore," said Yip. But starting from 2023, issuers can choose to spend the proceeds in China or repatriate 100% of them, following a circular from the People's Bank of China (PBoC) and the State Administration of Foreign Exchange (SAFE) in 2022 that clarified rules on the use of proceeds. The flexibility has made the market more attractive to potential issuers, especially foreign corporates.

Yield differential

The surge was also driven by the widening onshore and offshore yield differential, as China’s monetary policies diverge from other major economies, said Yip.

While the US Federal Reserve and the European Central Bank held rates in recent meetings, both retained a hawkish tone. In China, however, the PBoC has introduced interest rate cuts and lowered the reserve requirement ratio for banks to shore up the economy.

The yield gap between US Treasuries and China government bonds has been widening. At the 10-year mark, it is around 190bp currently, and for the three-year, it is around 220bp.

As a result, it makes sense for foreign corporates that have a natural need in renminbi or those that want to take advantage of the low funding cost to consider the Panda bond market.

Egypt in October sold a Rmb3.5bn 3.51% three-year sustainable issue, the largest ever sovereign Panda bond. This was guaranteed by two Triple A rated multilateral development banks, the African Development Bank and Asian Infrastructure Investment Bank, helping to secure competitive terms for the transaction and setting a template for other African countries to follow.

Volkswagen, which is present in China since the early 80s, in September issued a debut Rmb1.5bn 3.05% two-year Panda bond. Having issued onshore auto asset-backed securities and offshore Dim Sum bonds in the past, the latest transaction further expanded the Wolfsburg-based carmaker's renminbi funding channels.

Yip said he is seeing increasing interest for the Panda bond market from global issuers including corporates, financial institutions and the public sector. But it will take time for them to prepare documentation and obtain regulatory approval or registration, as appropriate.

HSBC was a joint lead underwriter for both the Egypt and Volkswagen transactions, helping the two issuers to bridge the cultural, regulatory and documentation differences across the international and onshore renminbi bond markets.

Bjoern Baetge, head of global markets at Volkswagen, said the group has monitored the Panda bond market for several years before deciding to enter the market. The group has been in a consistent dialogue with its bank partners and regulator on the development of the market and requirements.

"Preparation is just as important as timing when you want to successfully issue your inaugural bond of this size. It helped that we never underestimated the time we needed to get ready. During that phase we built up a very good relationship with local Chinese Investors and did a successful roadshow in China" said Baetge.

The Panda bond issuance was highly strategic for Volkswagen as the implementation also supports its strategy of “In China, For China”. Proceeds will be used for its onshore business in China.

Baetge said the group is likely to revisit the Panda bond market in 2024.

Room for growth

Despite the surge in issuance volume, the Panda bond market currently only compromised of a relatively small portion of China’s bond market, signaling strong potential for growth.

As China further opens its capital market, Baetge expects more multinational corporations and international investors will pay attention to the potential of the Panda bond market as the liquidity and depth of the market further build up.

Ivan Chung, a Moody's associate managing director, said that the recent renminbi weakness and lower rate environment in China, coupled with clear guidelines governing the use of proceeds, have improved the attractiveness of the Panda bond market.

Although Chung does not expect a dramatic growth in issuance in the short term, he thinks the increasing use of renminbi in global trade will eventually boost the demand for renminbi financing by global companies.

"We've seen the increasing usage of RMB as cross-border payments, albeit slowly, as more countries are trying to reduce their dependence on the US dollar. In the long run, it will support the demand for RMB assets and funding," he said.

According to data from payment network Swift, the renminbi is the fifth most active currency for global payments by value, with a share of 3.71% in September 2023.

Chung added that if more multinational corporations issue Panda bonds, then it will also attract more international investors to enter the market.

Moreover, there is likely to be more product innovation in the Panda bond market as China continues on its irreversible path of high quality two-way opening up, including more ESG themed bonds. Fixed income instruments with equities elements, features or characteristics might be on the agenda, too, said Yip, given that regulators are looking at ways to increase the connectivity between the fixed income and equities markets.

For financial institutions, China has opened the gate for senior preferred bonds in Panda format, but Yip said regulators are expected to continue to analyse the risks associated with statutory or contractual loss-absorption clauses in capital instruments (Additional Tier 1 or Tier 2) courtesy of other jurisdictions, in particular given the inherent cross-border nature of the Panda product.

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