More panda bonds than ever are being issued, but problems
surrounding them mean their range of appeal outside red-chip
companies is limited.
In 2005 the Chinese government introduced panda bonds to
liberalise its capital market, offer foreign investors an
opportunity to invest in China and help local Chinese to diversify
There are in general two main Panda bonds markets in China: the
interbank market, which is an over-the-counter market regulated by
the National Association of Financial Market Institutional
Investors (NAMFII); and the exchange market (the Shanghai and
Shenzhen stock exchanges), which is regulated by the China
Securities Regulatory Commission (CSRC). Panda bonds are debt
instruments denominated in RMB and issued by foreign institutions
in China for domestic consumption.
Panda bonds can be either a public or private offering. With
more stringent controls imposed by the exchange, it is now becoming
more popular to seek trading of panda bonds on the interbank bond
market targeting institutional investors. The period of the bonds
varies from one year (commercial paper) to 3-5 years (medium-term
note). The coupon rate is around 5 per cent, which is lower than
the bank borrowing rate and is attractive to companies in need of
Unlike high-yield US dollar or 'dim sum' bonds, panda
bonds are generally unsecured. The credibility of the issuers is
supported by personal undertakings from directors and senior
management of the issuers.
Reception to the panda bonds market has been lukewarm over the
years. To attract further interest, more flexible and relaxed
regulations were introduced to widen the scope of qualified foreign
issuers, although there remain some uncertainties in the
repatriation of the RMB proceeds out of China.
Since the third quarter of 2015, more 'red-chip'
companies (ie Chinese companies operating in China and listed on
the Stock Exchange of Hong Kong through Bermuda and Cayman Islands
special-purpose companies) have been using this platform as an
alternative channel for financing their business and operational
requirements. In particular, Chinese property developers whose main
source of income is RMB but borrow in US dollars are queuing to
issue panda bonds.
Historically, these companies raised debt through the issue of
high-yield dim sum and US dollar bonds with high coupon rates
depending on their credit ratings. Given the dynamics of panda
bonds, where the cost of borrowing is at more attractive rates,
anecdotal evidence suggests that these companies are now retiring
their high-yield dim sum and US dollar bonds to streamline their
debt profile and to protect against foreign currency translation
Notwithstanding the above, panda bonds are not without issues.
Regulations are still unclear and deal-flow to completion has been
slow. Each transaction is dealt with on a case-by-case basis and
documentation may be different for even similar transactions.
Financial disclosures are also required to be in accordance with
Chinese accounting standards. In addition, there is a potential
liability issue where the issuer's directors and senior
management will have to give personal undertakings on the
correctness and completeness of the disclosures in the offering
The anticipation of further depreciation of the RMB, the
relaxation of regulatory requirements and the low RMB coupon rate
create an incentive for Chinese property developers to restructure
their existing high-yield US dollar and dim sum bonds.
On balance, it is anticipated that panda bonds will still be the
bond of choice in 2016 for red-chip companies or 'fake
pandas' due to its much lower cost of borrowing. However, on
the whole, there appears to be doubt over the future success of the
panda bonds market.
Unless the regulatory and accounting issues currently faced are
clarified, personal undertakings are removed and the documentation
is set in a more standard form or package, it is unlikely the panda
bond market will be successfully liberalised.
Going forward, high-yield US dollar and dim sum bonds in an
established and mature market will continue to be in demand. This
is because the current trend of raising RMB debt is unique to
Chinese property developers taking advantage of the lower cost of
borrowing to restructure their existing US-dollar denominated
This article was first published in The Lawyer, June
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