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09 Mar 2017

Will China's Panda bonds make lunch of Dim Sum Bonds in 2017?

Written by Anton Marusenko

In the last year, Panda bonds (the name of mainland RMB denominated bonds from a non-domestic issuer) have become increasingly competitive and attractive for investors. What explains the increased usage of inland bonds in contrast to slightly diminishing performance of the Dim Sum (RMB denominated bond issued abroad)? How do we define the current interrelationship of the two. And what is in store for the future of the Chinese bond market?

The nascent shift of company listing from Hong Kong Dim Sum to mainland Panda is apparent on the most obvious level of total value of deals in 2016, with the Panda bond deals totaling $11.8 billion (backed by global financial institutions and major sovereign wealth funds, like the IFC, British Columbia and Republic of Korea), whilst the respective offshore counterpart equated to approximately $7.2 billion. This transition can be explained by a multitude of factors, not least of which are the capacity for companies to take advantage of cheaper costs, higher liquidity and greater exposure to investors in the mainland market. This may have far reaching consequences for the Chinese debt market.

Valued at 36 trillion yuan, the Panda bond market is significantly more resilient to currency fluctuations when it comes to investors that wish to use proceeds for Chinese domestic investment or spending (both funds raised and spent are in RMB). The HK yuan pool which by the end of 2016 shrank to 600 billion yuan, is far less convenient for investors that wish to move said capital back to mainland. Any advantages associated with the Dim Sum, such as exclusive access to fixed income in RMB, are set to dissipate with the soon to be introduced bond connect scheme, which will add many new high-yielding bonds to the RMB fixed income universe.

On the other hand, there are some reservations with the Panda bond that make investors cautious and prevent businesses from issuing them. From a foreign company point of view, there are a number of barriers that range from foreign language and distance to difference in accounting standards. Furthermore, the AAA credit rating of British Columbia for example is less meaningful to institutional investors, and individual investors are put off by distance and lack of brick and mortar contact in the event of a default.

Respectively, many issuing bond parties are put off by Panda bonds because of the difficulty of navigating the multitude of respective regulatory bodies and the necessary compliance procedure in regards to mainland accounting standards, which are not aligned with international standards supported by the Hong Kong Dim Sum and the raised funds can only be used in Mainland China. Among other attractive qualities, because of foreign exchange controls enforced by the State Administration of Foreign Exchange (SAFE), profit repatriation from the Dim Sum is less difficult.

Regardless, there have been a number of recent developments that played in favour of the Panda bond. Among them, UC RUSAL, the globe’s second largest processor of aluminium, has announced its plans for 10 billion yuan 7-year listing in order to fund Chinese domestic expenditures on alloying materials.  Parallel to this development, JP Morgan Chase received an underwriting licence for corporate bonds in China’s interbank bond market, whilst Citi received a bond settlement agent licence. It is speculated Chase will use this licence to bring international companies to China to raise finance.

Conclusively, it is too early to suggest that “Panda will eat Dim Sum”. What has occurred however is a noticeable development in China’s bond market that would not have been predicted a year ago. Overall, there is ample opportunity to come about from a domestic bond market as large as China’s both in the form of a diversified investment and reliable listing. 

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