China’s Panda bonds are an onshore product, offering international borrowers a way to tap domestic renminbi investors. As the market grows, it’s become apparent just how international the product is, and what it means for China in a globalising world.
Panda bonds are renminbi-denominated notes sold by a non-Chinese issuer in onshore China. The first notes were sold in 2005 by the International Finance Corporation and the Asian Development Bank, but since then the market has blossomed to include deals from the likes of German carmakers Daimler and BMW, Singapore’s United Overseas Bank and sovereigns like the Republic of Hungary and the Philippines.
As the notes are sold domestically in China, they naturally attract primarily Chinese investors. But recently the investor base for the notes has become as internationalised as the issuers themselves, helped along by access through Bond Connect and other methods, as well as growing transparency.
“The Panda bond market continues to develop and internationalise,” said Sean McNelis, Co-Head of Debt Capital Markets, Asia-Pacific, Global Banking at HSBC. “Issuers now include SSAs, banks and corporate issuers and the investor base has evolved to attract more and more international investor participation.”
Nearly 1,200 foreign investors have access to China’s bond markets, holding Rmb1.73tr, according to the recent China Bond Market International Forum. The number of institutional investors registered under Bond Connect surged to 617 in February 2019, compared to 506 in December and 356 in June 2018. HSBC research forecasts that $150bn of foreign participation will flow into the onshore market over the next 20 months, thanks to bond index inclusion.
“The market has definitely become more open and transparent,” added Ko-Wei Hsiung, Associate Director, Debt Capital Markets, Asia-Pacific, Global Banking at HSBC, explaining how Panda bonds have opened up to outside investors.
Some borrowers have issued renminbi-denominated bonds offshore, otherwise known as dim sum bonds, but those are few and far between, especially compared to the lucrative onshore market. For foreign investors, the Panda market allows onshore, renminbi exposure through companies that investors already know and are comfortable with. For instance, a business like Daimler is well known by international investors, making it an easier investment decision than less familiar credits.
“When entering a new market, investors often start with well-known issuers with strong credit ratings,” said Hsiung. Many will start by looking at Chinese government bonds, then move on to the big four banks and state-owned enterprises, before gradually exploring higher yielding opportunities. International credits selling Chinese bonds adds “a very interesting story to the mix,” said Hsiung. “Investors, almost by default, will recognise these credits,” making them an ideal transition into China for investors, he said.
For foreign corporate issuers, selling a Panda bond can also diversify coffers, and provide funding for onshore businesses, as is the case with car companies like BMW and Daimler. While BMW was a debut Panda issuer this year, companies like Daimler are already using Panda bonds as a regular funding tool. The company has tapped the market 14 times since March 2014, raising a total of Rmb47bn across 20 tranches.
Panda bonds are also becoming popular among sovereign issuers. Six sovereign Panda bonds have been sold so far from Poland, Hungary, British Columbia, Emirate of Sharjah, Korea, and most recently from the Philippines. Italy could be next, as it is said to be eyeing the market.
Participation of international banks has also helped further the Panda market. Banks like HSBC that have led Panda transactions can add an additional layer of relief for borrowers and investors, as the bank can bring its global capabilities to a deal. These banks already operate with an international approach, language and standards, pointed out Hsiung. They can also distribute Panda bonds to global investors through various channels. HSBC is the only foreign bank who can offer solutions in both CIBM and the exchange market, through HSBC China in the Interbank market and HSBC Qianhai Securities in the exchange market. The latter is the first joint venture to be majority owned by a foreign bank.
“We see bringing in international investors as a hugely important step to the development of the Panda bond market, helping the issuer to diversify its investor pool, as well as price tightening,” said McNelis.
The growth of the Panda market has run in tangent with China’s efforts to internationalise the yuan. “This is definitely at the top of the agenda for the Chinese,” said Hsiung. With a push and pull of supply and demand, renminbi and China’s capital market are opening to meet the needs of foreign issuers and investors.
The next steps for the Panda market will include more diversity. “We’ve already seen quite a lot of different issuers,” said said Luying Gan, Head of Sustainable Bonds, Debt Capital Markets, Asia-Pacific, Global Banking at HSBC. “We would love to see more Panda bonds that are coming to the market with a purpose,” for instance carrying a Green or Social bond label, or carrying close ties to China’s Belt and Road Initiative, she said. “That kind of theme-based Panda would generate a lot of market attention.”
And while the market has opened up and become more transparent, there is still a way to go, say market watchers. More investors need an understanding of the Panda market before they will participate. The same goes for potential issuers, said Hsiung. “We’re all trying to make this market more accessible.”