As China continues to open its financial sector, the market for China’s panda bonds – international bonds issued in renminbi – is gaining interest among international borrowers. Indicating the strong desire by investors and firms to raise money out of China, panda bond total issuance stood at $5.4 bn, with the outstanding volume was roughly at $39 bn, by the end of 2020.
China owns the second-largest fixed-income market in the world after the US, with a size of over $19 tn (as of August 2021). But the panda bond market is a nascent part of the overall Chinese fixed income asset class, accounting for merely 0.22% of the overall Chinese bond volume. The panda bond market, however, is growing and developing, on the back of boosting overseas demand for yuan funding.
To plot business expansion, global multinationals have continued to bank on the world’s second-largest economy’s long-term growth outlook and issued onshore panda bonds.
Not only do these onshore bonds provide a vehicle for companies to finance their subsidiary businesses in China, but it has also encouraged sovereigns to decide upon future projects. Panda bonds have supported the development of many industries such as chip manufacturing, environmental protection, automotive, ports, pharmaceuticals, power, warehousing and logistics, and transportation, according to an International Capital Market Association (ICMA) report.
As per the historical data, the China renminbi bonds offer a higher yield with a relatively lower exchange rate volatility compared to other major economies. Another advantage for companies issuing panda bonds is that they enjoy investment-grade ratings of at least BBB.
Moreover, an increasing number of international issuers and investors are participating in the onshore fixed income market, in order to limit exposure from foreign exchange risks.
China’s attractive panda bonds
Panda bonds have turned out to be one the most attractive bond market type for overseas investors in China’s debt market, ICMA stated. Overall, 64 overseas issuers in total have issued $57 bn worth of panda bonds in China’s interbank credit market as of the end of August 2021, as per ICMA data. As of the end of July 2021, 21% of the bonds are held by overseas investors, it added.
Panda bond issuers’ home jurisdictions are geographically diversified but primarily based in Asia and Europe and North America, which includes sovereign and local governments like Poland, Hungary, British Columbia, Emirate of Sharjah, Korea, as well as international development institutions like the World Bank or Asian Development Bank.
Corporate bond issuers also includes financial institutions and non-financial enterprises companies like Crédit Agricole S.A., BMW Group or Daimler. Chinese red chip issuers like China CITIC Bank International and China Power International Development Limited have also completed China panda bond offerings.
During the first six months of 2021, the panda bond issuance volume of the top three companies such as GLP Holdings, BMW and Daimler hit $3.1 bn in the first half of the year. According to the industry report by China Chengxin International Credit Rating Co., the financing environment for the panda bond market, however, tightened compared to the same period last year.
China opening up bond market at accelerating pace
To boost the global status of China’s debt market, Chinese regulators have taken various steps to make panda bonds become a prominent global fixed-income product. While the first notes were sold in 2005, panda bond floats gained much significance since 2015, when Chinese financial authorities ratcheted up efforts to open up the bond market to bridge the financing gap, boost market diversification and foreign participation.
Furthermore, access through recently launched Bond Connect, the Qualified Foreign Institutional Investor scheme and the Interbank Market Scheme have resulted in a blossoming bedt market and a higher scale of bond issuance from overseas. Initiatives such as the ‘Belt and Road’ Initiative and the Greater Bay Area have further prompted a new wave of financing to overseas investors.
China’s market regulator – the National Association of Financial Market Institutional Investors – has also announced to allow foreign issuers to issue social and sustainable development panda bond issuance in a pilot scheme.
Earlier in July, the People’s Bank of China (PBOC) announced that central banks, sovereign wealth funds and supranational institutions would no longer need pre-approval to invest in China’s interbank fixed-income market.
Expressing views on opportunities for global issuers in mainland China bond markets, Timothy Yip, Head of China Debt Capital Markets at HSBC explained that “the Chinese bond market is already the second-largest in the world. The authorities have continuously developed the market. As a result, global issuers with business activities in China now have the opportunity to meet their renminbi financing needs even more efficiently.”
At the same time, an attractive offer for international investors was created, he added.