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New trend of Panda bonds in China

With the internationalization of Chinese renminbi and the opening up of China's capital market, the accelerating development of the Chinese bond market is foreseeable. Panda bonds, as an increasingly vital part of the Chinese bond market, will be expected to play a more active role from now on.


The "New Panda Bonds Measures"[1] promulgated on 8 September 2018 triggered another wave of attention for Panda bonds. Panda bonds refer to bonds which are calculated in RMB and issued by overseas institutions in China, and the principal and interest of which are agreed to be repaid within a certain period of time. Panda bonds are often compared with the Yankee bonds in the United States, the Samurai bonds in Japan, and the Arirang bonds in South Korea, all of which share a common trait, i.e., named after the most distinctive feature of the issuing country. Panda bonds are expected to witness a boom in the coming years.

I. General picture of Panda bonds

First issued in 2005, Panda bonds witnessed its first peak in 2016 and once again show an upward trend in 2018. The following is a statistical analysis based on the data as of the end of 2017[2]:

 i. About the markets

In terms of the markets, the exchange market on the whole is more active than the inter-bank market. Inter-bank market bond issuances tend to be public offerings, and are subject to stricter approval requirements; exchange market bond issuances tend to be private offerings, providing issuers and investors with the option to issue bonds based on less complicating conditions reached by the parties.

ii. About the issuers

In terms of the registered places of the issuers, Hong Kong, the Cayman Islands and Bermuda are the top choices. The total number of registered entities in Hong Kong, the Cayman Islands and Bermuda is 72.55%, and all the registered entities in the Cayman Islands and Bermuda are red-chip enterprises. In addition, there are registered entities in France, the Philippines and Malaysia, as well as four sovereign countries, i.e., Canada, Poland, South Korea and Hungary.

In terms of the types of issuers, they can be roughly divided into four categories, i.e., foreign government institutions, international development institutions, financial and nonfinancial institutions legally registered outside of China.

In terms of the industries which issuers are from, a wide range of industries are concerned, with the real estate industry ranked at the top, followed by the automotive industry and the commercial bank industry.

In terms of the credit ratings, the majorities of the issuers have AAA ratings. Among the Panda bonds with public ratings, only three ratings, AAA, AA+ and AA, are concerned.

iii. About other matters

In terms of the types of Panda bonds which have been issued, corporate bonds (including normal corporate bonds and private placement bonds) accounted for the highest proportion, followed by medium term note (MTN), private placement notes and international institutional bond, further followed by commercial bank bonds and short-term financing bills (including normal short-term financing bills and ultra-short-term financing bills).

Panda bonds which have been issued cover periods ranging from 0.74 to 10 years, with 3-year and 5-year as the most typical periods.

As of the end of July 2018, the average issuance interest rates for the most typical 3-year and 5-year Panda bonds were 5.53% and 5.24%, respectively.

II. Legal landscape of Panda bonds

The regulatory authorities and applicable laws of Panda bonds vary depending on the issue market, the issuer, the type of issue, and the method of issuance (public or private). Given the less strict supervision of privately issued Panda bonds, the following analysis will mainly focus on the supervision of publicly issued Panda bonds.

 i. Issuance in the inter-bank market

Panda bonds in the inter-bank market are regulated by the People's Bank of China and the National Association of Financial Market Institutional Investors (NAFMII), and are subject to the Law of the People's Republic of China on the People's Bank of China (Revised in 2003)[3] and such accompanying regulations as the New Measures.

There are requirements concerning the threshold of capital, assets, and profits of the issuer in the inter-bank market. For overseas financial institutions in the inter-bank market, the New Measures stipulate that “[t]o issue bonds, overseas financial institutions shall ... have the paid-in capital no less than RMB10 billion or its equivalent in any other currency...and have been profitable in recent three consecutive years...”[4]; for overseas non-financial institutions in the inter-bank market, the applicable Guidelines on the Issuance of Commercial Papers of Non-Financial Enterprises in the Inter-bank Bond Market stipulate that, “the balance of the short-term financing bills to be repaid shall not exceed 40% of the net assets of the enterprise”[5]; similarly, Guidelines on the Issuance of Medium-Term Notes of Non-Financial Enterprises in the Inter-bank Bond Market stipulate that “the balance of the repayment of medium-term notes shall not exceed 40% of the net assets of the enterprise”[6]. In addition, relatively high subject ratings and debt ratings have always been important for the issuance of Panda bonds, but the New Measures have formally eliminated the mandatory rating requirements of overseas financial institutions.[7]

With regard to the New Measures, there are two aspects that deserve special attention. On the one hand, the New Measures changes significantly in part from the Interim Measures for Administration of the Issuance of RMB Bonds by International Development Institutions[8], which were repealed on the same day. First, the authorities and procedures of approval/registration of different overseas institutions have been clarified. To issue Panda bonds, except for overseas financial institutions, the other three types of entities need only to apply for registration with the NAFMII[9]. Second, the rating requirements of overseas financial institutions were abolished[10], and new requirements of “hav[ing] the paid-in capital no less than RMB10 billion or its equivalent in any other currency...and hav[ing] been profitable in recent three consecutive years...” were imposed[11]. Thirdly, the requirements for auditing by domestic audit institutions, and application of Chinese accounting standards or equivalent accounting standards have been abolished as a whole, foreign accounting firms are allowed to conduct audits[12], and accounting standards other than the Chinese accounting standards or equivalent accounting standards are allowed[13] . On the other hand, the New Measures adopt a “decentralization” policy on the other three categories of entities. The New Measures stipulate that “[t]he NAFMII shall … be responsible for formulating relevant rules on registration and issuance of bonds on the national inter-bank bond market by foreign government institutions, international development institutions and non-financial institutions and guidelines for information disclosure of issuance of bonds by overseas institutions….”[14]. The NAFMII will soon issue relevant rules and guidelines, and the registration procedures specified therein are expected to be basically consistent with those of domestic institutions.

ii. Issuance in the exchange market

Panda bonds in the exchange market are regulated by China Securities Regulatory Commission (CSRC) and the Securities Association of China (SAC), and are subject to the Securities Law of the People's Republic of China (Revised in 2014)[15] and such accompanying regulations as the Administrative Measures for the Issuance and Trading of Corporate Bonds[16] (hereafter referred to as “the Administrative Measures”). Article 70 of the Administrative Measures stipulate that “[t]he Measures shall apply mutatis mutandis to the issuance, trading or transfer of the bonds of overseas registered companies at the bond trading places under the supervision of the China Securities Regulatory Commission (CSRC).” The public issuance of panda bonds shall meet the requirements for the public issuance of corporate bonds stipulated in the Securities Law and the Administrative Measures; the private issuance of panda bonds shall meet the requirements for the private issuance of corporate bonds issued by the SAC and relevant stock exchanges. In addition, in order to promote the issuance of Panda bonds related to the Belt and Road Initiative, the Shenzhen Stock Exchange and the Shanghai Stock Exchange have successively issued the Notice on Launching the “Belt and Road” Bond Pilot, further facilitating the issuance of panda bonds related to Belt and Road Initiative.

Similarly, there are requirements concerning the threshold of capital, assets, and profits of the issuers in the exchange market. In the exchange market, the requirements for public issuance of corporate bonds mainly include “the net assets of a joint stock limited company shall be no less than RMB 30 million, and that of a limited liability company shall be no less than RMB 60 million”, “the aggregated outstanding balance of bonds shall be no more than 40% of the value of the company's net assets" and "the company's average profits available for distribution over the previous 3 years are sufficient to cover the one-year bond interest"[17]. In addition, there are also similar credit rating requirements in the exchange market[18].

The differences between the two markets are expected to be mitigated to some extent in the long run. It is reported that on  4 September 2018, in order to further strengthen the interconnection between the two bond markets and further promote the healthy development of the credit rating industry, the People's Bank of China and the China Securities Regulatory Commission jointly issued the Announcement on Matters Concerning the Bond Rating Business Conducted by Credit Rating Agencies in the Inter-bank Bond Market and the Bond Market of the Exchange[19]. Although merely covering rating matters, this announcement may to some extent be viewed as a signal sent by relevant regulatory authorities indicating that they are trying to increase the compatibility between the two markets.

Epilogue

Up to now, the ratio of Panda bonds issued to the total bond market in China is only about 0.3%[20], showing a clear gap between comparable markets in other countries. With the internationalization of Chinese renminbi and the opening up of China's capital market, the accelerating development of the Chinese bond market is foreseeable. Panda bonds, as an increasingly vital part of the Chinese bond market, will be expected to play a more active role from now on.

 

(This material has been prepared for general informational purposes only and is not intended to be relied upon as law, accounting, tax or other professional advice, for more information, you may contact Mr. Arthur Chen at czj@chenandco.com or Ms. Coco Feng at keou.feng@chenandco.com.)

[1] The Interim Administrative Measures for the Issuance of Bonds by Overseas Institutions on the National Inter-bank Bond Market (Announcement of the People's Bank of China and the Ministry of Finance) [2018] No.16, hereafter referred to as “the New Measures”).

[2] Research on Issuance and Rating in the Panda Bond Market. (2018, 1 25). Retrieved from New Century Rating: https://mp.weixin.qq.com/s?__biz=MzA4NTU4MDUyNQ==&mid=2650676607&idx=1&sn=da9018afccee064f4627e137a255dc42&chksm=87df72fdb0a8fbeb3333f429070eaf8d3e5cff0e4d8ff1caf308b5aef4ecf4350fd464251c04&mpshare=1&scene=1&srcid=0925bShNwu12UXx0iu3eUosU#rd.

[3] Order of the President [2003] No.12.

[4] Article 6.

[5] Article 4.

[6] Article 4.

[7] For underwriters and investors, however, bond and subject credit ratings may still remain important criteria for measuring the quality of issuers from a practical point of view.

[8] Announcement of the People's Bank of China, the Ministry of Finance, the National Development and Reform Commission and the China Securities Regulatory Commission [2010] No. 10.

[9] Article 4.

[10] Articles 7 and 10.

[11] Articles 6.

[12] Subjective to the requirement that such overseas accounting firm shall be subject to the supervision of the MOF and also file a record with the MOF (Article 20).

[13] Subjective to such further requirements as disclosure and certification if the accounting standards used differs significantly from the Chinese accounting standards or equivalent standards. Such further requirements vary in details between different types of issuers (Articles 15,16 & 19).

[14] Article 27.

[15] Order of the President of the People's Republic of China No. 14.

[16] Order of the China Securities Regulatory Commission No.113.

[17] Article 16 of the Securities Law.

[18] Article 18 of the Administrative Measures.

[19] Announcement of the People's Bank of China and the China Securities Regulatory Commission [2018] No.14.

[20] The information cut-off date for this ratio was 3 April, 2018. Panda bond market development and outlook - 2017 cross-border bond market research report III. (2018, 4 3). Retrieved from Zhongchengxin International Credit Rating: https://mp.weixin.qq.com/s?__biz=MzA3NTI2MTAyOA==&mid=2650588199&idx=3&sn=7c71927da10c7477fe2f4fd34ba4687c&chksm=877b512cb00cd83a1b1f8ddd03df0c2488b3ef18c37251e4af9f136aeab6542205b06a0977de&mpshare=1&scene=1&srcid=0925SFwPpztQ6DUd8YnEwg8q#rd.



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