Explaining Panda Bonds: it’s black and white

Panda bonds are renminbi-denominated bonds sold by a non-Chinese issuer within mainland China (excluding Hong Kong and Macau). They allow foreign companies, particularly those with mainland China subsidiaries, to tap into a deep investor base and find the renminbi (RMB) capital that they need at attractive rates. Panda bonds were initially issued in 2005 by the International Finance Corporation and the Asian Development Bank. Since then, the market has expanded to include German carmakers Daimler and BMW, Singapore's United Overseas Bank and sovereign issuers like the Republic of Hungary, British Columbia, Emirate of Sharjah, Korea and the Philippines. As of November 2020, the China onshore bond market was estimated to be the second largest globally at USD 15 trillion, putting it behind the US.

Panda bonds provide companies with a means to finance their mainland China operations in RMB without exposing themselves to FX risks. Based on KPMG’s 2018 analysis which compares RMB fundraising in onshore China (via Panda bonds) versus offshore (via Dim Sum Bonds), it was found that issuers were able to achieve a lower cost of funding through Panda bonds in comparison to Dim Sum Bonds. This is likely due to a liquidity flush in the onshore market, whilst a volatile USD/RMB resulted in Dim Sum Bond issuers having to pay a higher premium to compensate for higher FX risks.

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). As the bonds 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, the Qualified Foreign Institutional Investor scheme and the Interbank Market Scheme.

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 RMB financing.

Notable entities have already attracted critical acclaim by issuing panda bonds across the Middle East in attempts to raise the UAE’s profile to Chinese investors. The Government of Sharjah, for instance, was awarded 'Sovereign Debt Finance Deal of the Year' at the 2018 Bonds, Loans and Sukuk Awards for its US$316 million panda bond issuance.

If you would like to find out more about the process of issuing Panda Bonds, please do not hesitate to contact Lee Irvine and Jay Lee.