Banking & Finance

Bamboo bonanza

Will onshore issuance gobble up dim sum bonds?

Panda w

It comes with coupons too

Pandas love to eat bamboo. Less well known is their consumption of dim sum. The dim sum in question, however, is the nickname for the more prosaic renminbi-denominated offshore bond that’s issued in Hong Kong.

Bankers love giving different bonds their own monikers. When foreign issuers raise money in the US debt market the bonds are known as Yankees. In Japan’s domestic market, they borrow money in yen through Samurai bonds.

And now there’s a new market in town, which promises to be the daddy bear of them all. In a recent article, wonders whether China’s Panda bonds will gobble up the longer established but presently struggling Dim Sum bond market across the border in Hong Kong.

Pandas are bonds issued by foreign entities in mainland China. Until very recently, China’s closed capital account meant it was very difficult for foreign entities to raise capital in this way – even though the renminbi is increasingly used for global trade.

For a long time, the embryonic Panda market showed about as much appetite for going forth and multiplying as the animal itself. After the International Finance Corporation issued the first Rmb1.13 billion ($174.33 million) bond in 2005 there was almost nothing else for a decade.

Then suddenly the market sprang back into life last year as the government opened up the domestic bond market as part of its financial liberalisation plan. At $7.5 trillion, the Chinese bond market is now the world’s third largest in absolute terms, although it remains miniscule if measured against China’s GDP (just 1%). Last August, the government allowed foreign central banks, sovereign wealth funds and banks to start trading in the bond market without quotas. This February it enabled all foreign long-term institutional investors to follow suit.

On the issuer side, three banks (including HSBC) were allowed to raise funds in Pandas. They were swiftly followed by the Republic of Korea, which became the first foreign sovereign to raise Panda debt in December (no doubt irking Pyongyang). Many others (Sri Lanka, Russia, Nigeria and Poland) are now queuing up to establish a Panda footprint.

This year, the market has shown further signs of gaining traction with issuance reaching $2.596 billion during the first three months compared to $1.244 billion for the whole of 2015 according to Dealogic. However, all the issuers aside from the Province of British Columbia have been Hong Kong-listed Chinese firms – such as Shimao, China Gas, Country Garden and Yuexiu Transport.

Indeed, mainland-based issuers – once keen to execute US dollar bonds offshore – have been flocking to the domestic market where they face no currency risk and yields are lower because investors expect the central bank to continue its loosening bias. According to HSBC, property companies alone raised Rmb114 billion onshore during the first quarter, almost 50% of the amount they raised last year.

The Dim Sum market, on the other hand, saw issuance shrivel to just Rmb6 billion in March, with redemptions topping Rmb22.7 billion.

Financiers in Hong Kong still believe all is not lost. There’s no doubt China’s domestic market will increasingly eclipse Hong Kong’s, becoming one of the global fundraising centres. But it will take time and offshore centres are likely to retain their importance.

For one thing, Panda regulations need fleshing out, with many foreign issuers put off by the need for Chinese language documentation, a domestic credit rating and Chinese- style accounts. Then there is the issue of China’s ‘opaque’ legal system and what might happen in the event of an issuer default. In this respect, many experts believe Hong Kong, and even London, will benefit from investors’ concerns about their legal rights on the mainland.

Central bank governor Zhou Xiaochuan recently concluded there is room for both markets as the renminbi continues to internationalise.

China’s Panda population will grow exponentially. But who can resist one of Hong Kong’s har gow (shrimp dumpling) too?

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