China rings changes in homegrown bond markets

Tim Yip, HSBC

Innovation is never far away in a new and transforming market, but even by China’s standards August was an exceptional month. Two completed deals, and a third underway, stood out. 

First, Poland became the first European country to issue a Panda bond, representing an important broadening of the nascent market’s issuer base. 

The Republic of Korea and Province of British Columbia, both much higher rated than Poland’s A2/A-/BBB+, have issued before, but Poland’s Rmb3 billion ($451 million) deal, led by Bank of China and HSBC, was a welcome expansion of a market that has been disappointingly quiet in its early years. 

Tim Yip, head of cross-border RMB, debt capital markets at HSBC, says the slow pace of development has been about approvals rather than lack of interest. 

“Panda bond issuers need to obtain necessary regulatory approvals,” he says. “Which is not something which can happen overnight: it needs meticulous planning, adequate disclosures, attention to detail during execution, and documentation in Chinese governed under Chinese law.” It can take as much as half a year to get through the process. 

Since Poland has no renminbi funding needs and will swap the proceeds back to euros to finance budgetary expenses, it is being seen as a politically driven trade following President Xi Jinping’s visit to the country in June. Nevertheless, it may be the shot in the arm the market has needed: at the time of writing, Veolia Environnement, the French utility company, was rumoured to be planning an issue too. It may be that Panda bond issuance (Rmb55.6 billion in the first seven months of the year) may overtake dim sum issuance (Rmb68.3 billion) and exceed it for the full year for the first time. 

Then, the International Bank for Reconstruction and Development, the funding arm of the World Bank, completed the first capital markets instrument to be denominated by IMF special drawing rights for 30 years – dubbed a Mulan bond, after the famed female warrior from Chinese tradition.

The issue raised SDR500 million ($700 million) through a three-year note with a tight 0.49% coupon. It was straining for significance: timed to coincide with the G20 meeting in Hangzhou, designed to illustrate the international credentials of the renminbi ahead of the currency joining the SDR basket after October 1, and giving Chinese investors exposure to a basket of currencies (which is what an SDR really represents) for the first time. “It was a landmark in every way,” Yip says.

Beyond its symbolism, it may prompt other SSAs to look at SDRs as an issuance vehicle, but the deal was really about demonstrating the increasingly international nature of China’s currency and bringing something new to Chinese investors. It is payable and settled in renminbi and issued in China’s interbank bond market. 

Meanwhile, Shanghai’s city government is considering a free trade zone bond denominated in offshore renminbi and targeted at international investors. 

The idea is to broaden the appeal of Shanghai’s Free Trade Zone, and to allow buyers to settle through accounts either with a domestic securities depositary or an international one. Euroclear is partnering with the Shanghai Clearing House for the initiative.

Several FTZ securities already exist, including interbank deposits, but the new bonds should add momentum to the state’s attempts to make the renminbi a reserve currency, while also helping to develop China’s municipal bond market. 

All these innovations take place against a backdrop that is both invigorating and troubling, as concerns grow about the potential for defaults in domestic Chinese debt. Around 20 companies are reported as being in financial difficulties and unable to meet payments on publicly syndicated bonds, up from zero two years ago. 

“But what we see in official statistics is the tip of the iceberg,” says one domestic debt capital markets banker on the mainland. “There are lots of privately issued notes we do not see. This is definitely something to keep a close eye on.”