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Tee Choon-Hong Managing Director Regional Head of Capital Markets, Greater China & North Asia Standard Chartered Bank (Hong Kong) Limited |
The growth of the panda bond market in 2016 was one of the major success stories of the global capital markets and there is every reason to expect further expansion and diversification in 2017 and beyond. With Chinese regulators expected to continue opening up the onshore bond market – and international banks such as Standard Chartered providing support and advisory services – a widening range of issuers and investors are already seeking opportunities.
In 2016 there was meaningful acceleration for the Chinese bond market, and the panda bond in particular. It also saw Standard Chartered consolidate its position as a leading underwriter and adviser. Already the world’s third-biggest bond market, the Chinese onshore bond market grew by a third in 2016 to $9.3 trillion, driven in part by fast-growing issuance of panda bonds (renminbi-denominated debt securities issued on the domestic market by non-domestic entities). With issuers increasingly choosing onshore issuance over the offshore dim sum market, panda bonds posted an almost four-fold increase over the 12 months to December, with total issuance reaching Rmb44.6 billion ($6.5 billion).
At this stage, most of the demand for panda bonds comes from domestic investors, attracted by the opportunity to gain foreign credit exposure without FX risk. But the continuing regulatory accommodation of panda bonds that has taken place in parallel with the renminbi’s inclusion in the IMF’s special drawing rights (SDR) basket is expected to stimulate further foreign investor interest, as institutions look for opportunities to manage their renminbi exposures.
On the supply side, the range of entities issuing panda bonds in 2016 – European corporates, North American banks, sovereigns and supranational agencies – gave as much encouragement for future prospects as the number of issues. While corporate entities are increasingly alert to Chinese official support for panda bonds that finance onshore operations, the appeal for non-corporate issuers lies also in the increasing liquidity and keen pricing (three-year renminbi funding costs are around 4% those for AAA credits) available in a market that is rapidly integrating itself into the international capital markets.
Among the transactions that swelled the panda market in 2016 was the second-ever corporate deal: French utility operator Veolia’s three-year Rmb1 billion issue, launched in September, which funds capital expenditure of its local Chinese subsidiary. As well as advising on this transaction, Standard Chartered served as joint lead underwriter and bookrunner on the first panda bond issued by a North American bank – National Bank of Canada (NBC) – in a Rmb3.5 billion three-year deal. Significant for a number of reasons, this deal required the reconciliation of the issuers’ use of Canadian accounting standards with regulatory requirements, thus helping to pave the way for other issuers that do not use HK GAAP or EU IFRS standards.
The pace of development, demand and diversification in the Chinese bond market is demonstrated by a number of other transactions involving Standard Chartered during 2016. The bank’s pioneering SDR-denominated issue, the first in China by any commercial issuer, was snapped up by Chinese banks with a strengthening appetite for foreign-currency assets. A similar signpost for the future of foreign involvement was a domestic bond issued by the Shanghai Municipal Government on the Shanghai Free Trade Zone (FTZ) market. Not only was this Standard Chartered’s first Chinese local government bond (indeed the first such bond to be underwritten by a foreign bank) but, as a result of reforms announced in 2015, debt securities issued in the Shanghai FTZ can be settled via existing accounts at international central securities depository Euroclear, rather than at the Shanghai Clearing House, which removes a major obstacle to foreign market participation in the panda bond market.
The growth of the panda market during 2016 – and of Chinese bond market activity in general – was substantial, but not surprising, given the building blocks put in place in recent years and the Chinese authorities’ commitment to further development.
The renminbi’s accession to the IMF SDR basket in 2015 spurred the development of a vast pool of easily accessible, long-term liquidity. This was, of course, achieved through a long-term commitment by the Chinese authorities to the gradual opening up of capital flows. But the IMF’s decision was just another step on the road. Both a further relaxation of foreign investment quotas and the entry of foreign investment institutions into the domestic interbank bond market were announced in Q1 2016, for example.
This process may seem slow, but it is inevitable because of the range of legal, regulatory and accounting issues to be addressed, as well as the cautious approach of the authorities. Nevertheless, in 2017 there will be substantial progress in the maturity of the panda market.
As the leading underwriter of panda bonds in 2016, Standard Chartered will continue to help issuers and investors to make the most of the opportunities afforded by the progress of the panda market. We are well positioned to provide this support as one of a very few foreign banks that is separately licensed as underwriter or sub-underwriter in each segment of China’s interbank bond market, as well as being one of the most broadly licensed foreign banks in China’s onshore financial market, authorized as settlement agent, primary dealer, bond and FX market maker. As activity in the panda market picks up, Standard Chartered will keep pace.
Euromoney and Standard Chartered will be running a series of webinars on debt capital markets. The first one will be on ‘Investing China: CGB futures and the Bond Connect’ on May 15. Find out more
Tee is charged with leading the Regional Capital Markets for Greater China & North Asia region, in addition to promoting RMB Capital Markets Products globally through Standard Chartered Bank’s Capital Markets platform.
He has more than 20 years of capital market experience with a strong knowledge of a wide range of debt and hybrid products, providing clients with a solution-based funding advice. In Asia, Mr. Tee has worked in various capacities in capital markets, liability swaps and equity derivatives business since 1993, assisting many sovereign, quasi-sovereign and top issuers from the region in their funding and asset/liability risk management programs involving FX, Rates, Credits and Equities. Tee has worked in Tokyo and London before and is based in Hong Kong since 1993.
Tee has also been deeply involved in the two Sukuk bonds by HKSAR in 2014 and 2015 and China MOF’s CNH Bonds in HK since 2009.
Since 2009, Tee has been deeply involved in the development of the Dimsum bond market and more recently, the development and promotion of the Panda bond market.
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