Bank of China (Hong Kong) and HSBC earned their stripes in China's domestic bond market on Tuesday after completing successive Rmb1 billion ($157 million) Panda bond issues, the first by foreign financial institutions.
The Panda bond market (renminbi-denominated transactions by foreign entities) has long held much promise but generally disappointed prospective borrowers by proving to be as fertile as the animal it is named after.
Such has been the Chinese government's caution towards opening up its domestic bond market that only three foreign borrowers have executed trades in the decade prior to Bank of China and HSBC being given permission to launch their first deals.
Bond experts believe that attitude is now changing due to the government's ambition to get the renminbi included in the basket of reserve currencies used by the International Monetary Fund (IMF) to determine the valuation of its Special Drawing Rights (SDR).
"A decision is expected this November," said one mainland-based expert. "The inclusion criteria include how open the renminbi is as a financing channel. The Chinese government has done a great job setting up 18 offshore renminbi centres but it was definitely time to do more work opening up the onshore market."
Like all twins, one Panda was delivered ahead of the other, with Bank of China (Hong Kong) managing to pop out its transaction on Tuesday morning followed by HSBC later the same afternoon.
The two bond offerings also proved to be identical twins. Both were Rmb1 billion in size with a triple-A rating from China Chengxin, three-year maturities and coupons of 3.5%. Domestic bond experts said this pricing level represented a 10bp pick-up over China Development Bank’s (CDB) curve and about 50bp inside smaller commercial banks trading around the 3.9% to 4% mark.
"The big commercial banks don't issue much senior unsecured debt because they're so awash with deposits," said one specialist. "The key issue was how close investors would be prepared to buy the two deals relative to CDB's curve and how far away from the smaller commercial banks at the other end of the spectrum."
In terms of international credit differentials, Bank of China (Hong Kong) has a two notch higher senior unsecured rating of Aa3/A+ from Moody's and Standard & Poor's compared to HSBC's A1/A rating. Fitch, by contrast, rates HSBC two notches higher than Bank of China (Hong Kong) at AA- compared to A.
In the US dollar market, international investors still rank HSBC above Bank of China with the former trading about 16bp to 18bp tighter than the latter on a like-for-like basis.
A second notable aspect highlighted by the re-opening of the Panda bond market has been the attractive cost of funding China's onshore market offers relative to the offshore market.The two curves have been converging with three-year onshore sovereign CNY paper quoted on Tuesday at 2.73% according to Bloomberg and offshore sovereign CNH paper at 2.8%.
The People's Bank of China (PBOC) has cut interest rates six times since last November and domestic funds have also been rotating into bonds after the stock market rout, prompting some to suggest a new bubble may be forming. According to recent HSBC research there was a noticeable uptake by domestic funds during August, but a decline in holdings by foreign investors under the county's RQFII and QFII schemes.
The biggest investors in the domestic interbank market, where bonds trade, are national commercial banks holding about 50% of paper, followed by funds on roughly 11%, city commercial banks with 7%, insurance funds with 7% and rural commercial banks with 4%. Figures from June showed that non-resident investors held about 2.11%.
At the end of 2014, outstandings totalled Rmb35.9 trillion, making China's domestic bond market the world's third largest on an absolute basis behind the US and Japan. Relative to GDP, however, it is still very small at just 1%.
Over the past couple of years, the issuance dynamics have been changing with corporates issuers in particular starting to become far more active. In 2014, corporate and financial issuers combined accounted for more than 40% of overall issuance according to HSBC.
Gross domestic issuance by all borrowers amounted to Rmb1.9 trillion, up 35% year-on-year.
Panda breeding programme
Panda bond outstandings, however, amount to just Rmb9.5 billion from a total of eight issues.
First into the market in October 2005 was International Finance Corp (IFC), which raised Rmb1.13 billion from a 10-year deal with a 3.34% coupon. This was followed a few days later by an Rmb1 billion 10-year deal from the Asian Development Bank (ADB), which was priced at 3.34%.
IFC returned the following year with an Rmb870 billion deal, which carried a 3.2% coupon, while ADB made its second foray in 2009 with an Rmb1 billion transaction.
The only other issuer has been German car company Daimler, which has accessed the market twice.
In March 2014, it became the first foreign corporate to raise Panda financing, with an Rmb500 million one-year deal that carried a 5.2% coupon. It returned again in April this year with an Rmb3 billion deal, which also had a one-year maturity and a 4.8% coupon.
Bankers are now waiting for the government to issue revised guidelines that may prompt a wave of new issuance. Both Bank of China (Hong Kong) and HSBC had to work off the most recent set of guidelines from 2010, which were developed for supranational, bi-lateral and regional development institutions.
These guidelines, in turn, built on 2005 regulations. Positive changes included allowing issuers to swap proceeds out of renminbi and remit them offshore subject to approval.
“Currently, the PBOC is responsible for transfers of renminbi funds from the mainland to overseas,” Allen & Overy partner Jane Jiang told FinanceAsia. “The State Administration of Foreign Exchange (SAFE) is in charge of US dollar remittances.”
The current guidelines also specify that prospective issuers need to have a track record of $1 billion in loans or equity investments in China - not much of a handicap for the many of the larger multinationals seeking to raise funds for their Chinese operations.
More of an issue is a requirement to prepare financials under Chinese accounting standards, although it is possible to seek an exemption from the Ministry of Finance.
“They will also need to consider Chinese language disclosures and reconcile the timing of them to comply with [their] own fiscal year and home country rules,” Jiang added.
Both Bank of China (Hong Kong) and HSBC are believed to have made additional disclosures in their domestic offering circulars compared to the information contained in their offshore MTN programmes.
Jiang also noted that the PBOC is responsible for approving prospective financial issuers, while the National Association of Financial Market Institutional Investors (NAFMI) is in charge of corporate issuers. The processing time is expected to take about one to two months.