Caixin Weekly | Expansion of Panda Bonds (AI Translation)

财新周刊｜熊猫债扩容

Panda bonds, which are renminbi-denominated bonds issued by foreign entities in China, are expected to exceed 200 billion yuan in issuance by 2024, marking a record high for the second consecutive year [para. 1]. Traditionally, these bonds were slowly adopted due to strict regulatory frameworks and high borrowing costs compared to USD financing, especially post-2008 financial crisis [para. 6]. However, 2023 saw a resurgence in their popularity due to favorable interest rate differentials, regulatory optimizations, and increased market diversity [para. 4][para. 5][para. 18].

The first issuance of Panda bonds was in 2005 by the International Finance Corporation (IFC) and the Asian Development Bank (ADB) but the cumulative issuance remained low until significant developments occurred post the 2015 "8.11 Exchange Rate Reform." This reform led issuers to move from offshore Yuan ("Dim Sum bonds") to onshore Yuan financing, causing an exponential growth in issuance by 2016 [para. 6]. Between 2017 and 2020, issuance fluctuated with an average annual issuance of 71.32 billion yuan, driven by regular regulatory improvements [para. 6]. From 2021 onwards, issuance surged again with annual figures hitting 106.516 billion, 85.07 billion, and 154.45 billion yuan respectively.

As of July 2024, issuance already reached 108.3 billion yuan, with projections exceeding 200 billion yuan for the year. New regulatory features and market diversification have been key growth drivers since 2023 [para. 9]. Pure foreign issuers saw a significant rise in the market, which increased overall market liquidity and stability [para. 26]. For instance, Deutsche Bank issued 8 billion yuan in Panda bonds across four tranches, leveraging new regulatory frameworks which allowed more efficient fund transfers abroad [para. 26][para. 28].

The regulations improved the Panda bonds market by allowing more flexibility on fund use and simplifying the issuance process. "Document No. 272," for instance, permits the transfer of raised funds abroad, making Panda bonds more attractive [para. 28][para. 29]. As a result, Deutsche Bank’s offerings saw increased investor interest and oversubscription rates as high as 2.01 times in 2024 [para. 27].

The wider acceptance of RMB in the international financial system, boosted by regulatory initiatives, has specifically enhanced the Panda bonds market [para. 9]. Data shows a diversified issuer base, with foreign and Chinese institutions accounting for 35.7% and 64.3% of outstanding bonds respectively [para. 27]. Market participants anticipate new issuers from regions like the Middle East and Latin America, with varied credit qualifications and guarantee structures [para. 27].

Moreover, leading companies like NWS Holdings and Xincheng Holdings have been proactive in issuing Panda bonds to replace more expensive offshore borrowings, demonstrating their strategic cost-saving and asset-liability management goals [para. 42]. These issuances not only reduce financing costs but also enhance corporate visibility in Mainland China [para. 42][para. 43]. Additionally, the regulatory landscape helps issuers tailor their offerings for different purposes, such as green bonds aimed at specific projects [para. 44][para. 45].

On a larger scale, Panda bonds contribute to the internationalization of the RMB by providing RMB-denominated assets and facilitating cross-border financing loops. While the issuance process is being further streamlined to reduce time and costs, the interest rate differential between China and the U.S. remains a significant driver. Analysts suggest this window of low RMB borrowing rates can be maintained long-term given the divergent monetary policies between China and developed nations [para. 57][para. 62][para. 63].

For regulatory bodies, this period is critical to promote RMB internationalization effectively. Policymakers are hopeful that Panda bonds will mainly raise funds in RMB for cross-border use, as stated in "Document No. 272," accelerating the global acceptance of the RMB within the manufacturing-led, export-oriented Chinese economy [para. 64]. Panda bonds, therefore, present a multifaceted strategy benefiting issuers and the broader goal of RMB internationalization [para. 65].