Panda bond issuance more than doubles as rates fall

Panda bond issuance surged to 29 billion yuan ($4.33 billion) in the year to date in 2016, compared with 12 billion yuan in all of 2015, said a JPMorgan Chase & Co report.

The large increase in the issuance of Panda bonds, yuan-denominated bonds sold in the onshore market by a non-Chinese issuer, was mainly driven by cheaper funding costs. A typical corporate issuer with BBB+ rating could reduce its financing costs by around 80 basis points by issuing a Panda bond and then swapping China's onshore currency into dollars, compared with issuing dollar bonds, the report said.

"Dollar/yuan cross-currency swap rates have remained at relatively high levels due to investors' concerns about the yuan depreciation, which gives Panda bond issuers more attractive yields to swap their yuan into dollars," said Gu Ying, Hong Kong-based emerging markets strategist at JPMorgan.

"Moreover, the negative outlook on the yuan also causes some foreign issuers to raise yuan directly via Panda bonds to finance their investments in China, with the aim of eliminating the foreign exchange mismatch risk."

Corporates represent 65 percent of issuers in the Panda bond market, followed by foreign governments (14 percent), financial institutions (12 percent) and supranational issuers (9 percent).

During the first six months of this year, Industrial and Commercial Bank of China Ltd, the nation's largest State-owned commercial lender by assets, underwrote more than 5 billion yuan of Panda bonds for overseas companies, including the issuance of Panda bonds worth 4 billion yuan for Daimler Group in private placement.

But many of the corporate issuers are overseas-incorporated Chinese companies. Real foreign borrowers still need to overcome hurdles such as the discrepancy in accounting rules, the lack of official guidance on moving funds raised from Panda bonds offshore, and the lack of transparency in approval procedures, according to the report.

"A well-developed Panda bond market is crucial to the opening of the Chinese onshore bond market," Gu said.