Panda bonds to help RMB expand footprint

Increased interest in panda bonds, spurred by China's low interest rates and supportive policies, will help promote the internationalization of the renminbi, experts said on Monday.

Panda bonds are yuan-denominated bonds issued by overseas institutions in the Chinese onshore market.

Calculations by the People's Bank of China show that 58 panda bonds were issued in the country during the first eight months, with the total fundraising reaching 106 billion yuan ($14.8 billion).

Up to 52 panda bonds were issued last year, with the total funds raised coming in at 85 billion yuan, according to the country's central bank.

Freddy Wong, head of the fixed income department at Invesco Asia-Pacific, said issuances of panda bonds so far this year have overtaken that of 2016 in value terms — the previous peak — to touch a record.

Supportive institutional arrangements such as the Bond Connect and Swap Connect programs have better linked the onshore and offshore investments, encouraging the issuance of panda bonds, he said.

The low interest rate in China is an incentive for international institutions to issue panda bonds, said Ethan Wang, head of investment strategy for wealth management at Standard Chartered China.

At present, the yield on China's 10-year government bond is around 2.6 percent, while the corresponding bond yield in the United States is as high as 4.5 percent.

Experts from the foreign exchange and commodities department at CIB Research wrote in a report that RMB assets are a safer financing option for international institutions given their lower correlation with the US and European markets.

This is especially important at a time of rising market volatility, they said.

International investors cannot overlook China as it is already the second-largest bond market in the world after the US, they added.

In September, the RMB became — for the first time — the second most used global currency in the trade finance market, overtaking the euro, according to global financial messaging services provider, the Society for Worldwide Interbank Financial Telecommunication.

At the end of last year, the PBOC and the State Administration of Foreign Exchange announced new measures for the capital management of overseas institutions' bond issuances in the Chinese onshore market. They said that proceeds from panda bond issuances can be remitted overseas as long as the actual usage of the funds is consistent with the purposes stated in the offer circular, said Feng Lin, a senior analyst at Golden Credit Ratings.

Prior to this, such financing could only remain in the Chinese onshore market. Therefore, the new measure will encourage the issuance of panda bonds, she said.

More importantly, facilitated issuances of panda bonds will encourage overseas institutions' cross-border receipts, payments and use in the form of the RMB, said Feng.

When panda bonds mature, the issuers will have refinancing needs. This will help stabilize the issuance of the yuan-denominated bonds, said Wong from Invesco.

This is conducive to the internationalization of the RMB, making the Chinese currency a financing tool for multinational companies, he said.

According to a report on RMB internationalization released by the PBOC in October, continued efforts will be made to support more overseas central banks, international development institutions and multinational companies in issuing panda bonds.