Overview
Sales of panda bonds, the renminbi-denominated debt issued by offshore companies in China’s onshore market, jumped in 2023.
As this week’s Chart Room shows, the issuance of panda bonds has reached 150bn RMB ($21.1bn) in 2023, surpassing any previous annual amount since their debut in 2005. However, the volume is still tiny compared with the sales of dim sum bonds - renminbi bonds issued in Hong Kong - which are also poised to surge to a record in 2023.
China’s cheap borrowing costs are the main attraction for foreign companies to issue panda bonds. While much of the rest of the world tightens financial conditions, the People’s Bank of China is loosening monetary policy to support the economy. This has widened the difference in interest rates between the US and China significantly. Yield premium of US three-year treasuries over similar-maturity Chinese government bonds increased to 253 basis points in October, the highest level since 2006.
Internationalisation of the renminbi has also helped to accelerate the market’s expansion. The currency’s share in global payments has almost doubled to 3.6 per cent in October, from 1.9 per cent in January, according to Swift, the international payments platform. It also overtook the dollar as the most used currency for China’s cross-border payments and receipts in March, commanding almost half of all transactions, according to media reports.[1]
What’s most important is the boost from a new policy on foreign issuers’ cross-border fund transfers. Launched in December 2022, the PBOC and State Administration of Foreign Exchange allowed panda bond issuers to repatriate proceeds overseas as long as funds are used in accordance with their offer terms.
Still, the market faces some major hurdles, especially compared to its biggest competitor, the offshore dim sum bonds. First, panda bonds have a limited pool of investors, resulting in very low liquidity. Selling panda bonds is difficult and most investors can only hold them until maturity. Second, while the number of foreign sovereign, financial, and corporate issuers is rising, most borrowers are still Chinese companies’ offshore units. If a foreign company is looking for renminbi funding, the dim sum bond market offers similar funding costs within a more established global issuance standard. Moreover, the need of international manufacturers to raise working capital in renminbi is likely to diminish as they continue to diversify their supply chains beyond China. But the take-off of the panda bond market will depend on attracting overseas issuers - including those without operations in China, which will in turn help to expand the investor base.
[1] “Yuan overtakes dollar to become most-used currency in China's cross-border transactions.” Reuters, April 26, 2023.
