Some questions on the Panda bonds

In 2005 the International Finance Corporation (IFC) and the Asian Development Bank (ADB) issued the first “Panda” bonds — “a Chinese renminbi-denominated bond from a non-Chinese issuer, sold in the People’s Republic of China (, Sept. 29, 2005). “Both the IFC and the ADB believed issuance by supranationals could open up the market to other types of issuer — particularly in the rapidly expanding infrastructure sector, where China’s government alone spends $260 billion a year” (“Panda bonds explained,” GlobalCapital, Oct 19, 2005). IFC’s issue of Rmb 1.13 billion ($140 million) and ADB’s Rmb 1 billion ($123 million) at 3.4% coupon (24 basis points over the Chinese government bond) sopped up some of the excess liquidity in the domestic Chinese market and helped relieve the upward pressure on the renminbi (Ibid.).

It worked well for IFC and ADB, with the Panda scheme of getting the funding from China’s onshore investors, and then on-lending these same funds to the infrastructure projects within China. Good for the Chinese local investors, too, who enjoyed higher yields over those on regular government securities. But why did the Panda bonds not live up to the initial hype?

The Panda bonds were difficult to implement in China’s controlled economy, as it was probably seen difficult to feel the edges of how this would affect China’s obstinate currency peg. At first, “funds raised from the sales of Panda bonds would have to remain in China; issuers would not be permitted to repatriate such funds (The Wall Street Journal, July 6, 2007).” When offshore investors and outward remittances were finally allowed in 2010 (), and the Chinese fear of losing control forced even tighter regulation on the Panda bonds.

J.P. Morgan’s strategist Ying Gu analyzed the problems and benefits of overseas nonfinancial corporates and banks, as well as governments, in issuing Panda bonds (Treasury Today Jan 2017). “China is the world’s third largest bond market and provides ample liquidity to issuers,” he said. Yet “the Panda bond market accounts for only a tiny fraction of China’s $3-billion onshore debt market.” There’s a lot of funding waiting there, Gu said. Only, there are some big hurdles (Ibid.). These obstacles were also discussed in an article “Panda Bonds: Not Yet The Future Of The Debt Market” by Christopher Bickley et. al of Conyers Dill & Pearman (, July 11, 2016).

First, “there is very little transparency around the process and what makes a (potential issuer’s) request successful, Gu said. “Each transaction is dealt with on a case-by-case basis and documentation may be different for even similar transactions,” the Conyers analysts corroborated. And then, if and when the approval is given to an issuer, there is no official guidance on what can be done with the proceeds. If the (foreign) issuer cannot shift the proceeds offshore… there is really no benefit for them to enter this market,” Gu said.

A second big hurdle would be the requirement to provide the past three years financial statements under the Chinese Account Standards. “A lot of bond issuance is made in US dollars and filed under US GAAP (Generally Accepted Accounting Principles). Issuing a Panda bond and changing your accounting standards can be a costly and tiring exercise (Treasury Today, op. cit.).

Thirdly, a local (Chinese mainland) credit rating must be earned by the proponent-issuer — which goes back to some analysts’ queasiness about the case-to-case basis of how China would choose issuers of Panda bonds.

And so the China-based debt watcher Lianhe Credit Rating Co. Ltd gave the Philippine government an “AAA” top rating (stable outlook, lowest expectation of default risk) and the issuance of Panda bonds was approved by the People’s Bank of China and National Association of Financial Market Institutional Investors (NAFMII) on Feb. 9, as announced by Finance Secretary Carlos Dominguez III (Philippine Daily Inquirer, Feb 12, 2018). The Philippine government’s inaugural RMB 1.46 billion worth of renminbi-denominated bonds was launched in March (����ý, March 20, 2018). With a tight spread of 35 basis points above benchmark, the three-year Panda bonds fetched a coupon rate of five percent, “a reflection of confidence in the robust growth prospects and creditworthiness of the Philippines (The Philippine Star March 22, 2018).”

The Philippine government said that the renminbi-denominated debt sale affirms the country’s “improving bilateral relations” with China and the increasing relevance of its currency (����ý op. cit.). The sale followed a Philippine road show in Singapore, Hong Kong and China on March 14-16, led by National Treasurer Rosalia V. de Leon and Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa C. Guinigundo.

But the “deal” was really clinched when Secretary Dominguez signed the underwriting agreement with Bank of China (BOC) Chairman Chen Siqing in ceremonies held at Malacañan Palace on Nov. 15, 2017, witnessed no less than by the Chinese Premier Li Keqiang and President Rodrigo Duterte at China’s first-in-ten-years state visit to the Philippines.

A case-to-case basis (even a cozy one) — as the critics of the Panda bonds warn, shows a lack of transparency in standards and procedures — contrary to the teaching points on financial best practices which the IFC and the ADB wanted to impart to China as first Panda bonds issuers.

Yet steel-hearted finance people must detach from subjective judgment of possible utilitarian motivations that may later complicate objective business transactions. So, there should be no allusions to the South China Sea/Philippine Sea territorial dispute between China, the second richest country in the world (next to the US) and the Philippines, which might have been given a cuddly Panda bear to hug while crying for development funds amidst budget shortfalls.

The Republic of Korea and Canada’s Province of British Columbia were among the first sovereign issuers to tap Panda bond funding (, Dec. 23, 2015). Neither had any political complications vis-à-vis China, and local government oppositionists in Canada openly questioned China’s onshore pricing and wondered whether they needed China at all, when they had prime access to debt everywhere else, without the hot-and-cold regulation of the Chinese central bank (Read: “Concerns raised over ‘Panda Bonds’ issued by B.C. government,” globalnews.ca, July 1, 2016).

The Philippine government has programmed a P888.23-billion borrowing plan this year to fund its budget deficit that is capped at three percent of GDP. Of this amount, P176.27 billion will be sourced externally while P711.96 billion will be borrowed locally (����ý, March 20, 2018).

Proceeds of the Panda bonds will be converted into peso, to be deposited with the BSP, and will help fund the government’ infrastructure projects and other financing requirements. The government plans to spend some P8 trillion up to 2022, when President Rodrigo R. Duterte ends his six-year term, in a bid to boost gross domestic product (GDP) growth to 7-8% up to then from 2017’s 6.7% and a 6.3% average in 2010-2016 (Ibid.).

Have the cash flows, spending versus repayment of debt, been as carefully planned? Ahh, but there’s the comfy bear-hug of the great Panda, China, our leaders might assure us.

Amelia H. C. Ylagan is a Doctor of Business Administration from the University of the Philippines.

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