New Policy Boost for Panda Bond Market

The panda bond market has been gaining momentum in recent years as more overseas companies，financial institutions and international agencies look to raise renminbi funds. New additions to the regulatory framework ¨C put in place over the last six months -- are likely to give the market a further boost.

In September，the People's Bank of China and the Ministry of Finance jointly issued the Interim Measures for the Administration of Issuance of Foreign Institutional Bonds in the National Interbank Bond Market (People's Bank of China/Ministry of Finance Circular 16，2018) and in January，the National Association of Financial Market Institutional Investors (NAFMII) issued the Guidelines for the Operation of Offshore Financing Instruments for Non-financial Enterprises (Draft)" (the Business Guidelines). Circular 16 divides the issuers of panda bonds into four categories，namely foreign government agencies，international development agencies，overseas financial institutions，and overseas non-financial corporate legal persons. Meanwhile，Circular 16 sets procedural rules，such as the conditions for issuance，issuance procedures，and information disclosure requirements，providing operational norms for all types of issuers. Moreover，the Business Guidelines further clarify the conditions for registration by foreign non-financial companies that issue panda bonds.

Circular 16 and the Business Guidelines are the first systematic policy measures put in place for the interbank bond market since the pilot launch of panda bonds in October 2005. The regulations coordinate the policies of the People's Bank of China，the State Administration of Foreign Exchange (SAFE)，the Ministry of Finance and the National Association of Financial Market Institutional Investors (NAFMII). They embody the experience of panda bond issuance management over the past few years and offer a foundation for the future development of these securities on the domestic interbank bond market.

Market Expansion

In 2005，the International Finance Corporation and the Asian Development Bank issued bonds of 1.13 billion yuan and 1 billion yuan in China's interbank bond market，ushering in the panda bond market. Since then the pool of panda bond issuers has become increasingly diversified，and panda bonds have tapped into the interbank bond market as well as domestic stock exchanges.

According to financial information platform Wind，32 entities issued 58 panda bonds on the interbank and securities exchange bond markets in 2018，up 56.7% from 2017，with total issues worth 95.59 billion yuan，an increase of 26.4%.

The interbank market still dominates. In 2018，a total of 43 panda bond offers were made on the interbank market，raising 74.66 billion yuan，accounting for nearly 80% of the total market value. The poor performance of the stock exchange market was partly due to the strict rules imposed by regulatory authorities on debt financing by real estate companies.

In 2018，panda bond issuers fell into three groups，namely government agencies，financial institutions and non-financial companies. Among them，non-financial companies were the majority，with a total of 49 issuances，accounting for 84.5% of the total. These companies were engaged in real estate，energy，manufacturing，transport，and construction among other industries.

Maturities have also been extended. The term of panda bonds issued in 2018 was mostly three to five years，with a sharp decline in one-year debt. This probably was due to efforts to reduce refinancing risks.

Additionally，the Belt and Road Initiative，a key infrastructure program，helped boost the issuance of panda bonds. In 2018，panda bonds were issued by three foreign governments participating in the program，namely the Philippines，Hungary and the United Arab Emirates. A number of panda bond issuers used the funds for projects under the Belt and Road Initiative. For example，the funds of the "18 Zhaoshang R1" bonds issued by China Merchants Port Holdings Co.，Ltd.，were intended for use in the acquisition of the Bentota Port in Sri Lanka; and the funds of the "18GLPR1" bonds issued by ProLogis China Holdings Ltd were to be used to acquire logistics infrastructure facilities in Europe.

New Policy，New Opportunities

By comparison，Circular 16 has clarified a number of issues related to panda bonds on the interbank market，looking at issuers，issuance conditions，and accounting standards. In this regard，the author examined the changes in the panda bond issuance system on the interbank market from Circular 16 (See Table 1 for details). In addition，in view of the Business Guidelines，the issuance of foreign non-financial corporate issuers is divided into two segments - targeted bond issues and non-targeted issues. Relevant registration conditions，procedures，registration documents，use of fund