Why panda bonds continue to be hot

　 "The panda bond market will become one of the important pillars of international financing" and "the panda bond market will continue to be hot......"

　　In recent years, panda bonds have become popular among overseas issuers. According to Bloomberg data, as of the end of the first quarter, the scale of panda bonds issued by overseas institutions this year reached 67.4 billion yuan, a year-on-year increase of 220.95%, a record high. The scale of panda bonds exceeded 275.4 billion yuan.

　　So, why is the popularity of panda bonds rising, and what is the future trend?

Panda bonds are off to a good start to the year

　　According to international practice, when an overseas institution issues a local currency bond in a country's domestic market, it is generally named after the most characteristic element of the country, so the renminbi-denominated bonds issued by foreign institutions in the mainland are named panda bonds.

　　Compared with the Yankee bonds of the United States, the samurai bonds of Japan, and the kangaroo bonds of Australia, which are also foreign bonds, panda bonds have not been slow to develop in recent years, although they started relatively late.

　　In 2023, the issuance of panda bonds will hit a record high, with the annual issuance exceeding 150 billion yuan.

　　At present, the issuance of panda bonds continues the hot trend of last year. Since the beginning of this year, the panda bond market has made a good start, and after the issuance volume hit a record high last year, in the first quarter of 2024, panda bonds have once again ushered in a good start, and the global bond market has continued to refresh its popularity, with many bonds setting new historical records. As of April 14, a total of 29 panda bonds have been issued this year, with an issuance amount of 66 billion yuan, an increase of 128.37% over the same period last year.

　　Under multiple factors, the willingness of foreign institutions to participate in the Chinese market is also becoming stronger. For example, Deutsche Bank Group (Deutsche Bank) has recently successfully completed the issuance of the third tranche of Panda Bonds, which are senior senior bonds with a maturity of 2 years.

　　Fang Zhongrui, head of Deutsche Bank's China debt capital markets, said that the panda bond market had an active start to this year, with 61 billion yuan of issuance in the first three months. We are currently seeing strong interest from European and emerging market issuers in RMB bonds, and they are also closely monitoring opportunities in China's bond market.

　　The expansion of the issuance of panda bonds is conducive to promoting the international use of the renminbi. Huang Ka-shing, managing director and head of fixed income for Asia Pacific at Invesco, said that in the medium and long term, the increase in the size of the panda bond market can boost the widespread use of the renminbi. With the maturity of old panda bonds, foreign companies need to refinance new renminbi in the market, which also opens the door for renminbi to be an important international financing tool. Moreover, the development of the panda bond market will further prompt policymakers to accelerate the construction and improvement of supporting facilities for the domestic and overseas circulation of RMB, laying a more solid foundation for the internationalization of RMB.

Why panda bonds are at record highs

　　Behind the record high is the relatively low financing cost and the increasingly complete and convenient institutional environment in China.

　　Huang Ka-shing said that the main reason for the recent popularity of the panda bond market by issuers is the interest rate differential between the renminbi and the US dollar. Compared with the US dollar bond market, the RMB bond market has a significant advantage in financing costs. In the past, when the US dollar was low in interest rates, most international companies generally preferred to complete bond issuances in the US dollar bond market and then convert the funds into RMB to fund their domestic branches in China. Due to high US dollar interest rates, these international companies are now turning to direct issuance of RMB bonds to meet their financing needs.

　　As a result, panda bonds have become an important means for overseas issuers to "reduce costs".

　　Bloomberg Industry Research Asia Pacific ex-Japan senior credit strategist William Chan and assistant strategist Li Zihao believe that most of these US dollar bonds are likely to be refinanced through the panda bond market, given the interest rate and credit spread gap between the RMB bond and US dollar bond markets. The entry of foreign Chinese companies into the onshore bond market can significantly reduce the cost of debt, which in turn can promote the improvement of credit indicators.

　　The Belt and Road Initiative has also further increased the development potential of the panda bond market. At present, the number of panda bond issuers from the Belt and Road countries is increasing, and the number of issuers from the euro zone such as Portugal, Italy, and France is also continuing to pour in. With the expansion of the space for international cooperation in the Belt and Road Initiative, the demand for RMB bonds issued by countries and international multilateral financial institutions along the Belt and Road will continue to rise.

　　A number of foreign-funded institutions mentioned that the "Circular on Matters Related to the Management of Funds Issued by Overseas Institutions in China" issued by the People's Bank of China and the State Administration of Foreign Exchange in December 2022 clearly stipulates that "the funds raised by panda bonds can be retained in China or remitted for overseas use", as well as measures such as relaxing the restrictions on the number of lead underwriters in the registration and issuance process and optimizing the pricing and placement mechanism of bonds of overseas institutions, which provide a good institutional foundation for the development of the panda bond market.

Industry experts: future growth is expected

　　For the next development of the panda bond market, CITIC Securities Chief Economist Ming Ming believes that considering the current monetary policy environment and market demand, it is expected that the issuance of panda bonds will continue to maintain a growth trend. At the same time, with the maturity and diversification of the market, the issuers and investors of panda bonds will be further expanded, and the market structure will be further optimized. In addition, it is expected that more innovative panda bond products will be launched in the future to meet the needs of different issuers and investors.

　　The relevant person in charge of China Chengxin International said that from the perspective of the whole year of 2024, the advantages of low-cost financing and refinancing demand will form a certain support for the issuance of panda bonds this year. In addition, considering last year's high base level (the annual issuance exceeded 150 billion yuan), it is expected that the growth rate of issuance for the whole year this year will not necessarily exceed that of last year, but the issuance scale is expected to further increase. In addition, last year, a number of innovative varieties of panda bonds such as sustainable development bonds, carbon neutrality bonds, sustainability-linked bonds, "Belt and Road" green bonds, and rural revitalization bonds were launched, and it is expected that more issuers of sustainable development bonds will emerge this year, and sustainable development panda bonds will become a type of thematic bonds with rapid growth in the future.

　　The "2023 RMB Internationalization Report" released by the People's Bank of China mentioned that the next step will be to further promote the development of the panda bond market, enhance the breadth and depth of the mainland bond market, continue to promote the high-level two-way opening of the bond market in a steady and orderly manner, continuously optimize the RMB cross-border investment and financing policy environment, and serve the development of the real economy.

　　Talking about the focus of further promoting the development of the panda bond market, Ming Ming suggested that in terms of system construction, the relevant laws and regulations on the issuance and trading of panda bonds should be further improved to improve market transparency and efficiency. In terms of product innovation, we will launch and promote more innovative products that are in line with international market trends, such as green bonds and sustainable development bonds. In terms of market access, the market access process for overseas issuers will be further simplified, the issuance costs will be reduced, and more high-quality foreign issuers will be attracted to participate. In terms of risk management, we will establish a sound risk early warning and response mechanism to ensure the stable operation of the market.

　　The person in charge of a foreign bank said that the next stage of China's financial market opening up is a higher level of opening-up, and more institutional docking, and promoting the docking of different markets can better give full play to the advantages of international banks in connecting China and overseas markets, as well as investor education, institutional docking, and market docking.

　　Since the beginning of this year, although the market's expectations for interest rate cuts in the United States and Europe have begun to ferment, the expectation that the mainland's monetary policy will remain loose is also strong, and the advantage of low interest rate financing costs of RMB is still expected to continue. More importantly, with the gradual increase in the importance of the RMB in the international monetary system and the continuous expansion and opening up of the mainland bond market, panda bonds will still have broad room for development, and will further achieve two-way promotion with the internationalization of the RMB.