Panda bonds are renminbi-denominated bonds issued in the PRC by non-Chinese issuers. Data from the People’s Bank of China (PBOC) show that by the end of 2018 panda bonds worth up to nearly RMB200 billion (US$29.56 billion) had been issued, with the scope of qualified issuers expanding, from international development agencies initially, to include foreign governments, foreign financial institutions and non-financial companies.
Years have passed, but no systemic rules have been introduced to regulate the issuance of panda bonds, except those from international development agencies. In most cases panda bonds have been issued with reference to conditions and requirements applicable to bond issues from Chinese entities, and panda bond issues have been launched on a pilot basis. These give rise to uncertainties surrounding panda bond policies and concerns about unestablished and non-transparent issuance process.
In September 2018, the Interim Measures for the Administration of Issuance of Bonds in the National Inter-bank Bond Market by Foreign Institutions (Measures) were jointly released by the PBOC and the Ministry of Finance. The National Association of Financial Market Institutional Investors (NAFMII) has also started formulating more specific guidelines for panda bonds, and recently released the Business Guidelines for Debt Financing Instruments of Foreign Non-financial Enterprises (Trial) (Business Guidelines).
Drawing on the experience of previous domestic pilot programmes and international forerunners, the measures outline the conditions that foreign institutions must meet, and the application and registration procedures that they must complete, in order to issue panda bonds in the interbank bond market. They also regulate matters that include, but are not limited to, issue registration, custody and settlement, fund account opening, fund remittance, information disclosure, and investor protection. Among the many policy highlights of the measures are some crucial ones summarized below.
Use of proceeds. The use of panda bond proceeds has been a top concern for the market. According to the Interim Measures for the Administration of the Renminbi Bond Issuance of International Development Organizations, released in 2005, monies raised through issuance of panda bonds shall be used for projects within China; converting them to foreign exchange and remitting them abroad is prohibited. In connection with this matter, the measures set out principles only. Specifically, the measures state that any activities involving the proceeds from issuance of panda bonds, including account opening, exchange and remittance, and cross-border transfer, shall be subject to relevant regulations of the PBOC and the State Administration of Foreign Exchange.
As a matter of fact, since 2010, China has allowed monies raised from issuance of panda bonds to be used either domestically or aboard (whether remitted in RMB or in converted foreign currency). Besides, panda bonds for self-use are no longer subject to foreign debt quota. According to the Business Guidelines, subject to relevant laws and regulations and regulatory requirements, proceeds from issuance of panda bonds by foreign non-financial companies may be used either within or outside China.
They also allow the change of use of proceeds during the term of the panda bonds, provided that relevant procedures must be completed for the change. Recently a PBOC official also said that proceeds from panda bonds are not restricted to be used domestically or abroad. However, cases where proceeds are remitted aboard and converted to US dollars immediately after bond issuance may arouse the vigilance of regulators.
Accounting standards and audit requirements. It has been challenging for issuers to identify applicable accounting standards and audit requirements for their panda bonds. According to the previous regulations, financial reports of foreign panda bond issuers should be prepared in accordance with the PRC or equivalent accounting standards, and audited by accounting firms in the PRC or certified public accountants from countries or regions that have signed audit regulation or any other equivalent agreements with the PRC. Therefore, entities that do not prepare financial reports according to equivalent accounting standards have met strong headwinds in issuing panda bonds.
The measures have relaxed these restrictions in connection with accounting standards and audit requirements on panda bond issuers: in the case of panda bonds offered through private placement, the accounting standards to be adopted may be determined based on consultation between the foreign issuers and the targeted qualified institutional investors. In the case of publicly issued panda bonds, the foreign issuers should provide a statement regarding the accounting standards used for their financial reports. If they do not use the PRC or equivalent accounting standards, they should also disclose any significant differences between the accounting standards and/or provide a reconciliation statement. Foreign panda bond issuers should also have their financial reports audited by Chinese or qualified foreign accounting firms. Any reconciliation statements of the foreign issuers prepared in accordance with the Chinese Accounting Standards for Business Enterprises should be certified by Chinese accounting firms.
Credit rating. According to the previous regulations, before issuing any panda bonds, a foreign issuer must obtain a credit rating of “AA” or above from two credit rating agencies. According to the measures, panda bond issuers are no longer mandatorily required to obtain a credit rating. Instead, they require issuers making credit rating reports publicly available to have those reports issued by recognized rating agencies. It is worth noting that China currently allows qualified foreign rating agencies to provide credit rating services in the interbank bond market. Officially allowed to provide credit rating services in China on 28 January 2019, Standard & Poor’s is the first to enter China’s credit rating market as a wholly foreign-funded rating agency.
By outlining a policy framework for various foreign institutions to issue panda bonds in the interbank bond market, the measures make issuance of panda bonds more efficient, reduce communication costs, and help making the interbank bond market more attractive to panda bond issuers and investors. China is the third-largest bond market in the world. By the end of 2018, total outstanding bonds in China reached RMB86 trillion. At present, panda bonds account for less than 0.3% of that total amount. As further clarified and improved rules for panda bonds are introduced, the author believes that the panda bond market will benefit from greater prospects in the future.
Zhang Lei is a partner at Jingtian & Gongcheng
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