The following article is published in collaboration with IFR Asia.
China’s onshore bond market took another great leap forward in the first half of 2020 as regulators simplified rules and endorsed debt capital issuance as a response to the Covid-19 crisis.
Onshore renminbi bond sales jumped to a record in the first six months of the year, fuelled by easier monetary policy and a spike in corporate borrowing to weather the effects of the coronavirus outbreak.
International issuers and investors are benefiting, too.
Overseas issuers have sold over USD5.6 billion of Panda bonds this year, versus USD6.7 billion in the whole of 2019, according to Refinitiv data.
Global fund managers have greater access to onshore renminbi bonds than ever before, at a time when China’s 10-year government bond yield of 3.13 per cent looks incredibly compelling versus 0.6 per cent on US Treasuries and a negative return in euros.
International participants still account for a fraction of onshore volumes, but they are punching above their weight when it comes to influencing policy. From the settlement changes required by global index providers to a registration process for Panda bond issues, China’s regulators have aligned the domestic markets more closely with global standards.
“It is a long-held ambition of Chinese authorities to facilitate greater investor access into the local market to broaden diversity,” said Timothy Yip, head of debt capital markets at HSBC Bank (China).
“Apart from continued successes in Panda bonds, a healthy mix of international investors going onshore and domestic investors going offshore would encourage the onshore-offshore markets to be more congruent in the future.”
Regulatory developments are moving ahead quickly, and market participants say the measures put in place this year will help deepen the renminbi bond market for years to come.
After streamlining issuance requirements in the first quarter, the Central Bank (PBoC) and securities regulator (CSRC) in July announced plans to harmonise infrastructure related to the interbank and exchange bond markets. Ultimately, that will reduce the barriers of entry for international investors.
There are other signs of maturity, too. The onshore market has navigated recent defaults without major disruption, in a sign that investors are differentiating between good and bad credits – a key step towards market-driven pricing.
Standard practices in the global markets have also gained traction onshore in recent months. As well as the gradual adoption of cross-default clauses and financial covenants – unheard of on onshore renminbi bonds until only a few years ago – this year has seen the introduction of liability management technologies such as bond exchanges and consent solicitation, which aim to improve transparency around debt restructurings.
“While the local market has a comparable low default history, the risk of moral hazard is expected to recede as more credit events occur – which is all part and parcel of the transition to a fully-fledged bond market,” said Yip. “Progress is certainly being made on that front, and liability management exercises are expected to become a more prominent feature.”
Cross-border connections are growing fast. Onshore Chinese government bonds now feature in leading bond indexes compiled by Bloomberg Barclays and JP Morgan - a phased-in inclusion into the latter’s GBI-EM index began in February.
After the removal of quotas for some foreign investors in the interbank market in 2016 and the launch of the Bond Connect trading link with Hong Kong in 2017, key steps in 2019 and 2020 include the arrival of global credit rating agencies and greater underwriting capabilities for foreign banks.
“Undoubtedly there has been the fast emergence of a relatively level playing field within the domestic Chinese markets, with the regulators comfortable to allow foreign wholly-owned subsidies or joint ventures for securities trading and underwriting,” said Ricco Zhang, director Asia Pacific of the International Capital Market Association in Hong Kong.
Recent months have also seen the arrival of major international participants, in a sign of China’s continued commitment to deepening the domestic market. BlackRock’s onshore investment management company received a full onshore licence in August, a first for an international fund manager, while Fitch Ratings entered the Chinese domestic market in May via Fitch (China) Bohua Credit Ratings.
"The opening up of China's domestic debt market is happening relatively rapidly. It's not just the ratings agencies and foreign investment banks, but the likes of Mastercard and other wholly-owned subsidiaries of foreign financial companies which are moving in,” Kwong Li, Head of APAC Business Management, Fitch Ratings.
"It will take time for the full adoption of international standards but certain dynamics such as the introduction of Bond Connect have helped broaden the market and encourage best practice,” said Fitch’s Kwong.
Fitch, together with rival S&P, which won a China licence in 2019, are aiming to bring an international perspective to a market that can be hard for global issuers and investors to understand.
“We believe there is a general recognition that international CRAs can play a pivotal role in making that convergence a smooth one by providing independent credit opinions in China based upon internationally recognized standards,” said Hongshan Chen, president & CEO of S&P Global (China) Ratings.
International issuers are also bringing some global flavour to the Chinese market.
Standout cross-border issues this year have included a landmark debut local currency transaction for the Asian Infrastructure Investment Bank, the first international Triple A issuer to tap the Chinese market under streamlined Panda bond rules. Sumitomo Mitsui Banking Corp also sold its first Panda bond in June after obtaining a AAA rating from S&P Global China. Both deals were led by HSBC and were placed to both onshore and offshore buyers.
Multinational corporate issuers have also been active, notably BMW, which set up a private placement programme in 2019 and has become a regular onshore renminbi issuer.
“Foreign issuers are willing to invest time, efforts and resources into the Panda bond option – in the context that Onshore China is currently the World’s second largest bond market and represents enormous potential. This is signified in the uptick in aggregate Panda bond issuance volumes in 2020,” said Yip at HSBC.
The liquidity and relative pricing available onshore suggest this investment can pay off handsomely. For many issuers, the onshore market offers a cheaper and easier way of funding their Chinese operations than the international arena.
Chinese banks are a case in point, issuing RMB634.6 billion (USD93.6 billion) of Tier 1 and Tier 2 capital instruments in the onshore market in the first eight months of 2020, compared to just RMB33.7 billion offshore, according to China Central Depository & Clearing data.
“In general, pricings in onshore RMB have been more competitive compared to offshore,” said Yip. “With continued support from the Chinese regulators for this product, the Panda bond market provides a great solution for credits aspiring to hedge their RMB assets with liabilities.”