InTheKnow: The black and white of panda bonds

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on April 29, 2019 - May 05, 2019.
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Panda bonds are renminbi-denominated bonds offered by non-Chinese issuers. They are sold to China’s onshore market by companies that are based elsewhere. According to news service Global Capital, these include red chips — Chinese companies that are listed and incorporated outside China.

Companies typically do this when interest rates in China are low relative to the foreign corporation’s domestic rates, which lowers their interest expense. Investors in China are insulated from currency exchange rate risk as the bonds are issued in China’s domestic currency.

Non-Chinese companies usually issue these bonds when they have plans to expand operations in China. Investors find these bonds attractive when they wish to diversify their portfolios geographically.

In February, China Construction Bank proposed to issue Panda bonds in China, the proceeds of which will be used to finance the East Coast Rail Link in Malaysia. This would be a way for the Chinese government to spread its risk. Previously, it was talking about an outright bilateral loan from China to Malaysia.

In March last year, the Philippines government became the first country in Asean to issue a Panda bond of RMB1.46 billion (RM902 million), with a 5% coupon rate. It received RMB9.2 billion in bids, representing an oversubscription rate of 6.3 times — the highest to date.

Through debt paper with low coupon rates, Malaysia may refinance some of the existing high-interest loans, which would then reduce the country’s whopping interest expenses. According to Budget 2019, the country’s debt service charges are expected to rise from RM30.88 billion last year to RM33 billion, or 12.6% of public revenue, this year.

On March 13, United Overseas Bank became the second Southeast Asian financial institution to issue such debt paper when it issued Singapore’s first Panda bond. The three-year RMB2 billion onshore bond is said to have one of the lowest coupon rates of all Panda bonds issued to date at 3.49%.

In 2017, Malayan Banking Bhd (Maybank) issued a RMB1 billion Panda bond under China’s Bond Connect, a scheme that links the country’s bond market with foreign investors. This followed the People’s Bank of China’s approval to issue renminbi bonds of up to RMB6 billion in its interbank bond market.


How did Panda bond come about?

International Finance Corp (IFC), a member of the World Bank group, and the Asian Development Bank (ADB) issued the first two Panda bonds in October 2005, on the same day. These marked the opening of the Chinese renminbi bond market to international financial institutions, which helped deepen the overall capital markets.

IFC’s RMB1.13 billion 10-year bond, with a 3.4% coupon rate, was placed with institutional investors in the national interbank market. IFC stated that it would use the proceeds from the bond to finance three Chinese companies — Guangzhou Development Industry Holdings, Chindex International’s United Family Hospitals and Anhui Conch Cement Co Ltd — according to its press release.

ADB priced its Panda bond, which would mature in October 2015, at a principal amount of RMB1 billion. Priced at par, the bond carried an annual coupon of 3.34%.