22 October 2018
The Chinese currency may weaken further against the US dollar this year. Photo: Bloomberg
The Chinese currency may weaken further against the US dollar this year. Photo: Bloomberg

Panda bonds seen enjoying robust take-up

So-called “panda bonds” allow foreign issuers to sell yuan-denominated bonds in the onshore debt market.

The market was launched in October 2005 when the International Finance Corp. and the Asian Development Bank issued bonds worth 1.13 billion yuan (US$210 billion) and 1 billion yuan, respectively.

However, the market has developed fairly slowly compared with the offshore renminbi bond market which started two years later.

Over the past decade, there have been only five issuances of panda bonds but the market is expected to post strong growth this year.

Their financing costs will drop further.

The People’s Bank of China (PBoC) has cut interest rates several times and reduced the reserve requirement ratio (RRR) since late last year.

As a result, interest rates in China’s money market has been falling. Also, AAA-rated mainland bonds have seen their yields decline.

China still faces huge downward pressure on the economy.

In the first four months, fixed-asset investment rose 12 percent from a year earlier and inflation expanded 1.5 percent in April from the previous year.

Meanwhile, M2 supply grew 10.1 percent.

In order to offset the economic slowdown, Beijing has been ramping up monetary easing measures.

The PBoC is likely to cut interest rates by another 0.23 percent and RRR by a further 1.5 percent.

Also, it is expected to use other monetary tools such as pledged supplementary lending, medium-term lending facility and standing lending facility.

Local government bonds will be accepted as collateral for loans which means local government debt issues will not drain capital from the bond market.

The impact of market reform on interest rates and on IPOs will be manageable.

As a result, bond yields in China’s onshore market could be headed for a further fall.

By contrast, yields on medium and long-term bonds in the US and Europe have started to pick up.

Yields on 10-year US government bonds have rebounded to 2.3 percent from 1.8 percent. Those for 10-year German bonds have risen to 0.7 percent from 0.05 percent.

The US is on track to normalize interest rates, making yields likely to return to normal levels.

And the yield gap between China and developed markets is also expected to narrow.

Onshore yuan bond yields may continue to lag offshore markets. The offshore yuan bond market has seen a spike in yields this year.

There is a limited chance for a sharp decline in offshore yields in the coming months.

Meanwhile, the Chinese currency may weaken further against the US dollar amid an impending US rate hike, China’s interest rate cut and capital outflow.

There will be limited growth in the offshore yuan pool from trading.

The expansion of Shanghai-Hong Kong Stock Connect and RQFII (renminbi qualified foreign institutional investor) scheme will speed up capital inflow.

As a result, asset prices and tight supply are set to ease, especially amid the push for mutual recognition of funds and the upcoming Shenzhen stock linkage.

The domestic and foreign bond financing comparative index was minus 135.77 points at the end of March. It is expected to hover in negative territory in the months ahead.

Chinese regulators will support the panda bond market by easing restrictions and simplifying approval procedures.

Developing nations in the “One Belt One Road” corridor will be able to issue panda bonds to raise funds.

The ongoing financial reform will reduce hedging costs and beef up the attractiveness of these bonds for foreign companies and institutions.

This article appeared in the Hong Kong Economic Journal on June 3.

Translation by Julie Zhu

[Chinese version中文版]

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Economist at Bank of China (Hong Kong)

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