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More panda bonds than ever are being issued, but problems surrounding them mean their range of appeal outside red-chip companies is limited.
In 2005 the Chinese government introduced panda bonds to liberalise its capital market, offer foreign investors an opportunity to invest in China and help local Chinese to diversify their investments.
There are in general two main Panda bonds markets in China: the interbank market, which is an over-the-counter market regulated by the National Association of Financial Market Institutional Investors (NAMFII); and the exchange market (the Shanghai and Shenzhen stock exchanges), which is regulated by the China Securities Regulatory Commission (CSRC). Panda bonds are debt instruments denominated in RMB and issued by foreign institutions in China for domestic consumption.
Panda bonds can be either a public or private offering. With more stringent controls imposed by the exchange, it is now becoming more popular to seek trading of panda bonds on the interbank bond market targeting institutional investors. The period of the bonds varies from one year (commercial paper) to 3-5 years (medium-term note). The coupon rate is around 5 per cent, which is lower than the bank borrowing rate and is attractive to companies in need of RMB financing.
Unlike high-yield US dollar or ‘dim sum’ bonds, panda bonds are generally unsecured. The credibility of the issuers is supported by personal undertakings from directors and senior management of the issuers.
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Panda bonds: not yet the future of the debt market
This article was first published in The Lawyer, June 2016