What are highlights of the new rules for issuing
The People’s Bank of China (PBoC) and the
Ministry of Finance jointly issued regulations on September 25
2018 to promote bond issuances by foreign institutions in the
PRC interbank bond market. Renminbi- denominated bonds, also
known as Panda bonds, issued by foreign institutions, including
foreign governments, overseas financial institutions and
non-financial companies will be covered by the regulations.
The rules provide clearer standards for foreign bond issuers on
application procedures, disclosure requirements and issuance
"Issuers with AAA ratings in
international markets have entered the Chinese market
but were given the same rating as a domestic issuer
that only got a BBB rating in the international market
- international issuers weren’t happy to
One of the areas the rules provide more clarification on is
which regulator issuers need to go. According to Ricco Zhang,
director, Asia Pacific, International Capital Market
Association, foreign issuers found the system lacked clarity
when it came to which regulator gave approvals. Going forward,
the PBoC overseeing issuances from foreign institutions and the
National Association of Financial Market Institutional
Investors (NAFMII) for everyone else.
An express framework, similar to the schedule B securities
practice of the US’ Securities and Exchange
Commission (SEC) for issuing sovereign debt, has also been
"By formalising this framework, debt issuers can register
with NAFMII for a shelf regulation programme to have multiple
issuances pre-approved," said
Connie Heng, partner at Clifford Chance.
Like a medium-term note (MTN) programme rather than having
each issuance approved individually, a quota is provided to an
issuer to issue multiple times. However, issuers must meet
certain prerequisites. For instance, the issuer must have
substantive experience issuing bonds overseas. Those with
previous experience issuing Panda bonds and which have provided
disclosure in China for more than a year will also be
encouraged. Overall, the more seasoned the issuer is, the
easier it will be to get approval for the express framework. In
addition to getting pre-approval, issuers can have the
flexibility to see how the market is and how much of the quota
they would like to use up rather than to have to go back to get
more approvals when they want more issuances.
Another welcome change is that issuers no longer need a
domestic rating agency to rate their proposed bond issuances in
the application process.
Clifford Chance’s Kimi Liu said that although
issuers can choose to include a domestic rating
agency’s rating of the issuance in the application
process, it is entirely voluntary.
Zhang said that for onshore bond issuances by domestic
issuers, ratings from domestic rating agencies are required.
But under the new rules, foreign issuers no longer need to
provide ratings for their issuances - the rules are now more
market driven and friendly to international issuers and are
consistent with the international market practice.
"In the past, foreign issuers with AAA ratings in
international markets, for instance, have entered the Chinese
market but were given the same rating as a domestic issuer that
only got a BBB rating in the international market and the
international issuers weren’t happy to see this,"
One aspect issuers need to pay attention to is that for
financial statements that do not follow the PRC’s
generally accepted accounting principles (GAPP), issuers need
to include an explanation on the material differences between
the accounting principles used when compared to PRC GAPP. For
certain jurisdictions with accounting procedures recognised by
the PRC authorities, such as the Hong Kong financial reporting
standards (HKFRS), there won’t be issues but some
issuers using other accounting procedures might encounter
"In the past, the requirement to produce PRC GAAP accounts
used to be a hurdle for issuers who prepared their financial
statements using a different accounting standard. However, the
regulations now allow issuers to get around the issue through
disclosure of material differences," said Heng.
Why are the rules being changed?
"The lack of clarity is due
in part to China’s desire for money to be
The rules are being changed as part of China’s
aim to speed up the opening up of the financial markets and to
expand the internationalisation of the renminbi.
What challenges remain for issuers when applying the
The issue of whether funds can be brought out of China from
Panda bond issuances remains unclear and will still be decided
on a case-by-case basis.
"There is no clear rule on the use of proceeds," said
The lack of clarity is due in part to China’s
desire for money to be kept onshore. Issuers that are keeping
proceeds onshore to be used for onshore activity will be
encouraged as opposed to those that are remitting for overseas
"The uncertainty of the rules means that it is advantageous
for issuers to engage with regulators earlier in the
application process," Liu added.
Zhang added that more rules may be expected from the State
Administration of Foreign Exchange on the use of proceeds of
Panda bonds. He also expects that by the end of 2018, rules for
Panda bonds on the exchange-traded market will also follow and
one of the selling points for such market is to target retail
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