PRIMER: China’s new Panda bond rules
The PRC is focusing on internationalising the use of the renminbi
What are highlights of the new rules for issuing Panda bonds?
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.
"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 see this"
The rules provide clearer standards for foreign bond issuers on application procedures, disclosure requirements and issuance registration. 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 rolled out.
“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,” said Zhang.
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 challenges.
“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.
"The lack of clarity is due in part to China’s desire for money to be kept onshore"
Why are the rules being changed?
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 new rules?
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 Liu.
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 use.
“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 investors.
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