IFR Asia – February 10, 2018

Panda rulebook on the horizon

„ Bonds Long-awaited guidance looms after initial approval from regulators

BY INA ZHOU

China has taken a big step

towards the publication of long-

awaited guidance on Panda

bond offerings, more than

two years after reopening the

market in September 2015.

The main regulator for

corporate bonds in the

interbank market said last

week a committee had granted

initial approval to a new rule

on non-financial Panda bonds,

raising hopes that the rulebook

is finally on the horizon.

The National Association of

Financial Market Institutional

Investors, which operates

under the People’s Bank of

China, said in a statement on

its website that its Bond Market

Professional Committee had

passed guidance on overseas

non-financial corporate debt

instruments, without giving

details.

Market participants said that

meant rules on Panda bonds

were imminent, as they now

only require a second approval

from another committee

at NAFMII and registration

with the PBoC before being

published. NAFMII oversees

corporate and sovereign Panda

bonds in China’s vast interbank

market.

Bankers have been waiting

for explicit guidance for the

Panda bond market for the

past two years. That did not

stop deals from coming to

market, but meant most issues

had to be reviewed on a case-

by-case basis, with little clarity

over the odds of regulatory

approval.

“We are very much looking

forward to the new rules after

going through ambiguity in

the past. We do hope it will

give us clear guidance”, said a

Beijing-based DCM banker with

a Chinese bank.

Bankers who have seen

NAFMII’s new rules said they

deal mainly with technical

issues such as the types of

documentation required

and the registration process,

and are roughly in line with

existing practice in the Panda

bond market.

NAFMII has not directly

addressed sensitive issues like

accounting systems and the use

of proceeds, but asked issuers

to meet certain requirements

set by Chinese regulators,

including the PBoC, these

bankers said.

The main sticking point

for regulators has been the

complexity of reconciling

foreign accounting and auditing

standards with their Chinese

equivalents.

Those issues are expected to

be addressed in new guidelines

from the PBoC, which could

come out before the release of

NAFMII’s rules, bankers said.

“This time, Panda bond rules,

from both NAFMII and PBoC,

look set for publication,” said

a Shanghai-based DCM banker.

He expected both sets of rules

to be announced after the

Lunar New Year, with the PBoC

likely to publish first.

According to sources, the

PBoC’s guidance is expected

to stipulate that financial

and corporate issuers using

accounting standards that

are not recognised by China’s

Ministry of Finance, such as

US GAAP, will need to provide

quantitative reconciliation or

qualitative restatement of their

financial reports for any public

offering of Panda bonds.

These issuers will also have

the option of adopting the

private placement format,

which does not require

reconciliation or restatement of

financial reports, sources said.

MORE DIVERSE ISSUERS

Bankers said the new rules

would potentially open Panda

bonds to a more diverse range

of issuers, but did not foresee

a jump in supply, given rising

onshore yields, additional costs

for some issuers and some

disclosure requirements with

which non-Chinese issuers

might not be comfortable –

for instance, updating their

financial statements quarterly

in China.

As the MoF only recognises

European and Hong Kong

accounting standards, issuers

using other norms will face

additional costs to adjust

their financial statements

for a public offering. Private

placements usually required

a higher liquidity premium,

bankers said.

Sovereigns, supranationals

and agencies are not subject

to the rules on accounting

treatment for public offerings,

sources said.

In the past three years, some

foreign names have tested

the Panda bond market, but

offshore-incorporated Chinese

issuers have been the main

issuers. Bankers do not expect

that dynamic to change soon.

Excluding sovereigns, only

two issuers have launched

public offerings of Panda bonds

without Hong Kong accounting

standards. To win approval,

National Bank of Canada

and Maybank had to provide

qualitative explanations of

accounting differences.

In the private placement

segment, Daimler, French

water-management company

Veolia Environnement, Russian

aluminium producer Rusal, and

Japanese lenders Bank of Tokyo-

Mitsubishi UFJ and Mizuho

Bank are the only issuers

not following Hong Kong

accounting standards.

According to United Credit

Ratings, issues of Panda bonds

in the interbank and exchange-

trade markets fell 40% in 2017

to Rmb71.7bn (US$11.3bn) „

News

6 International Financing Review Asia February 10 2018