China proposed landmark new rules last year aimed at allowing more foreign issuers to tap its vast bond market as well as giving domestic investors a chance to diversify away from its volatile stock market.
Issuers must provide financial statements for investors drawn up under International Financial Reporting Standards (IFRS). That effectively excludes U.S. firms – a setback to making the yuan a more international currency – and a frustration for debt bankers looking to develop this market.
Cheaper alternative funding options also mean there is little incentive now for U.S. firms to go to the expense of converting their accounts for the sake of a Panda bond issue.
“To regurgitate the entire financial report into a different accounting standard would not make any commercial sense for any issuer at this stage,” said Jane Jiang, head of Allen & Overy’s regulatory group based in Beijing. “This is a large stumbling block.”
The financial power of U.S. firms, which Standard & Poor’s figures show carry the highest outstanding amount of corporate debt in the world after China, is crucial to adding depth to new markets.
IFRS is a set of global accounting rules popular in Europe and parts of Asia. Most U.S. firms use Generally Accepted Accounting Principles (GAAP) for their bookkeeping.
“Europeans have more opportunities to tap the Panda bond market since they file under IFRS,” said Keith Pogson, a partner in EY. “An American issuer would need a sizeable amount of work to convert their U.S. GAAP accounts into IFRS to make the specific filing.”
China’s new rules for Panda bonds were drafted in the run up to a November decision by the International Monetary Fund to include the yuan in its basket of reserve currencies by October.
Apart from HSBC and Standard Chartered, South Korea and the Hong-Kong based unit of Bank of China (HK) have issued Panda bonds since the draft rules were issued.
Some issuers willing to test the onshore market are likely to be drawn from the offshore yuan debt market, said Warut Promboon, Hong Kong-based chief rating officer at Dagong rating agency, because onshore financing is cheaper.
For example, the offshore unit of Chinese property firm Country Garden sold a five-year Panda bond yielding 4.99 percent in December 2015. That was about 2 percentage points lower than the yield at the time on higher-rated Long for Properties 2018 offshore yuan bonds.
In February, developers Agile Property and Country Garden, both indicated plans to issue Panda bonds this year
The inaugural Panda bond was issued in 2005 by the International Finance Corp, a private sector arm of the World Bank, with a 1.13 billion yuan deal and it plans to be a frequent issuer.
Before the new rules were drafted last year, only global development institutions were allowed to issue Panda bonds with the proceeds useable in China only. Before the draft rules, only a handful of Panda bonds had been issued.
The new rules have not been formally endorsed, but have been put into practice. They allow for a broader base of private issuers, including corporations, and would allow for the bond proceeds to be transferred abroad.
The IFC estimates it will be a $50 billion market by 2020.
For now, ultra-low interest rates in Europe and Japan and simpler rules in those markets are discouraging yuan bond issuance more broadly.
“The cost to issue is higher in yuan than in euros. U.S. companies are currently going for euro debt issuance,” said Mark Cernicky, London-based managing director for global fixed income at Principal Global Investors.
And fundamentally, few American companies need to issue a bond in yuan, he said.
“There are very few American companies that have significant assets in yuan that a yuan bond would help them hedge,” he said.