May 2016 Panda Bonds Overview and current development in the interbank market
What you need to know As at the end of February 2016, the issuers in the interbank market were mainly international development agencies, sovereign governments, financial institutions and non-financial companies. RMB proceeds from Panda Bond issuance by international development agencies may be remitted overseas and/or converted into foreign currency with approval from SAFE. Overview A Panda Bond is a Renminbi (RMB)-denominated bond issued in Mainland China. According to international practice, a foreign financial institution always selects the country s mascot as the name when issuing local currency-denominated bonds. As such, China s Ministry of Finance named the bonds Panda Bonds. The issuer of a Panda Bond, always a foreign entity, can be either a financial or non-financial institution. A Panda Bond is similar to Japan s Samurai Bond or the US s Yankee Bond. The first two Panda Bonds were issued in October 2005, by the International Finance Corporation (IFC) and the Asian Development Bank (ADB). New regulations are still being codified however, several practices have been established to meet regulator expectations : To prepare the financial reports in accordance with Chinese accounting standards for enterprises unless the accounting standards currently used by such issuers have been recognized as equivalent to Chinese accounting standards by the Ministry of Finance (MOF) To have the financial reports audited by an appropriately qualified accounting firm in China (If the audit firm is not registered in China, the issuer may need approval from the regulators allowing the overseas audit firm to be involved in the transaction.) 2 Panda Bonds
Issuance of Panda Bonds In 2014, Daimler AG sold a RMB500-million bond to Chinese investors, marking the first foreign non-financial corporate bond issuance in China s domestic market. It indicated that the domestic financing channel for foreign non-financial enterprises had been officially established in the China bond market. As at the end of February 2016, the approved/registered program for issuing Panda Bonds in the interbank market amounted to RMB54 billion. Panda Bonds totaling RMB20.5 billion have been issued so far in 15 offerings. Reasons for issuing Panda Bonds Offer a way for financial and nonfinancial enterprises to diversify their investor base and gain a foothold in China. Provide a vehicle for enterprises wanting to fund an onshore subsidiary or to do more business in China. Type of issuer Approved/ registered program (RMB billion) Amount issued (RMB billion) Number of offerings Gain publicity and marketing advantages, a key attraction for first-movers International development agencies ADB 2 2 2 IFC 2 2 2 Advantages of issuing Panda Bonds in the interbank market Sovereign and quasi-sovereign Financial institutions Non-financial companies Republic of Korea Province of British Columbia, Canada 3 3 1 6 3 1 HSBC HK 1 1 1 Bank of China HK Standard Chartered HK 10 1 1 2 1 1 Daimler 25 7 5 China Merchants Group (HK) 3 0.5 1 TOTAL 54 20.5 15 Source: National Association of Financial Market Institutional Investors ( NAFMII) In 2010, China s People s Bank of China (PBOC), Ministry of Finance (MOF), National Development and Reform Commission (NDRC), and the China Securities Regulatory Commission (CSRC) jointly issued amendments to the Panda Bond regulations, namely, the Provisional Administrative Rules on the Issuance of RMB Bonds by International Development Institutions. The new regulations expanded the scope of qualified issuers and the use of RMB proceeds, particularly with significant liberalization on the remittance out of Mainland China of RMB proceeds from Panda Bonds. China s bond market is the largest among the emerging economies in Asia, and comprises two main bond markets: the interbank bond market, and the stock exchange markets in Shanghai and Shenzhen. The interbank bond market is China s over-the-counter (OTC) market. Valued at about USD7 trillion, China s interbank bond market is currently the third largest in the world, after the US and Japan. There are several advantages of issuing Panda Bonds in the interbank market: The interbank bond market accounts for 80% of China s overall bond market, with diverse participants, high liquidity, a wide range of products, and flexible innovative mechanisms The numerous, multi-tier professional participants in the interbank bond market include commercial banks, securities companies, accounting firms, law firms, and rating agencies. The interbank market integrates the foreign exchange, money, and bond markets; and thus it is more able to timely follow policies, and maintain close communication with regulators Panda Bonds 3
The steps to make a registered offering of Panda Bonds in the interbank market Public offerings 1 2 Application submittal The lead underwriter prepares and submits registration documents to NAFMII based on the standard procedures. Preview and feedback NAFMII previews the completeness of proposed disclosures of the registration documents, and provides feedback within 10 working days. 3 Registration meeting NAFMII selects experts to attend the review, issue an independent opinion, and make a decision on the application. 4 5 Document issuance NAFMII issues Notice of Acceptance for Registration. Issuers can then conduct a registered offering of Panda Bonds in the interbank market. Bond offering Upon receipt of the Notice, companies can start working on the initial offering of Panda Bonds. Issuance of non-financial enterprises Public offerings Key documents Registration report, prospectus, recommendation letter from lead underwriter, overseas and domestic legal opinions, financial report, credit rating report, and other documents as required by NAFMII. Language of disclosure All disclosure documents at the registered offering stage must be drafted in simplified Chinese or a complete Chinese translation attached. Chinese translations of the post-issuance documents dictated by NAFMII must also be provided. Accounting and auditing The accounting and auditing standards should comply with the requirements of the Chinese regulatory authorities. Credit rating Credit rating(s) must be obtained from at least one rating agency registered in China and authorized by the supervisory authorities of the interbank market. Legal opinions Overseas law firms qualified to practice under the relevant jurisdictions shall provide legal opinions on overseas matters; domestic law firms shall provide legal opinions on domestic matters. All law firms must take responsibility for their legal opinions. Funds raised Funds raised can be used within or outside of China. Fund applications must comply with Chinese laws and regulations, and the rules of the relevant regulatory authorities. Private placements Private placements For private placements, the above procedures apply except that Steps 2 and 3 are combined into one: NAFMII verifies and reviews the registration documents within two working days upon receipt of materials, and completes the review and provides feedback in three working days. The requirements for private placements are similar, except it is more relaxed in the selection of language and ongoing information disclosure, as issuers can agree the specific criteria with private placement investors. Accounting and auditing standards can also be determined by the issuers and investors. The use of accounting standards that have converged with the International Financial Reporting Standards (IFRS) is encouraged. Source: National Association of Financial Market Institutional Investors ( NAFMII) 4 Panda Bonds
Regulatory concerns Key challenges for potential issuers NAFMII (PBOC in certain circumstances) will review the issuer s investment circular. These are the currently acceptable financial reporting frameworks: Accounting standards: Chinese Accounting Standards (CASs), Hong Kong Financial Reporting Standards (HKFRSs), or International Financial Reporting Standards (IFRSs) Auditing standards under Chinese Standards on Auditing (CSA), and Hong Kong Standards on Auditing (HKSA) Audit report issued by Mainland China or Hong Kong Certified Public Accountants (CPA) The circular must be written in Chinese translation may be an issue. Concerns may arise if overseas entities adopt an accounting framework which is not IFRSs and/or its audit firm is not registered in Mainland China or Hong Kong. Issuers must provide past three years of financial statements under the CASs it may involve a sizeable amount of work to convert non-cas accounts into CAS to make the specific filing. However, the MOF is authorized to grant an exemption to use CASs where the accounting standards adopted are accepted by MOF as being equivalent to CASs. Circular and disclosure documents are to be drafted in Chinese; therefore, the translation needs careful planning. A credit rating must be obtained from at least one domestic rating agency. Panda Bonds rated by a global rating agency may have a different rating to those from a domestic rating agency. The regulations surrounding Panda Bond issuance are evolving, and discussions between interested parties and the regulators are continuing. If you are interested about the latest developments please feel free to contact us. Panda Bonds 5
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For more information, please contact: Financial Services Other contacts Jack Chan Vivien Zhang Managing Partner Financial Services, Greater China Tel: +86 10 5815 3340 Tel: +86 10 5815 4057 Email: vivien.zhang@cn.ey.com Email: jack.chan@hk.ey.com EY Hua Ming LLP (Beijing) Geoffrey Choi Alfred Yin FSO Assurance Leader Partner - Assurance Greater China Tel: +86 21 2228 2152 Tel: +86 10 5815 3222 Email: alfred.yin@cn.ey.com Email: geoffrey.choi@cn.ey.com EY Hua Ming LLP (Shanghai) Kelvin Leung William Huang Banking and Capital Market Leader Greater China Tel: +86 20 2881 2688 Tel: +86 10 5815 3305 Email: william.huang@cn.ey.com Email: kelvin.leung@cn.ey.com EY Hua Ming LLP (Guangzhou) HuifongLee Tommy Tsang Partner Financial Services Tel: +86 10 5815 3970 Tel: +852 2846 9776 Email: huifong.lee@cn.ey.com Email: tommy.tsang@hk.ey.com EY Hua Ming LLP (Beijing) EY Hong Kong Professional Practice Group Clare Wong Tel: +86 755 2502 8013 Email: clare.wong@cn.ey.com EY Hua Ming LLP (Shenzhen) Tony CF Lin Tel: +86 21 2228 2766 Email: tony-cf.lin@cn.ey.com EY Hua Ming LLP (Shanghai) Panda Bonds 7
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