Rise in Panda Bonds Causes Dim Sum Bonds to Lose Traction
She Qingqi
/SOURCE : Yicai
Rise in Panda Bonds Causes Dim Sum Bonds to Lose Traction

(Yicai Global) Sept. 20 -- Panda bonds, those issued by foreign institutions in mainland China, are becoming increasingly common while dim sum bonds, yuan-denominated debt issued offshore in Hong Kong, are losing traction, insiders told Yicai Global.

Bank of China Hong Kong Ltd. issued CNY9 billion (USD1.37 billion) worth of 17 BOC Hong Kong Bond 01 bonds on the domestic interbank market two days ago, marking the largest single issue of panda bonds to date.

More than CNY200 billion panda bonds have been issued so far, including CNY60 billion this year to date. Offshore bonds have plunged to less than CNY10 billion over the same period, data from Wind Information shows.

Panda bonds are becoming increasingly recognized by overseas investors, and quality international issuers keep entering the market to raise money, Li Yanjie, head of bond underwriting at Bank of China Ltd. [SHA:601988;HKG:3988], told Yicai Global. For example, investors in the 17 BOC Hong Kong Bond 01 mainly include sovereign funds, commercial lenders, asset managers and securities houses.

It has become easier for international investors to gain access to the domestic market, Li said, adding that panda bonds are also advantageous in tax terms for foreign investors. A 4.4-percent coupon rate and stable yuan are other positive factors pulling them in.

Li believes the Bond Connect program, which connects the mainland bond market with Hong Kong, has made it easier for foreigners to invest in China, making panda bonds more attractive.

The sharp decline in dim sum bonds is down to two main reasons, according to Chen Jianheng and Zhang Jiqiang, analysts at China International Capital Corp. Ltd.

The first is the offshore yuan pool, which has become much smaller. Offshore yuan deposits in Hong Kong have fallen 47 percent to CNY534.7 billion (USD81.2 billion), from CNY1 trillion in 2014.

Secondly, onshore financing costs have fallen substantially in the past two years, taking away the cost advantage of financing offshore. Fundraising costs have been higher abroad than at home since December 2014 to domestic firms from issuing yuan bonds outside China and prompting many dim sum bond issuers to return to the onshore market to raise money.

"A large amount of dim sum bonds will be due next year and the following year," the analysts said. "If no new dim sum bonds are issued, we don't rule out the possibility that the market may gradually disappear."

Both bond types are innovative products, dim sum bonds were just rolled out earlier, Li said, adding that both are very price-sensitive and their issuance is market-driven.

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Keywords: FINANCING , Onshore Funding , Offshore Funding , Bond Connect , Panda Bonds , Dim Sum Bonds