Foreign corporates still stuck in the policy quagmire of China’s onshore bond market
Foreign issuers in the offshore “dim sum” market will see 364 billion yuan worth of debt issued in the past mature this year, but the corporates behind these instruments face the option of having to refinance the bonds from the market or dig deep into their own pockets to repay investors.
The peaking of the current wave of maturing debt is happening just as yuan in the offshore market has become ever harder to come by and more expensive to attain from either banks or offshore bond investors. This is the consequence of moves by the People’s Bank of China to tighten offshore yuan market liquidity, first by requiring 20 per cent margins over swap instruments and then by imposing rolling reserve margins over banks’ offshore yuan cash.Total offshore yuan deposits in Hong Kong have tanked from their 1 trillion yuan peak to 723 billion yuan, according to the Hong Kong Monetary Authority’s latest available figures at end of April.
The full opening of the onshore interbank bond market to overseas institutional investors this year, some 11 years after foreign institutional investments were allowed in, should on paper be the perfect opportunity for issuers to tap the domestic pool of yuan liquidity refinancing which, at 47 trillion yuan, is said to be the largest yuan pool in the world.
But in reality, even motivated sovereign issuers, much less willing corporates, are still finding it difficult to get on board with the onshore market.
Behind the potential, mainland regulators have yet to formalise the framework for foreign issuers to access the domestic bond market. Every issuance is a case-by-case haggle for approval from multiple regulators who are still working on trial rules basis. That’s why, despite the policy relaxation directed at foreign issuers’ last summer, only a handful of onshore issuances have taken place to date.
“The pipeline is long. We have people sitting in Europe now. There is huge interests from issuers,” said Carmen Ling, global head of RMB solutions at Standard Chartered.
“We understand that [the regulators] are working on that. The [PBOC] and [the Ministry of Finance] are still trying to find the best way.”
Christine Chen, partner at law firm King & Wood Mallesons said: “There are a few technical issues that need to be addressed before the market can really take off. We don’t find they are significantly affecting willingness to do the deals.”
Whether technical or not, experts say the top stumbling blocks concern three issues: government insistence on using local rating agencies, local accounting practises, and local auditing providers. The rating agencies prefer to give final say to indigenous Chinese providers, or at least show a semblance of control over established foreign ones.
“As far as MOF is concerned, it’s the matter of auditor oversight. They want to find the best way to supervise auditors from outside of China. It’s still a work in progress. The market has to wait,” Ling said.
Chen added: “The financial statements of the issuers need to be prepared under [mainland accounting standards] or standards that are equivalent. The other thing is auditing: financial statements need to be audited by PRC auditors or auditors from jurisdictions that have memorandum of understanding with the Chinese MOF on auditor oversight. So far only Hong Kong has that.
“Even for European issuers who have accounting standards that can satisfy the regulators’ requirements, they can’t really use their current auditors and just present their books. The [process of getting reaudited by a local] would require a significant amount of time and of course money. That needs to be addressed properly before the market can take off.”
In defence, Ariel Yang, general manager, international business at China’s oldest credit rating agency China Chenxin International Credit Rating, said that local agencies know the China market better.
“We have our own independent framework and methodology…accumulated from more than two decades of experience. The Chinese onshore investors are more familiar with the ratings from local rating agencies. Our rating is very key to the pricing of the bond,” she said.
For the past decade the big three ratings agencies – S&P, Moody’s and Fitch – have been lobbying for bigger roles to play in participating in the onshore market, only to be told that it is considered a restricted activity by Beijing.
“To be able to admit the big three, to use their reports directly in China, you actually give them market access cross-border. That’s not consistent with the current investment policy administered by [the Ministry of Commerce]. So that’s why there is going to be dialogue going between different authorities,” Chen said.
And it is not solely a panda bond issue. “It is related to the overall investment policy: the opening up of certain service sectors to foreigners and whether cross-border provision of such services would be allowed,” Chen said. “Significant efforts need to be made to have the overall infrastructure able to align, to make the market develop.”
If the challenges could be resolved, the Asia Securities Industry & Financial Markets Association believes foreign issuance in the onshore panda yuan bond market could one day rival that of Japan’s “samurai” market, the segment of the market for foreign issues in the yen bond market.
“Of course, in the long run, we think we should introduce international practises into the China bond market,” Chen said.
In the mean time, the most attractive of blue-chip issuers won’t be holding their breath. A chief finance officer at a major German multinational with cross-border balance sheet flows told the Post: “People will just go back to dollars and euro after the stop-start.”