Panda bonds come of age: onshore renminbi funding for European multinationals

For most of the past decade, a European multinational funding its Chinese subsidiaries had two realistic choices: lend to them from the parent, accepting the currency mismatch and the cross-border registration, or borrow locally from banks. Issuing renminbi bonds onshore — the instruments the market calls panda bonds — was possible but rare, slow and restricted in what could be done with the proceeds.

That has changed. Issuance by foreign borrowers has grown steadily, European corporates and financial institutions are now a familiar presence, and the process for repeat issuers has been shortened materially. From a debt capital markets seat that arranges euro funding for Chinese names, the symmetry is notable: the same logic that brings Chinese issuers to the euro market is now taking European issuers onshore.

The case: currency match and cost

The first argument is the obvious one. A Chinese subsidiary earning renminbi and funded in renminbi has no translation exposure on its debt. The second argument has been the more persuasive recently: with onshore policy rates low and the domestic investor base seeking high-quality foreign names, all-in onshore funding costs for well-rated European issuers have compared favourably with euro issuance swapped into renminbi — and without the cross-currency basis that makes the swapped alternative hard to price in advance.

Neither argument is permanent. The cost comparison depends on relative rates and on the basis, both of which move. The currency-match argument is structural, and it is the one that should decide whether a group builds the capability, with cost deciding when to use it.

Build the onshore issuance capability for the currency match. Use it when the cost comparison favours it. Groups that do it the other way round arrive at the market when the window has closed.

China Everbright Bank Europe — Debt Capital Markets

What is different about the exercise

European issuers used to the euro market find three things unfamiliar. The first is the domestic rating: a rating from a Chinese agency on the Chinese scale, which is a separate exercise from the international ratings the group holds and calibrates differently. The second is the role of the domestic lead manager and the registration process with the interbank market authorities, which for a first-time issuer takes longer than a euro programme update. The third is the investor base: predominantly domestic banks and asset managers, with preferences on tenor and structure that reflect their own balance sheets rather than European conventions.

• Start the domestic rating and registration work well ahead of the funding need; the first transaction sets up the ones that follow.
• Decide use of proceeds early — onshore working capital, refinancing local bank debt, or remittance offshore — because it shapes the documentation.
• Expect domestic investors to prefer shorter tenors than a European issuer would choose and price accordingly.
• Coordinate accounting and tax treatment of the onshore liability with the group’s existing intercompany funding.

Proceeds and repatriation

The question every treasurer asks is whether proceeds can leave China. The answer has widened from a firm no to a qualified yes: remittance offshore is possible within the registration framework, subject to conditions that vary with the issuer and the purpose. For most European groups, however, the better use of onshore proceeds is onshore — refinancing local bank debt or funding local growth — with intercompany funding reduced correspondingly. That achieves the group-level effect without testing the boundaries of the framework.

Our debt capital markets team works with the group’s onshore franchise on exactly these transactions, from domestic rating through registration to distribution. The advice we give European issuers mirrors what we tell Chinese issuers coming to the euro market: the first deal is an investment in capability, and the return comes from the second and third.