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Challenges Exist as Panda Bonds Expected to Boom

Discussion in 'China & Far East' started by Aepsilons, Jan 27, 2016.

  1. Aepsilons

    Aepsilons ELITE MEMBER

    May 29, 2014
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    Kazuhiro Nomoto, The Japan Bank for International Cooperation's representative in China, takes an interview with CRI on Monday, January 25, 2016 in Beijing. [Photo: CRIENGLISH.com]

    Panda bonds - Renminbi-denominated bonds from a non-Chinese issuer and sold here in China - are set for a big expansion.

    Last year, overseas institutions issued Panda Bonds worth a total of 15.5 billion yuan and it's estimated that the market will surpass 320 billion yuan in the next five years as China pushes the further internationalization of its currency.

    But a forum held in Beijing to discuss Panda Bonds has heard that there's still much to do to secure their healthy development.

    Against the backdrop of Panda Bonds expansion, challenges are emerging: technical issues are still hindering international institutions from entering the market; and confusion exists when it comes to which rating scale, international or domestic, should be applied to the Bonds?

    Kazuhiro Nomoto, The Japan Bank for International Cooperation's representative in China, attended the forum.

    "I think the biggest obstacle for many Japanese issuers is that they require the accounting standard either International Financial Reporting Standard or Chinese standard. Many Japanese companies either use Japanese accounting standard or US standard. This is very difficult because to change the accounting standard, it takes year, so much efforts, to disclose financial statement in different accounting manners. So that is big cost."

    Since the first issuance of Panda Bonds in 2005, industry observers have repeatedly called on the government to adjust its accounting and rating standards to conform to those of other countries before accelerating the opening of China's bond market.

    There are some analysts who feel ratings relating to Panda Bonds are still not up to international standards.

    Simon Choi, CEO of Dagong Hong Kong, a subsidiary of Dagong Global Credit Rating, believes some ratings are too high.

    "Of six issuances in 2015, all of them are AAA. Why the same institution was issued AAA in China but a lower rating by their joint venture parent overseas? This is a question we need to answer."

    Choi added that, as an international financial product, Panda Bonds should be put on an international rating scale. But some agencies simply applied the domestic scale to them. Distorted ratings, he says, will increase financial risks.

    "All of those really have negative impact on the bond pricing. Moreover international investors would not be comfortable in investing these products because the ratings do not reflect their inherent risks. This will definitely have a negative impact to RMB and its process of internationalization."

    Along with other participants at the forum, Choi called on regulators to require credit rating agencies to adopt an international rating scale for Panda Bonds, and to China's bond market as a whole in the future.

    They also said regulatory reforms will help the Chinese authorities to accelerate the pace of RMB internationalization.

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