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Panda Bonds Set to Lure Borrowers From the Land of the Kangaroo

  • HSBC talking to Australian issuers about mainland China market
  • Banks from Down Under have already embraced Dim Sum bonds

Australian borrowers tempted by one of the world’s fastest growing pools of capital are considering yuan bond sales in mainland China, according to HSBC Holdings Plc.

The bank is currently in “reasonably deep dialogue” with about five or six Australian companies regarding the process for selling so-called Panda bonds, according to Andrew Duncan, head of debt capital markets at HSBC in Australia. While several issuers from Australia have sold Chinese currency bonds in offshore markets such as Hong Kong -- securities known as Dim Sum notes -- none of them have yet borrowed onshore.

Borrowers from Australia would follow German automaker Daimler AG, South Korea’s government and the Canadian province of British Columbia in embracing Chinese debt issuance. They have all sold Panda bonds since 2014, helping to revive a market which has been dormant for much of the period since it was established in 2005 and has seen total issuance of just 23 billion yuan ($3.5 billion). Kangaroo bonds, an equivalent type of Australian dollar security sold by international borrowers Down Under, saw A$32.3 billion ($24 billion) of sales last year alone.

An Australian company selling Panda bonds within the next couple of years is “almost a certainty” if borrowers are willing to spend the time on the process, Duncan said in an interview last week in Sydney. “It’s really the long-term strategic access to what is one of the biggest capital markets in the world.”

Australian companies need to source much of their funding from abroad and have historically borrowed in the U.S., the U.K. and Europe. While China is the largest destination for Australia’s commodity exports, the ties in financial services are more nascent, with Sydney being declared an offshore clearing hub for the yuan as recently as 2014 in concert with a free-trade accord between the two nations.

China is working to open up its capital markets and the onshore bond market has been expanding, with 1.75 trillion yuan of debt sold so far this year by local issuers. That compares with about 966 billion yuan in the same period last year. In comparison, Dim Sum note sales have been about 28.3 billion yuan compared with 71 billion yuan a year earlier.

Investor Demand

Managers of the world’s $11 trillion of reserves will be seeking yuan investment options after the International Monetary Fund included the currency in its reserves and the market has been made cheaper for borrowers by six interest-rate cuts since late 2014. And although speculation the yuan could drop further may crimp demand for offshore renminbi products, investors in mainland China are eager to diversify their portfolios.

“I think there will be demand from domestic investors for Panda bonds because of higher foreign issuer quality and also for diversification,” said Chen Yiping, a Shanghai-based bond fund manager at HFT Investment Management Co., which oversees 46.9 billion yuan. “Our fund is also interested, but it depends on the issuer and yield.”

Australian borrowers have sold publicly about 19 billion yuan of Dim Sum notes since November 2014, when the New South Wales state government did its inaugural renminbi transaction, according to data compiled by Bloomberg. Aside from New South Wales, all public issues so far have been done by one of the four largest Aussie lenders or by investment bank Macquarie Group Ltd.

At present the amount of funding in the renminbi represents just a fraction of Australia’s overseas financing needs. In 2015, Australian borrowers sold the equivalent of $83 billion of notes in international markets, in currencies ranging from euros and dollars to pounds and Swiss francs, Bloomberg-compiled data show.

Embracing Australia

Chinese investors have increasingly been looking to Australia as a place to put their money, with buyers snapping up assets from commercial and agricultural properties to companies such as John Holland and the Hoyts Group. China-based banks have also bolstered the amount of money they’re lending from branches Down Under to A$22.4 billion as of Jan. 31, a 72 percent increase from two years earlier, according to data from the Australian Prudential Regulation Authority.

It’s not yet clear whether the embrace of Australia by Chinese investors will lead to yuan-denominated bonds becoming a significant source of funding for companies in the South Pacific nation, although HSBC sees them growing in importance.

“I would say within three to five years it’s a genuine alternative to U.S. dollars, euro, sterling, Aussie benchmark issuance,” said HSBC’s Duncan. “Not for every credit in Australia, I’m not suggesting that, but certainly for more sophisticated top-end corporate Australia.”

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