HSBC China CEO Says Panda Bonds Have Plenty of Room to Grow

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  • Liao says a lot of client interest in the source of funding
  • Panda gives foreigners more opportunities to invest: Liao

China’s panda bond market has plenty of scope to expand after the government allowed more foreign investors to buy debt in the nation, according to HSBC Holdings Plc.

David Liao, president and chief executive officer at HSBC Bank China Co., said there is a lot of client interest in raising money through the yuan-denominated notes issued in China by foreign borrowers. The market for such securities, which began in 2005, is still small. Outstanding notes total only 195 billion yuan ($29 billion) compared with 70.4 trillion yuan for all onshore notes, according to data compiled by Bloomberg.

“The panda market is still very, very small compared to its potential,” Liao said in an interview in Shanghai. “The current market size is really just a starting point.”

China has been opening the world’s third-biggest debt market more to help counter capital outflows and promote greater use of the yuan. HSBC last month became the first foreign lender to win approval to be a joint lead underwriter for yuan-denominated bonds issued by foreign non-financial companies in China’s interbank market.

In July, overseas investors were allowed to invest via Hong Kong through the bond-connect program in the interbank market.

“Panda bonds will allow a wider scope of investment opportunities for foreign investors,” said Liao. “If they have familiar household multinational names they can buy into, it can certainly alleviate their credit concerns as they familiarize with investment in China. They can then move on to local credits and other sectors of the market.”

READ: HSBC approved to lead-underwrite corporate panda bonds

Issuance of such securities has slumped this year due to rising funding costs as Chinese authorities took steps to cut leverage in the financial system. Foreign governments and companies have sold 66 billion yuan of panda bonds this year, down from 109 billion yuan in the same period of 2016, Bloomberg-compiled data show.

Even so, Liao is optimistic about the future.

“The panda bond market diversifies funding source for multinationals,” said Liao. “It gives them an extra funding channel and allows those which already have strong presence in China and renminbi balance sheets to reduce the mismatch in currencies.”

Foreign investors held 1.1 trillion yuan of onshore bonds as of Sept. 30, up from 892 billion yuan as of June 30, according to central bank data. That accounts for less than 2 percent of total outstanding onshore notes.

Liao said the percentage of foreign investors’ onshore bond holdings may grow to 5 percent or beyond sometime in the future, which will help the development of the debt market.

“The broader internationalization of China’s financial landscape is only in its infancy,” Liao said.

— With assistance by Judy Chen

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