China’s panda bond market was established in 2005. Although it has passed ten years more after establishment, China’s panda bonds have started to become popular after 2015.

Turks were familiar with Eurobonds and now as Erdogan administration eyes China for diversification of financing, more and more Turkish wondering “What is panda bond market, “Why the government interested with it?” “What are the current developments in the Panda market?”

The Panda bond market allows foreign companies and governments to issue bonds in the yuan. Between 2005 and 2014, very few bonds were issued. Beginning in 2015, the panda grew vigor.

The reason for not experiencing the liveliness of the Panda bonds for 10 years is since the regulatory and supervisory agency was strict regarding norms. These norms are mostly technical details about the ratings given by credit rating agencies or the minimum asset limit that must be owned.

Although some steps have been taken to open the floodgates for Panda bonds in 2010 and 2015 the most significant step has come in 2016. For those who will be issuing bonds since 2016, the conditions for external debt have been lightened if the interested party wants to provide funds for its subsidiary in China.

(If you want to know more about what regulations have been made since 2004, check the “2016 Panda Bond Market Report” (in Chinese).)

Besides, the Central Bank of China’s cuts in interest rates several times in 2014 also led the cost of funding by issuing bonds from the Panda market reduced. The main reason for the decline in issued bonds in 2017 is the increase in financing costs in China. China tightened capital outflow controls because it wanted to reduce the debt burden. This has led to the downsizing of the Panda bond market.

China’s debt sensitivity is one of the most significant obstacles to the rapid growth of the panda bond market. The Sino-US trade war also increases China’s debt sensitivity and makes it challenging to combat debt problem. In 2016, the US trade deficit with China was $ 367 billion, and it continues to increase. If Trump takes the necessary steps to reduce the trade deficit, China’s exports will shrink. This, in turn, forces China to control capital outflows tightly.

Another reason is the flowing of cheap dollars from developing countries. The Fed is in a period of raising interest rates.

The trade war makes China’s Panda bonds less attractive to investors. However, it should not be overlooked that the popularity of issuing bonds from the Panda market has increased in general terms.

Daimler, one of the leading companies of the German auto industry, entered the Panda market in 2014. The National Bank of Canada entered this market for the first time in 2016 to issue bonds.

China wants more demanding from developed countries.

The Chinese are hopeful that the Panda bond market will grow with the Belt and Road project. They see the panda market as very important for Yuan’s increasing use of internationally.

Pakistan and the Philippines are planning to issue bonds in the panda market this year.

Bloomberg announced Pakistan will enter the Panda bond market with a report titled “Pakistan Refutes IMF Report as It Eyes Bonds, China Funding.”

This year, Hungary entered the Panda market as a bond issuer. The interest rate on the bond is 4.85%. This bond, issued in Yuan, will be swapped into the Euro. The purpose here is to eliminate currency risks.

One of the biggest reasons for Hungary’s entry into the Panda bond market is the lower interest rates than the Dim Sum bond market in Hong Kong.

There is severe competition between Dim Sum and the Panda bond market. As the cost of financing from the Dim Sum market in 2015 increased, the large Chinese-owned foreign construction companies in Hongkong moved into the Panda bonds market.

Many of the issuers of bonds in the Panda market are foreign-owned companies with Chinese capital. Most of them are construction companies like real estate developers.

China’s economic policies are directly affecting these companies. Therefore, the total amount of the bond issued by the Panda market can be var from year to year.

According to a report by Reuters in June 2018, two Chinese real estate developers canceled the planned panda bond. The main reason for this is China is cutting the speed of the growing construction sector based on debt concern. In fact, according to the reports regulators prevent real estate developers from selling bonds.

Bloomberg also published a report in June entitled “China’s Debt Crackdown Helps Revive Flagging Dim Sum Market.” It says that 13 bonds have been suspended. The reason is real estate developer companies are so much worry that the government’s debt combat will affect them.

We compiled data from Bloomberg and 2017 Panda Bond Market Report. It compares the number of bonds issued in the two bond markets. There is an increase for the first time in the Dim Sum market after four years. Bond issuances on the Panda market are also rising again this year. According to reports in the first half of 2018, both markets are in head to head status.

Turkey shouldn’t only focus on Panda bonds. Dim Sum bonds market is reviving. If the coupon rates more favorable than Panda bonds, why we wouldn’t sell Dim Sum bonds.

At the beginning of 2017, China had about $ 3 trillion in foreign exchange reserves. This figure was the lowest in the last five years. As a result, China has continuously raised capital controls until 2018. This inevitably affects the panda market. As of the first half of 2018, foreign exchange reserves have decreased slightly.

This point is closely related to Turkey as well, because the cost of issuing bonds from the Panda bond market is also very important for us.

Critics on Panda Bonds

Foreign companies are wondering whether Panda bonds will be more market-oriented or People`s Bank of China (PBOC) will have a hand always on it. Measures taken by PBOC directly affects the amount of total Panda bond issuance and it makes Panda bonds market volatile year to year based on PBOC`s steps. Foreigners want to see a more market-oriented approach. That`s one of the most significant reasons why foreigners hold themselves at a distance from panda bonds.

It is also obvious that the Panda bonds market needs more internationalization.

Although the market has been settled for over a decade, predominantly Chinese companies registered outside China show interest.

Another criticism on the panda bonds is that the approval process is so slow and not transparent. Sometimes the slow process can cause cancellation of bond issuance by foreigners. One of the reasons for the heavy processing is that all documents are requested in Mandarin. Many documents are in English and their translation into Mandarin creates an extra workload.

Further, regulators of the Panda bonds market got also criticism because when in a period that capital outflows are slowed down, why do regulator agency make more difficult norms for overseas investment in bonds? If the regulators want to open up the market further, why they make it easier on one side and harder on another side. They need to make a decision one way or another.

Indeed, China`s small Panda bonds market need maturation.

Why Does Turkey Eye Panda Bonds?

First of all, Turkey`s panda bond open up consists of a political message to its Western allies, particularly to the US. That approachment cannot be separated from political reasons.

Turkey is evaluating whether to sell Chinese Panda bonds to spread its borrowing risks, Former Deputy Prime Minister Mehmet Şimşek said in February 2018. Former Deputy Minister explained that step as a diversifying borrowing both geographically and in terms of instruments.

In 2017, Turkey has a trade deficit of 20.4 billion dollars against China. Therefore, there is a pressure to find a foreign currency in trade with China.

If the Turkish banks start selling Panda bonds after Treasury, importer companies also can start to buy goods from China.

Selling yuan-denominated bonds will work for Turkey because the Lira is depreciating more slowly against the yuan than the dollar.

This way, a competitive player is being introduced into the market in terms of financing and dependency on Eurobonds is being reduced.

Turkey`s Treasury authorities should also put Hongkong`s yuan-denominated Dim Sum bonds market under the scope. Both markets should be evaluated at the same time. The choice can be changed by interest rates.