Analysis of rules for offering Panda bonds

Q: What is a Panda bond? A: The term “Panda” refers to a bond denominated in renminbi, which a foreign organization issues in China (other than Hong Kong, Macau and Taiwan). In accordance with international practice, when a foreign organization offers bonds in a country, it will usually name them using a lucky symbol particular to that country. Based on this practice, renminbi-denominated paper that foreign organizations issue in China are called Panda bonds.

Q: What kind of development have Panda bonds undergone? A: Panda bonds were first issued in October 2005, when the International Finance Corporation and the Asian Development Bank offered RMB1.13 billion (US$139 million) and RMB1 billion worth of such paper, respectively, on the national interbank bond market (the interbank market). To date, there have been more than 30 issues of Panda bonds for a total of more than RMB50 billion. However, for a long time, regulators had not drawn up any specific regulations for Panda bonds (other than for international development institutions). On 25 September 2018, the People’s Bank of China and the Ministry of Finance issued Interim Administrative Measures for the Offering of Bonds on the National Interbank Bond Market by International Organizations (the Measures), regulating, for the first time, such issuance.

Q: What foreign organizations can issue Panda bonds? A: Pursuant to the Measures, among those able to issue Panda bonds are: (1) foreign governmental organizations; (2) international development institutions; and (3) financial institutions with legal personalities and non-financial enterprises with legal personalities lawfully registered outside China. Foreign governmental organizations include sovereign national governments, local governments and organizations with governmental functions. The term “international development organizations” refers to multilateral, bilateral and regional international development financial institutions that offer development loans and carry out developmental investments.

Q: What approval or recordal procedures are involved in the offering of Panda bonds? A: The Measures divide the administration of Panda bonds into two types, People’s Bank of China approval and registration with the National Association of Financial Market Institutional Investors (NAFMII): (1) the offering of Panda bonds on the interbank market by foreign financial institutions with legal personalities is subject to the approval of the People’s Bank of China; and (2) foreign non-financial enterprises with legal personalities, foreign governmental organizations and international development institutions offering Panda bonds on the interbank market are required to apply to NAFMII for registration.

Q: What conditions need to be satisfied to offer Panda bonds? A: The Measures clarify for the first time the substantive conditions foreign organizations must meet for the offering of Panda bonds, which specifically include:

• foreign governmental organizations and international development institutions are required to have experience in issuing bonds and good solvency;
• a foreign financial institution with legal personality wishing to offer bonds is required to satisfy the following conditions: (1) have paid-in capital of not less than RMB10 billion or the equivalent in a foreign currency; (2) have a sound corporate-governance structure and a sound risk-management system; (3) have stable finances and a good credit rating and have been profitable for the most recent three years in succession; (4) have experience in issuing bonds and good solvency; and (5) be subject to effective oversight by the financial regulator of its home country or region and its major risk regulation indicators complying with the rules of the financial regulator;
• no special express requirements have yet been set forth for foreign non-financial enterprises with legal personalities.

Q: Is a credit rating required to offer Panda bonds? A: There is no mandatory requirement for a credit rating for Panda bonds. However, a large majority of foreign governmental organizations have credit ratings when offering Panda bonds. The Measures specify that, if a foreign organization publicly discloses a credit rating report when offering Panda bonds, such must be issued by a ratings agency recognized by the interbank market.

Q: With whom are Panda bonds to be registered and placed in custody? A: Once Panda bonds have been sold, the issuer is required to carry out registration of the bonds with a registration and custody organization. The registration and custody organization must be one recognized by the People’s Bank of China. Previously, a large majority of foreign governmental organizations selected the interbank market Clearing House (also known as Shanghai Clearing House) as custodian for their Panda bonds issued on the interbank market.

Q: Must Chinese accounting principles be used for issuers’ financial reports? A: An issuer is not required to use Chinese accounting principles. If an issuer’s financial reports are prepared without using Chinese accounting principles or if the Ministry of Finance determines on the basis of the principle of reciprocity that accounting principles of equivalent effect as Chinese accounting principles were applied, the issuer is required to disclose simultaneously an explanation of the major differences between the accounting principles it used and Chinese enterprise accounting principles.

If an issuer prepares its financial reports using Chinese accounting principles, it is required to engage an accounting firm in China with securities and futures business qualifications to audit the same. If an issuer prepares its financial reports using other accounting principles, it may engage a reputable foreign accounting firm with practice qualifications in its home country to audit the same.

Q: What are the information disclosure requirements associated with an offering of Panda bonds? A: The Measures require that an information disclosure associated with an offering of Panda bonds comply with the principles of truthfulness, completeness and disclosure equivalency. An issuer’s information disclosure is required to be true, accurate, complete, timely and be free of false and misleading statements and material omissions. Based on the principle of disclosure equivalency, where an issuer discloses material information on another market, it is also required to carry out a disclosure on the interbank market simultaneously or within the shortest possible delay. The offer documents a foreign organization discloses publicly are to be written in simplified Chinese or accompanied by a translation in simplified Chinese.

Ren Gulong and Zhang Di are partners at AnJie Law Firm