Standard Chartered has cemented its place as one of the leading foreign banks in China's onshore bond market through a series of pioneering panda bonds in recent years. Edward Russell-Walling reports.

Standard Chartered team 0217

As China's onshore bond market continues to open up to outsiders, Standard Chartered has become one of the leading foreign bank players. Its Greater China debt capital markets team has led a number of pioneering deals in the panda bond market, and the bank was the first commercial issuer of Special Drawing Rights (SDR) bonds in China. 

The country is pivotal to Standard Chartered's emerging market-centred strategy. China's One Belt One Road, or New Silk Road economic plan, closely maps those regions where the bank is most active. 

It is one of three note-issuing banks in Hong Kong and can claim to have been doing business in China for more than 150 years. In today's China, it is one of only two or three foreign banks currently, and separately, licensed as underwriters or sub-underwriters in each segment of the interbank bond market. These include China government bonds, sovereign, supranational and agency bonds, and corporate bonds. 

Standard Chartered also describes itself as the "most broadly licensed" foreign bank in the onshore financial market, authorised to operate as settlement agent, primary dealer, bond market maker and foreign exchange (FX) market maker for most important currency pairs.

Bonds booming 

The Chinese bond market is certainly becoming more attractive for intermediaries. It is now the third largest in the world, with more than $9000bn outstanding at the end of 2016, a figure which grew by one third during the calendar year. Both domestic and international issuers have been turning to the onshore market, whose costs compare increasingly favourably to the once popular offshore or 'dim sum' market. 

The panda market (for bonds denominated in onshore renminbi, or CNY, sold by non-mainland issuers) has been a particularly vigorous subset, with issuance growing nearly three-fold in 2016 to CNY45bn ($6.58bn). 

Standard Chartered regards the renminbi as the next best thing to its home currency, and is getting ready for the day when it has a higher profile in international bond portfolios. "Once the market has opened up, for most international investors it will only be a matter of time before they get involved in a more meaningful manner," says Tee Choon-Hong, the bank's head of capital markets for Greater China and north Asia. "We are now preparing for that eventuality." 

Right now the bank is busy in the panda market, where it has been a participant since the early days. It was a joint lead underwriter on the first sovereign panda bond in December 2015, when South Korea came to market with a senior unsecured three-year issue, raising CNY3bn with a 3% coupon. 

Chinese investors are warming to pandas, because the instruments give them overseas credit exposure without the need for an FX transaction. "They look into supranational, sovereign and Fortune 500 names as a first step," says Wesley Yang, Standard Chartered's head of financial markets for China. "With the renminbi's inclusion in the SDR basket and the opening up of regulatory policy, we have also seen strong demand from international investors."

Feeding the panda 

In 2016, Standard Chartered advised on or underwrote a number of other panda deals. It was an adviser on the first French panda, from utility conglomerate Veolia. In September, the company issued CNY1bn of a three-year bond paying 3.5%. With Bank of China as lead underwriter, this was the first corporate panda led by foreign banks, which included BNP Paribas and Crédit Agricole. It was also only the second ever corporate panda, following in the footsteps of Daimler. 

"All else being equal, the regulator prefers panda issuers to on-lend the proceeds to their businesses in China," says Mr Yang. "Veolia used the proceeds to expand the capital expenditure of its local subsidiaries." 

In November, National Bank of Canada became the first North American bank – indeed, the first non-Hong Kong bank – to issue in the panda market, with Standard Chartered as a joint lead underwriter and bookrunner. It priced a larger-than-usual three-year CNY3.5bn transaction with a 3.05% coupon. 

One of the challenges that needed to be addressed here concerned accounting and auditing issues. Standard Chartered helped the issuer to draw up a table comparing Canadian generally accepted accounting principles with Chinese accounting standards, to give comfort to Chinese investors. 

"The issue was one of reciprocity – recognising each other's accounting standards," says Mr Tee, who adds that only Hong Kong and EU standards enjoy Chinese reciprocity at present. "The good news is that the regulator is willing to see what can be done." 

In 2016, Standard Chartered was joint lead underwriter on its first domestic renminbi deal, a green bond from New Development Bank, the Shanghai-based development bank for the BRICS (Brazil, Russia, India, China and South Africa) countries. The development bank already has $100bn in founding capital, so the five-year CNY3bn transaction was its debut international bond, pricing almost flat to China Development Bank.

SDR significance 

Standard Chartered was itself the issuer on its most intriguing recent deal – a small but highly significant SDR-denominated transaction out of its Hong Kong subsidiary. The SDR100m one-year bond is settled in renminbi. However, its coupon is a mere 1.2%, which represents a considerable saving on renminbi funding costs. 

The deal followed the admission of the renminbi to the International Monetary Fund's currency basket in October 2016, alongside the US dollar, euro, yen and UK pound. This was the first commercial SDR bond anywhere for more than 30 years and the first ever out of China. 

It was bought entirely by Chinese banks, who had their own reasons for snapping it up. "There is a strong pent-up [demand] for foreign currency assets," says Mr Tee. "And about 90% of the SDR basket is foreign currencies." 

While there was some interest from offshore investors, mainly central banks, the requirement for settlement in renminbi created technical obstacles for them. While the SDR coupon is much lower than on renminbi bonds, the normalisation of US interest rates may help to narrow the gap.

Municipal encouragement 

The Chinese government has been encouraging local governments to issue more on their own behalf, particularly now they have been obliged to make their balance sheets more transparent. Standard Chartered's first local government bond underwriting mandate – for Shanghai Municipal Government – was also the first bond from the fledgling Shanghai Free Trade Zone (SFTZ) market. 

The CNH3bn (offshore renminbi) deal had a three-year maturity and a 2.85% coupon. It targeted international investors, who will eventually be able to clear SFTZ purchases through Euroclear. "This is the first time a local government has invited foreign banks to join an underwriting group," says Mr Yang. 

Standard Chartered has also been active in the formosa market in Taiwan, where domestic investors have been eager to diversify by buying more foreign currency bonds. Last year's US dollar issuance out of Asia (excluding Japan) was about $250bn, according to Mr Tee. "The formosa market alone is worth $48bn," he says. Standard Chartered is one of the largest banks in Taiwan, adds Mr Tee, saying: "We were slow in getting a licence, but we are now number three in the formosa market, and number one for foreign banks." 

Among other deals, the bank was joint bookrunner on EDF's bumper two-tranche formosa issue in October. This consisted of a $491m 30-year bond paying 4.65% and a $2.16bn 40-year slice, with a 4.99% coupon. It also led Qatar National Bank's $625m formosa sale, the first floating rate note in this market, and the first Tier 2 deal, a $300m offering from ABN Amro. 

Mr Tee says that 2017 promises to be an "interesting" year, not least because the prospect of a new US administration has kept everyone guessing. "As long as the US interest rate curve doesn't move up too drastically, that will be good for the domestic Chinese market, and the offshore US dollar market for Asian issuers," he concludes.

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