In August, Poland's government became the first European sovereign to issue renminbi-denominated debt in China's onshore bond market. Joanne Hart investigates how the deal came together.

Piotr Nowak

The Chinese onshore bond market is the third largest in the world, with more than $6000bn of debt outstanding. Until recently however, international borrowers were not allowed to access it, limited instead to the far smaller offshore market. However, the situation has now changed and foreigners are being actively encouraged to issue renminbi-denominated debt onshore in China. 

In August, Poland became the first European sovereign to tap this so-called ‘panda bond’ market with the launch of a Rmb3bn ($449m), three-year transaction.

“For us, as a sovereign issuer, the most important issues that we look at are price competitiveness and the diversification of our investor base. The Chinese market offered us both,” says Piotr Nowak, undersecretary of state at the Polish Ministry of Finance. 

Initial reticence 

Mr Nowak and his colleagues began considering a panda bond transaction earlier in 2016 but the idea did not meet with universal enthusiasm. 

“There were some assumptions that the process would be long and difficult. The market is new and developing and the language is completely different. But when we saw what could be done in terms of pricing and the potential to expand our investor base, we decided to go for it,” says Mr Nowak. “We took the view that once we issue in the onshore market, Chinese investors can get to know our economy and our credit risk and then they might start to buy our domestic bonds.” 

In March, the Bank of China and HSBC were appointed as joint lead managers and shortly afterwards, the process formally began. “Bank of China has the biggest local experience and HSBC is an international bank with a strong footprint in China,” says Mr Nowak.

Clearing hurdles 

The Chinese bond market is regulated by the National Association of Financial Market Institutional Investors (NAFMII), so before any borrower can issue a panda bond, they have to gain approval from both NAFMII and the People’s Bank of China. 

“There were lots of requirements, some of which were not completely clear to us and, of course, every question had to be translated from English to Chinese and back again so the process was quite time-consuming,” says Mr Nowak. 

But he and his team persevered and at the end of May, they met investors in Beijing and Shanghai. Deemed a non-deal roadshow because Poland had not been given formal permission to launch a panda bond, it still gave Chinese institutions the chance to find out more about Poland’s economic situation and prospects. 

“They wanted to hear about our fiscal and monetary policies and our debt management programme. Some investors were already familiar with our credit but many were not, so this was a good opportunity for them to get to know us better,” says Mr Nowak. 

“A lot of accounts also wanted to know if we would be regular issuers and I certainly believe that we will come back to the market, if the conditions are right,” he adds.

Favourable conditions 

Over the summer, conditions were particularly favourable. “When we converted the renminbi to euros, we got a negative rate of -0.173% so it is really tempting. And our programme is Rmb6bn so we can issue another Rmb3bn and it should be quite straightforward. Basically, we believe this market has huge potential,” says Mr Nowak. 

Having completed the roadshow, the Ministry of Finance and its bankers spent another two months completing the necessary documentation and gaining approval from the Chinese authorities. By August, everything was in place and on the 24th, Poland announced that it would be issuing a Rmb3bn, three-year bond with a coupon of between 3.2% and 3.7%. The following day, the formal bookbuilding process began. 

“We were invited to the Beijing Financial Assets Exchange. There were speeches from the People’s Bank of China, from NAFMII and from myself as well. It was very different from launching a euro transaction. And it was nice,” says Mr Nowak. 

The bookbuilding process is slightly different in China from elsewhere, in that investors submit both the size of the order that they would like and the price they are prepared to pay. If the transaction is not well received, the issuer may not receive sufficient orders or investors may only submit orders at the top of the pricing range. 

“We were very pleased because we received orders of almost Rmb6bn and we were able to price the bond at a coupon of 3.4%, below the middle of the range,” says Mr Nowak.

According to Mr Nowak, the Chinese have a proverb: ‘Everything is difficult until it becomes easy.’ The Polish Ministry of Finance took a bold step with the panda bond and it took several months to launch the transaction. Henceforth, however, issuance should be considerably easier.

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