CHINA’S panda bond issuance is expected to exceed that of dim sum bonds for the first time this year, thanks to cheaper onshore funding costs that are expected to continue as the government keeps monetary conditions loose to support its sluggish economy.

    Panda bonds, or yuan-denominated bonds sold by foreigners on the mainland, kicked off in 2005, but their development has lagged far behind yuan-denominated bonds sold in the offshore market, also known as dim sum bonds, which started in 2007.

    That began to change about a year ago when Chinese issuers switched back to the onshore market to raise cheaper funds, and as foreign investors pressed dim sum issuers for higher returns to compensate for the weakening yuan.

    “Panda bonds have started to show momentum and the opening-up of the onshore debt market to allow foreign investors free access has also lifted issuers’ incentive to sell these bonds,” said Frances Cheung, head of rates strategy at Societe Generale Asia ex-Japan.

    Sales of panda bonds in the first seven months this year reached 55.6 billion yuan (US$8.39 billion), compared with 68.3 billion yuan of dim sum bonds. But if a 17 billion yuan dim sum bond sold by China’s Ministry of Finance is excluded, panda bond issuance would have been higher.

    Panda bond issuance for all of last year amounted to 13 billion yuan, less than 10 percent of dim sum bond sales.

    “The pace of panda bond issuance will continue to accelerate,” said DBS analyst Nathan Chow in Hong Kong.

    “I can’t see a turning point for sluggish dim sum bond sales in the next two years since we do not expect China to tighten its monetary policy during this period.”

    China onshore bond yields fell by over 150 basis points (bps) in the past two years as economic growth slowed.

    Bankers say issuers which have dim sum bonds that need to be refinanced may either rely on the panda bond market if they can get the proceeds out, or U.S. dollar bond market.

    “Some might use cash flow to pay back dim sum debt. It’s difficult to refinance in offshore yuan markets [due to the high cost],” said Paul Au, co-head of credit market syndicate at UBS.

    At present, funding costs in panda bond market could easily be 50-100 bps lower than dim sum bonds for issuers, bankers say.(SD-Agencies)