By Marc Jones
LONDON, Jan 11 (Reuters) - Sales of 'Panda' bonds in China
slumped almost 40 percent last year as Beijing's tighter money
transfer rules and rising market borrowing costs reduced their
appeal, but there are some signs sales may get a modest bounce
According to data from JP Morgan, Panda issuance dropped to
71 billion yuan ($11 billion) last year from 116 billion yuan in
2016 - when it saw an almost nine-fold increase.
Emerging market strategist Ying Gu at JP Morgan attributed
the plunge to several factors, all related to China's recent
efforts to rein in more unruly areas of credit growth.
Calling it a "bear market circumstance" Gu said higher bond
yields - or borrowing costs - in Chinese debt markets had
"trimmed the attractiveness" of Panda bonds for foreign issuers
who had previously been drawn in by their low funding costs.
Benchmark money market rates spiked
to almost 5 percent, their highest since 2015, late last year. A
clampdown, or in his words some "policy tightening", on selected
Panda bond issuers also had a negative impact, Gu said.
The strong growth in the Panda bond market in 2015 and 2016
was driven mostly by banks, real estate companies and overseas
subsidiaries of Chinese companies.
Other than Daimler, HSBC and Standard Chartered, though, few
were uniquely foreign. Strict currency outflow controls put in
place by Beijing also complicates repatriation of profits for
foreign investors, another big minus for Panda bonds.
There are some hopes though that the restrictions could be
loosened this year if the yuan can avoid the kind of lurches it
saw in 2015 and 2016 when worries about the health of China's
Signs have been tentatively encouraging. The Washington
DC-based IIF said this week that net capital outflows from China
were expected to have been a relatively modest $60 billion last
year compared with $640 billion in 2016.
"I hear that 2018 is when we are going see a push on that
(easing currency control)," said Isabelle Laurent, the head of
funding at international development bank, the EBRD, that China
is now a shareholder of.
"The view is 2018 is likely to be the year where there's
going to be greater flexibility."
JP Morgan's Gu also sees some improvement ahead. Hungary
sold a 1 billion yuan Panda bond in 2017, following Poland and
Korea in 2016. The Philippines has signalled it will do so this
year, and Portugal has made similar noises.
"Going into 2018, we see a modest rebound of Panda bond
issuance with full year forecast at 90 billion yuan ($14
billion)," Gu said.
Although the headwinds for the Panda bond market will still
be there, he expects more stability in the Chinese bond market
which should help rekindle demand.
Beijing has also started simplifying Panda bond rules for
government, financial institution and corporate issuers from
countries supporting its ambitious "One Belt, One Road"
infrastructure plan. Big development banks could benefit from
these changes, too.
"This could provide further impetus for the development of
the Panda bond market this year," Gu said.
The Panda market's popularity has coincided with a decline
in sales of dim sum bonds - yuan debt sold offshore in markets
such as Hong Kong or London.
Gu did not provide figures for dim sum bond issuance, but
ThomsonReuters data shows sales worth $6.42 billion last year -
less than a third of 2016 volumes and a fraction of what they
were in 2014.
($1 = 6.5055 Chinese yuan renminbi)
(Additional reporting by Fanny Potkin; Editing by Hugh Lawson)
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