Golden Credit Research

The Average Coupon Rate of Panda Bond Keep Lowering,

Foreign-Funded Entities Issued Panda Bond with Great Enthusiasm

—Panda Bond Monitor, August 2019

Panda Bond Market Movements

1. Primary Market Trends

The Panda Bond issue scale is 7 billion yuan in August, with cumulated issuing size amounting to more than 350 billion yuan.

Figure 1 Panda Bond Monthly Issuance Trend

3500

200 3000

2500 150 124 2000 110 98 100 88 1500 75 70 52 53 55 1000 42 50 40 40.4 40 27 30 17 500

0 0 May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug 2018 2018 2018 2018 2018 2018 2018 2018 2019 2019 2019 2019 2019 2019 2019 2019

Monthly Issuance(100mn yuan,left) Cumulated Issuance(100mn yuan,right)

Source: Wind Information, Golden Credit Research

By the end of August 2019, the cumulated issuing scale of Panda Bond has reached 355.87 billion yuan, whilst the outstanding amount is 280.29 billion yuan. From January to August in 2019, there were 26 tranches of Panda Bond being issued in ’s bond market with a total amount of 10.04 billion yuan. The issuance tranches and scale have declined 38.1% and 40.9% respectively comparing with same period of previous year. The main reason accounting for the decline of Panda

Bond issuance volume is that regulators have continuously strengthened restrictions on financing of real estate enterprises under the general background of domestic structural de-leverage. As the trend of continuous strengthening financing restrictions in real estate industry goes, those Golden Credit Research overseas-registered real estate enterprises, the dominant Panda Bond issuers previously, had declined Panda Bond issuance volume correspondingly, which reflected the transformation of

Panda Bond market on eliminating dependence on real-estate.

2. The Trend of Coupon Rate

Considering the current status with sufficient domestic investment and downward of credit bonds’ interest rate, the average coupon rate of Panda Bond has decreased YTD. As the data shown of 3- year matured Panda Bond, the average coupon rate from January to August in 2019 was less than

3.83%, with a sharp drop of 163 basis points from 5.46% in the same period last year and an issuance cost-cut over 29.85%. Since this year, the average coupon rate of Panda Bond in all categories turn to decline and the issuance pricing marketization has improved significantly.

Table 1 The Average Coupon Rate of Panda Bond（3-year maturity） Average Coupon Rate（%） Credit Rating January-August 2016 2017 2018 2019 Exemption / 4.8 / / AAA 3.41 4.71 5.25 3.87 AA+ 5.71 5.99 6.40 3.0 AA 7.06 / / / No Rating 3.27 5.34 5.37 3.94 Source: Wind Information, Golden Credit Research Since the year of 2019, the foreign-funded issuing entities, including foreign sovereign governments, international development institutions, overseas financial institutions and non- financial enterprises, performed actively in Panda Bond issuance, with a total volume of 29.34 billion-yuan, accounting for 73.3% of total issuance from January to August this year which increased 23.5% from 49.8% in the same period of previous year. In August, Cassa Depositi e Prestiti

SpA (CDP), the Italian deposit and loan institution, had successfully issued the Panda Bond, bringing in remarkable vitality for onshore bond market.

3. Case Study of The Month

There are four tranches of newly issued Panda Bond in August 2019. CDP, Daimler, and China Golden Credit Research

Mengniu Dairy Company Limited. have all issued Panda Bond in the inter-bank market.

Table 2 Cases Statistics in August Issuer CDP Daimler Daimler Mengniu Dairy Value Date 2019-8-1 2019-8-12 2019-8-12 2019-8-23 Maturity Date 2022-8-1 2022-8-12 2021-8-12 2020-2-19 Maturity 3 years 3 years 2 years 0.5 year Offering Size 1 billion yuan 3 billion yuan 2 billion yuan 1 billion yuan Coupon Rate 4.5% 3.84% 3.53% 2.96% Issuance Type Public Offer Private Placement Private Placement Public Offer Listing Inter-bank Inter-bank Inter-bank Inter-bank Issuer Rating AAA / / AAA Nations Italy Germany Germany Cayman Islands Source: Wind Information, Golden Credit Research In August, the foreign-funded Panda Bond issuers conducted the most active performance. CDP and Daimler have issued 1 billion-yuan bond in the public offered type and 5 billion-yuan bond in the private offered type respectively in the inter-bank bond market, accounting for 85.7% of total issuing volume in the month.

Table 3 Cases Study – CDP and Daimler Cassa Depositi e Prestiti (CDP) Cassa Depositi e Prestiti SpA (CDP) is an Italian state-owned joint-

stock company, under the control of the Italian Ministry of Economy

and Finance, with a total holding of 82.77% of the Group’s shares. As

the significant national economic institution in Italy, CDP came to be

the first Italian Panda Bond issuer.

In March 2019, Italy signed the Memorandum of Understanding

(MoU) on BRI with China, becoming the first EU member state to

embrace the BRI economic cooperation, and the first G7 nation to

sign up for BRI.

The successful issuance of CDP Panda Bond not only symbolized the

in-depth cooperation between China and Italy in the Panda Bond

market, but also actualized promoting mutual practice of MoU on

BRI, with irreplaceable positive significance for deepening bilateral Golden Credit Research

political and economic cooperation.

Daimler Daimler is one of the significant regular issuers in the Panda Bond

market. In March 2014, Daimler turned to be the first overseas non-

financial enterprise issuing renminbi-denominated bond in China’s

inter-bank bond market.

Currently, Daimler has issued 22 non-public offered debt financing

vehicles in China, with a total of 52 billion-yuan.

As an international manufacturer whose localization image in China

is constantly strengthened, Daimler has been financing in the

Chinese bond market through Panda Bond issuance for many years,

which not only deepens its development strategy in the Chinese

market, but also conveys its determination to deeply cultivate the

Chinese market. With the deepening relationship between Daimler

and BAIC, the Panda Bond issuance can assist with the brand

promotion in China, as well as enhance the understanding of Chinese

market participants on Daimler and establish a long-term trust

relationship. Considering China has become one of Daimler’s most

significant consumer markets, Panda Bond issuance will actualize the

business expansion of BBAC and satisfy operational funding needs in

China, and in the short term, Daimler’s demand for issuing renminbi-

denominated bonds will keep strong. Source: The , Golden Credit Research From the active issuing trends in this year of the Philippine government, the Portuguese government, the BRICS , Trafigura Group, UOB Bank, Maybank, overseas sovereign governments such as Cassa Depositi e Prestiti SpA (CDP), international development institutions, overseas non-financial enterprises, and overseas financial institutions, the issuance of renminbi-denominated bonds by countries along the “Belt and Road” and other entities continued have made substantial breakthroughs.

Golden Credit Research

T he Analysis of Exchange Rate and Interest Rate

1. International Issuers Had Expectations About RMB Exchange Rate Fluctuation; Panda Bond Issuance Not Influenced

Since the beginning of this year, RMB exchange rate showed fluctuated trends from increase to decrease within a big range driven by risk events in foreign exchange market. Overall, RMB exchange rate fluctuation hasn’t influenced Panda Bond issuance evidently.

Figure 2 RMB Exchange Rate and Panda Bond Monthly Issuance 7.4 240 7.2 200 7 160 6.8 120

6.6 80

6.4 40

6.2 0

2019-07-01 2017-06-01 2017-07-01 2017-08-01 2017-09-01 2017-10-01 2017-11-01 2017-12-01 2018-01-01 2018-02-01 2018-03-01 2018-04-01 2018-05-01 2018-06-01 2018-07-01 2018-08-01 2018-09-01 2018-10-01 2018-11-01 2018-12-01 2019-01-01 2019-02-01 2019-03-01 2019-04-01 2019-05-01 2019-06-01 2019-08-01 Panda Bond Monthly Issuance Size(100mn yuan, right) USD/CNY(left) USDCNY:NDF:1 year(left)

Source: Wind Information, Golden Credit Research

By monthly issue size, from January to August of 2019, Panda Bond issuance size has remained stable, and issuers in overseas and domestic markets haven’t had significant impact on RMB exchange rate fluctuation. For Panda Bond issuers, most of overseas issuers would timely follow up fluctuation on the international risk factors and China Central Bank’s policy stance on exchange rate so that they already had expectations on normal fluctuation of RMB exchange rate.

Meanwhile, when the Panda Bond issuers consider the issuance cost, besides the exchange rate between USD and RMB, they also evaluate the relative change in the exchange rates both of issuing country and of RMB. In other words, business operations for several Panda Bond issuers are not priced by USD, so the exchange rate fluctuation can’t reflect the practice of financing cost Golden Credit Research expectations and changes. Taking the Euro exchange rate as an example, exchange rate of

EURO/RMB hasn’t showed evident rising or declining trends since the beginning of this year with nearly zero change in exchange price. RMB/Ruble and RMB/Ringgit showed increase in value within a small range. Hence, for most of issuers in Eurozone and Asia, the wide-ranged fluctuation of exchange rate in USD/RMB didn’t stand for their considerations about exchange risk for bond issuance.

Overall, RMB exchange rate turbulence hasn’t exerted dramatic effect on international market, which not only showed the rational differentiated expectations about the Foreign Exchange market, but also reflected the increasing marketization improvement of the RMB exchange rate. On August

5 2019, the deprecation of renminbi, having broken 7 against dollars, has drawn highly focus from overseas and domestic markets. Actually, the deprecation of RMB mostly represents the rapid release of market mood after the upgrade of the economic and trade war and the pressure from periodical currency purchase, therefore the market had already digested the exchange rate fluctuations. Although currently uncertainties of external environment were interweaving, the factors to sustain RMB exchange rate within rational range also existed in a large amount. The stable trend of Chinese economy, the constant deepening open-up for China’s Capital Market, and the sufficient policy space in the macro level can provide supports for maintaining the stability of

RMB exchange rate and assist with expanding the depth and width of Foreign Exchange market, enhancing market confidence, and sustaining the Foreign Exchange market in good order.

To keep the bi-directional horizontal fluctuations in a wide range for RMB exchange rate in the future, external environment and the trend of USD index will be the two key influential factors. In general, the possibility of RMB exchange rate’s continuously unilateral development is quite low in a short term, and the elasticity of RMB exchange rate will be moderately expand and the flexibility will be further improved. Considering that the RMB exchange rate will be out of control with little possibilities and expectation of RMB depreciation hasn’t shown evident aggregation according to

NDF data of the offshore market, in the short term, the wide-ranged bi-directional turbulence of

RMB exchange rate will not exert evident influence on Panda Bond issuance.

2. Interest Rate Spreads Maintained at a High Level, Panda Bond Issuance Not Influenced

Evidently Golden Credit Research

Since the beginning of this year, interest rate spreads have continued to increase and expand by over 158 basis points in August 2019.

Figure 3 Interest Rate Spread and Panda Bond Monthly Issuance

4.5 270 4.0 240 3.5 210 180 3.0 150 2.5 120 2.0 90 60 1.5 30 1.0 0

Interest Rate Spreads(BPs,right) Panda Bond Monthly Issuance Size(100mn yuan, right) 10-year Treasury Bond YTM, China(%, left) 10-year US Treasury Bond YTM(%, left)

Source: Wind Information, Golden Credit Research

The growing worries among market participants that international trade war may weaken global economic growth, along with series of macro and geopolitical risks, have triggered a significant downward in 10-year treasury yield. Recently, FED cut the federal fund rate which related with the weakening American economy and slowing global economy since the year, as well as the rising uncertainty brought by strained relation of trade war. FED’s cut on interest rate represented that the global currency policy officially stepped into the monetary easing period. Domestically, China’s

Central Bank hasn’t immediately taken corresponding measure of cutting interest rate so that the domestic- overseas interest rate spread has widened again. On August 28th, 10-year treasury securities yield reached the bottom line with 1.47%.

For Panda Bond issuers, with the sharp drop of overseas risk-free interest rate, the averaged fund rate also showed a steadily downward trend in the offshore market, which to some extent boosted the attractiveness of financing in the overseas market and offered the adverse news for Panda

Bond issuance. However, on the process of evaluating issuance cost, international issuers should consider risk premium factors except for the risk-free interest rate. Although the benchmark of the interest rate decreased, the China-US interest rate spread widened, and the attractions of onshore Golden Credit Research

RMB financing seemed to weaken, but in the practice, the offshore market didn’t have conspicuous advantage in the perspective of composite cost. Hence, in spite of the widening trend of US-China interest rate spread, international issuers will not take it as the core factor when considering to issue Panda Bond.

For Panda Bonds investors, the widening trend of US-China interest rate spread enhanced the attraction on yuan-denominated assets and to some extent drove the demand of capital inflows.

According to the data from January to August of 2019, the averaged subscription of Panda Bond issued by foreign-funded issuers reached almost 3 times, which represented the high enthusiasm about onshore RMB bonds issuance for overseas investors. Taking the Portuguese-funded RMB

Bonds in June as example, the 2 billion yuan bond was oversubscribed by 3.165 times, of which overseas investors were allocated 48.5%. Overseas investors’ active subscription of the

Portuguese-funded RMB Bonds not only reflected high focus and participation enthusiasm on

China’s bond market by international institutions, but also drove the diversified development of cross-border investment and financing. For the major holders of Panda Bond, those large institutional investors, the low-risk characteristics and stable returns of onshore renminbi bonds have prompted them to take Panda Bond as a reliable investment option. Golden Credit Research

Outlook for Panda Bond Market

The Issuing size of panda bond along the BRI expected to further expand with the rising of two-way open-up for bond market

From January to August of 2019, issuers along the “Belt and Road” have issued 17.84 billion-yuan

Panda Bond, accounting for more than 60.8% of the total foreign-funded issuing size from the beginning of 2019 to now, increased by 10.3 basis points compared with the same period of last year.

Figure 4 issue amount along with the“One Belt, One Road” and issue amount by other foreign-funded issuers

Other overseas based issuance

Issue Size along the B&R

% 0 10 20 30 40 50 60 70

Jan-Aug 2019 Jan-Aug 2018

Source: Golden Credit Research

The active perform of Panda Bond issuance along the “Belt and Road” benefits from not only the consensus on propelling global economic development under the framework of BRI, but also the rising confidence of China’s economic strength by overseas investors, the adequate liquidity guarantee of China’s bond market, and constantly improved approval efficiency and policy transparency. It not only adds depth and resilience respectively to the China’s bond market and the financial market, but also boosts to consolidate the extensive blending between Chines financial market and international bond market. From the perspective of the two driving factors: strategic and commercial factors of Panda Bond issuance, strategic factors have been increasingly crucial for not only promoting the political and economic cooperation under the framework of BRI, but also developing the long-term trusty relationship with China’s market. Golden Credit Research

By the end of August 2019, countries along the “Belt and Road” initiative and Chinese-funded and foreign-funded corporates have cumulatively issued Panda Bond with over RMB 80 billion. For the short-term, lower-risk or risk-controllable areas including the Southeast Asia, Eurozone, and

Central and Eastern Europe, are expected to embrace the new upsurge for Panda Bond issuance.

Economic cooperation along the “Belt and Road” and project financing are predicted to bring in more high-qualified issuers and investors for onshore RMB bond market.

Prospecting the fourth quarter, with the accelerating two-way opening of China Financial market, the “Belt and Road” initiative continuously expanding the new international cooperation space, and constantly improved domestic policy environment and regulatory system, yuan-denominated bonds will continue to draw global attractions. However, considering the financing size of Panda

Bond by the Chinese-funded issuers is difficult to increase within the short term, it’s predicted that the issue amount of Panda Bond will wholly decline in 2019 compared with the previous year. In the future, the overseas-funded issuers may continue to maintain high issuance enthusiasm, the issuing quality may be steadily improved through eliminating dependence on Chinese-funded real estate enterprises, and the total issuing size may continue to expand. Golden Credit Research

Appendix I：Key Milestones in Panda Bond Development

Feb：The Provisional Administrative Rules on the Issuance of RMB Bonds by International Development Institutions (Provisional Rules [2005]) is  2 005 published. Oct：Asian Development Bank and International Finance Cooperation issued the first batch Panda Bonds Sep：The Provisional Rules [2005] is amended to expand the scope of eligible  2 010 foreign issuers and for proceeds to be used overseas (Provisional Rules [2010]). Mar：The first corporate Panda Bond issued in the China Inter-bank Bond  2 014 Market (CIBM). Mar：The Vision and Actions on Jointly Building Silk Road Economic Belt and 21st-Century Maritime Silk Road is issued. Jul：The Notice of the People’s Bank of China (PBC) on Issues Concerning  2 015 Investment of Foreign Central Banks, International Financial Institutions and Sovereign Wealth Funds with RMB Funds in the Inter-bank Market is published. Dec：The first sovereign Panda Bond issued The first corporate Panda Bond issued in the exchange market Apr ： PBC announced Notice on Implementing Overall Macro-prudential Management System for Cross-border Financing Nationwide (PBC Notice [2016]). The notice allows Panda Bond proceeds to be remitted to mainland  2 016 China subsidiaries without utilizing the subsidiary’s foreign debt quota. Sep：The World Bank issued the first Special Drawing Rights (SDR) bond in the CIBM, ahead of the RMB’s official inclusion as the fifth currency in the SDR basket Mar：The first Panda Bond issued by an issuer from a ‘Belt and Road’ country  2 017 Jul：The first Bond Connect Panda Bond issued Sep：The People’s Bank of China and the Ministry of Finance announced Interim  2 018 Measures for the Administration of Bonds Issued by Overseas Issuers on Interbank Market Jan：National Association of Financial Market Institutional Investors issued  2 019 Guidelines on Debt Financing Instruments of Overseas Non-Financial Enterprises (for Trial Implementation)

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Appendix II: Panda Bond Issuance in 2019 (up to 2019.06.30)

Size Coupon Sub- Value (100 Term Issuer Issuer Rate Type Scrip- Date Mn (year) Rating (%) tion yuan) 1 BEWG 2019-1-11 3.95 10 7 Public 1.77 AAA 2 BEWG 2019-1-11 4.49 10 10 Public 1.4 AAA 3 Everbright Water 2019-1-21 3.89 7 5 Public N/A AAA New Development 4 2019-2-26 3.0 20 3 Public 3.57 AAA Bank New Development 5 2019-2-26 3.32 10 5 Public 3 AAA Bank 6 SMIC 2019-3-4 3.57 15 3 Public N/A AAA BMW Automotive 7 2019-3-8 4.0 30 3 Private N/A N/A Finance United Overseas 8 2019-3-14 3.49 20 3 Public 2.7 AAA Bank 9 GLP 2019-3-18 4.35 33 9 Public N/A AAA 10 Lens Technology 2019-4-8 3.0 15 3 Private N/A AA+ 11 Mengniu 2019-4-19 3.35 10 0.7 Public 2.8 AAA 12 SMIC 2019-4-29 3.05 5 0.5 Public N/A AAA 13 SMIC 2019-4-29 3.1 10 0.5 Public 1.5 AAA 14 Trafigura 2019-5-20 5.49 5.4 3 Private N/A AAA 15 Republic of the 2019-5-20 3.58 25 3 Public 4.57 AAA Philippines 16 CITIC Pacific 2019-5-20 3.9 10 3 Public N/A AAA 17 The Republic of 2019-6-3 4.09 20 3 Public 3.18 AAA Portugal 18 Maybank 2019-6-21 3.58 10 3 Public 2.94 AAA 19 Maybank 2019-6-21 3.28 10 1 Public 1.76 AAA Source: Wind Information, Golden Credit Research

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Appendix III: About Golden Credit Rating

Panda Bond Rating http://www.dfratings.com/news/pnews/1010 Methodology

Panda Bond Panda Bond Development and Prospect

Research Reports Panda Bond Case Study and Practical Guidance

Golden Credit Rating has a professional international business team to

conduct credit risk research on cross border bond market, providing full

range credit information for international issuers and investors. At the

same time, with reference to RMB bond market internationalization and International the ‘Belt and Road’ initiative, the international business team develops Business Team rating system applying to global issuers and provides networking

opportunities for international investors to promote cooperation among

countries along the B&R, as well as communication between BRICs and

Asian credit rating agencies.