China's central bank is drafting new rules for yuan-denominated bonds sold by foreigners on the Chinese mainland, known as panda bonds, and plans to let more companies issue them and ease controls on how proceeds can be used, two people with direct knowledge of the matter said.
The People's Bank of China (PBC) will allow both international financial and non-financial institutions to sell the bonds in its domestic market, and proceeds can be used within and outside of China, said the people, both of whom were consulted by the central bank and saw the draft rules.
Currently, only global development institutions such as the International Finance Corp (IFC), the private-sector arm of the World Bank Group, are allowed to sell panda bonds. and the proceeds must remain in China.
"The draft regulation is ready, but has not been finalized," said one of the sources.
HSBC and Bank of China (Hong Kong) were approved to issue 1 billion yuan ($156.9 million) and 10 billion yuan of panda bonds, respectively, the PBC said in a statement released on Tuesday.
It was the first time that overseas commercial banks have been given permission to sell bonds in the $6 trillion interbank bond market of the world's second-largest economy. The Manila-based Asian Development Bank launched its debut yuan bonds later.
The central bank will not set a total quota for panda bond issuance and deals need to be approved on a case-by-case basis, according to the draft rules, said one of the people knowledgeable about the matter.
Market participants expect the initial pipeline to be strong as international financial institutions and companies eye China's big market and potentials in addition to the falling interest rate environment.
"Funding cost is just one factor foreign issuers will consider, and the more important factor is that they hope to gain bigger market share in China as the country accelerates opening up," said Banny Lam, co-head of research at Agricultural Bank of China International in Hong Kong.
