China to Boost Panda Bond Market by Allowing Japanese Companies to Issue

Japan’s Financial Services Agency exchanged letters of cooperation with China’s Finance Ministry last Friday for the creation of a framework to improve audit oversight between the 2 countries.  This was a major step toward allowing Japanese companies to directly issue yuan-denominated bonds in the Chinese domestic bond market, as opposed to using their local China-incorporated subsidiaries.  The Bank of Tokyo-Mitsubishi UFJ (China) previously completed the latter by issuing the first yuan-denominated bond from a foreign commercial bank in China’s domestic bond market in May 2010. The issue was a RMB 1 billion (US$143 million) 2-year floater at 48 bp over the five-day average of three-month Chibor, which was at 1.95% at the time.

Consequently, Mizuho Bank has obtained approval from the People’s Bank of China and will become, next month, the first Japanese business to issue Panda bonds – or sell bonds directly in the China onshore market.  It expects to raise RMB 500 million (US$76 million) via 3-year bonds at 5-5.5%, a premium of 1.2-1.7% over the yields of compatible Chinese government bonds.  The Bank of Tokyo-Mitsubishi UFJ also expects to receive approval soon to issue.

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