Panda Bonds - EY

1 Panda BondsOverview and currentdevelopment in theinterbank marketMay 2016 OverviewA Panda bond is a Renminbi (RMB)-denominated bond issued in MainlandChina. According to international practice, a foreign financial institutionalways selects the country s mascot as the name when issuing localcurrency-denominated Bonds . As such, China s Ministry of Financenamed the Bonds Panda Bonds . The issuer of a Panda bond , always aforeign entity, can be either a financial or non-financial Panda bond is similar to Japan s Samurai bond or the US s YankeeBond. The first two Panda Bonds were issued in October 2005, by theInternational Finance Corporation (IFC) and the Asian Development Bank(ADB).New regulations are still being codified however, several practices havebeen established to meet regulator expectations : To prepare the financial reports in accordance with Chineseaccounting standards for enterprises unless the accountingstandards currently used by such issuers have been recognized asequivalent to Chinese accounting standards by the Ministry of Finance(MOF) To have the financial reports audited by an appropriately qualifiedaccounting firm in China (If the audit firm is not registered in China,the issuer may need approval from the regulators allowing theoverseas audit firm to be involved in the transaction.)

2 What you need to know As at the end ofFebruary 2016, theissuers in the interbankmarket were mainlyinternationaldevelopment agencies,sovereign governments,financial institutions andnon-financial companies. RMB proceeds fromPanda bond issuance byinternationaldevelopment agenciesmay be remittedoverseas and/orconverted into foreigncurrency with approvalfrom Bonds3 Panda BondsIssuance of Panda BondsReasons for issuing PandaBonds Offer a way for financial and non-financial enterprises to diversifytheir investor base and gain afoothold in China. Provide a vehicle for enterpriseswanting to fund an onshoresubsidiary or to do more business inChina. Gain publicity and marketingadvantages, a key attraction forfirst-moversAdvantages of issuing PandaBonds in the interbank marketChina s bond market is the largestamong the emerging economies in Asia,and comprises two main bond markets:the interbank bond market, and thestock exchange markets in Shanghai andShenzhen.

3 The interbank bond market isChina s over-the-counter (OTC) at about USD7 trillion, China sinterbank bond market is currently thethird largest in the world, after the USand are several advantages of issuingPanda Bonds in the interbank market: The interbank bond market accountsfor 80% of China s overall bondmarket, with diverse participants,high liquidity, a wide range ofproducts, and flexible innovativemechanisms The numerous, multi-tier professionalparticipants in the interbank bondmarket include commercial banks,securities companies, accountingfirms, law firms, and rating agencies. The interbank market integrates theforeign exchange, money, and bondmarkets; and thus it is more able totimely follow policies, and maintainclose communication with regulatorsType of issuerApproved/registeredprogram(RMB billion)AmountissuedNumber ofofferings(RMB billion)Internationaldevelopmentagencies ADB222 IFC222 Sovereign andquasi-sovereignRepublic ofKorea331 Province ofBritish Columbia,Canada631 FinancialinstitutionsHSBC HK111 Bank of ChinaHK1011 StandardChartered HK211 Non-financialcompaniesDaimler2575 ChinaMerchantsGroup (HK) : National Association of Financial Market Institutional Investors( NAFMII)In 2014, Daimler AG sold a RMB500-million bond to Chineseinvestors, marking the first foreign non-financial corporate bondissuance in China s domestic market.

4 It indicated that thedomestic financing channel for foreign non-financial enterpriseshad been officially established in the China bond at the end of February 2016, the approved/registered programfor issuing Panda Bonds in the interbank market amounted toRMB54 billion. Panda Bonds totaling billion have beenissued so far in 15 2010, China s People s Bank of China (PBOC), Ministry ofFinance (MOF), National Development and ReformCommission (NDRC), and the China Securities RegulatoryCommission (CSRC) jointly issued amendments to thePanda bond regulations, namely, the ProvisionalAdministrativeRules on the Issuance of RMB Bonds byInternational Development Institutions. The new regulationsexpanded the scope of qualified issuers and the use of RMBproceeds, particularly with significant liberalization on theremittance out of Mainland China of RMB proceeds fromPanda BondsThe steps to make a registered offering ofPanda Bonds in the interbank marketIssuance of non-financialenterprisesPublic offeringsApplication submittalThe lead underwriter prepares andsubmits registration documents toNAFMII based on the and feedbackNAFMII previews the completeness ofproposed disclosures of theregistration documents, and providesfeedback within 10 working meetingNAFMII selects experts to attend thereview, issue an independent opinion,and make a decision on issuanceNAFMII issues Notice of Acceptancefor Registration.

5 Issuers can thenconduct a registered offering of PandaBonds in the interbank offeringUpon receipt of the Notice, companiescan start working on the initial offeringof Panda placementsFor private placements, the above proceduresapply except that Steps 2 and 3 are combinedinto one: NAFMII verifies and reviews theregistration documents within two working daysupon receipt of materials, and completes thereview and provides feedback in three offeringsKey documentsRegistration report, prospectus, recommendation letterfrom lead underwriter, overseas and domestic legalopinions, financial report, credit rating report, and otherdocuments as required by of disclosureAll disclosure documents at the registered offering stagemust be drafted in simplified Chinese or a completeChinese translation attached. Chinese translations of thepost-issuance documents dictated by NAFMII must alsobe and auditingThe accounting and auditing standards should complywith the requirements of the Chinese ratingCredit rating(s) must be obtained from at least onerating agency registered in China and authorized by thesupervisory authorities of the interbank opinionsOverseas law firms qualified to practice under therelevant jurisdictions shall provide legal opinions onoverseas matters; domestic law firms shall provide legalopinions on domestic matters.

6 All law firms must takeresponsibility for their legal raisedFunds raised can be used within or outside of applications must comply with Chinese laws andregulations, and the rules of the relevant placementsThe requirements for private placements aresimilar, except it is more relaxed in the selection oflanguage and ongoing information disclosure, asissuers can agree the specific criteria with privateplacement investors. Accounting and auditingstandards can also be determined by the issuersand investors. The use of accounting standardsthat have converged with the InternationalFinancial Reporting Standards (IFRS) : National Association of Financial Market Institutional Investors ( NAFMII)5 Panda BondsRegulatory concernsKey challenges for potential issuers Issuers must provide past three years offinancial statements under the CASs it mayinvolve a sizeable amount of work to convertnon-CAS accounts into CAS to make thespecific filing. However, the MOF isauthorized to grant an exemption to use CASswhere the accounting standards adopted areaccepted by MOF as being equivalent toCASs.

7 Circular and disclosure documents are to bedrafted in Chinese; therefore, the translationneeds careful planning. A credit rating must be obtained from at leastone domestic rating agency. Panda Bondsrated by a global rating agency may have adifferent rating to those from a domesticrating agency. NAFMII (PBOC in certain circumstances) willreview the issuer s investment circular. These are the currently acceptable financialreporting frameworks: Accounting standards: Chinese AccountingStandards (CASs), Hong Kong FinancialReporting Standards (HKFRSs), orInternational Financial Reporting Standards(IFRSs) Auditing standards under Chinese Standardson Auditing (CSA), and Hong KongStandards on Auditing (HKSA) Audit report issued by Mainland China orHong Kong Certified Public Accountants(CPA) The circular must be written in Chinese translation may be an issue. Concerns may arise if overseas entities adopt anaccounting framework which is not IFRSs and/orits audit firm is not registered in Mainland Chinaor Hong regulations surrounding PandaBond issuance are evolving, anddiscussions between interested partiesand the regulators are you are interested about the latestdevelopments please feel free tocontact Bonds7 Panda BondsFor more information, please contact:Financial ServicesOther contactsJack ChanVivien ZhangManaging PartnerPartner AssuranceFinancial Services, Greater ChinaTel: +86 10 5815 3340 Tel: +86 10 5815 Hua Ming LLP (Beijing)Geoffrey ChoiAlfred YinFSO Assurance LeaderPartner - AssuranceGreater ChinaTel: +86 21 2228 2152 Tel: +86 10 5815 Hua Ming LLP (Shanghai)Kelvin LeungWilliam HuangBanking and Capital Market LeaderPartner AssuranceGreater ChinaTel: +86 20 2881 2688 Tel.

8 +86 10 5815 Hua Ming LLP (Guangzhou)Huifong LeeTommy TsangPartner Financial ServicesPartner AssuranceTel: +86 10 5815 3970 Tel: +852 2846 Hua Ming LLP (Beijing)EY Hong KongProfessional Practice GroupClare WongPartner AssuranceTel: +86 755 2502 Hua Ming LLP (Shenzhen)Tony CF LinPartner AssuranceTel: +86 21 2228 Hua Ming LLP (Shanghai)About EYEY is a global leader in assurance, tax, transaction and advis oryservices. The insights and quality services we deliver help build trustand confidence in the capital markets and in economies the worldover. W e develop outstanding leaders who team to deliver on ourpromises to all of our stakeholders. In so doing, we play a critical rolein building a better working world for our people, for our clients and forour refers to the global organization, and may refer to one or more, ofthe member firms of Ernst & Young Global Limited, each of which is aseparate legal entity.

9 Ernst & Young Global Limited, a UK companylimited by guarantee, does not provide services to clients. For moreinformation about our organization, pleas e visit 2016 EYGM Rights no. 03003333ED NoneThis material has been prepared for general informational purposesonly and is not intended to be relied upon as accounting, tax, or otherprofessional advic e. Please refer to your advis ors for specific advic | Assurance | Tax | Transactions | Advisory