The Polish finance ministry has signed a memorandum of understanding on a CNY3bn (€400mn) ‘Panda’ bond issue with the Bank of China, Chinese media reported late on June 21. The bond would be the first in the Chinese currency sold onshore by a European sovereign.

Warsaw has yet to confirm that an agreement has been signed, and the announcement by the Bank of China has since disappeared. However, Piotr Nowak, Poland’s deputy finance minister told bne IntelliNews on June 22 that preparations for the issue are indeed underway.

“We are working now on the documentation,” he said via email. “We keep close cooperation with Chinese regulators to complete the registration. Once we are ready, we shall not delay the issue – subject, of course, to market conditions.” 

The yuan-denominated issue will be the first from a European sovereign to take place in China. The announcement comes immediately following a visit by Chinese President Xi Jinping to Warsaw, during which a strategic partnership was signed on top of several business deals.

Poland first said in February it was considering issuing debt in yuan. On the one hand, Warsaw has seen borrowing costs spike this year as investors fret over the rising political risk from the new Law & Justice (PiS) government rapidly consolidating power after its victory in the October election. On the other, Warsaw is also keen to strengthen ties with China.

Poland will issue the debt with the Bank of China as the lead underwriter, according to the China News Service. The Panda bonds will “push forward China-Poland bilateral cooperation in the fields of trade and financial,” the Bank of China asserted. A notice announcing the memorandum was posted on June 21 on the Bank of China’s website, according to Reuters, but was not accessible on June 22.

Like most of its Central & Eastern European neighbours, Poland is pushing to develop closer relations with China as it eyes Beijing’s huge investment war chest and looks to boost trade and reduce its massive trade deficit with the eastern giant. China is keen to build an economic and political presence in the EU, and views the eastern member states as an ideal bridgehead.

At the same time, Beijing remains a wily and hard-nosed negotiator. Many big- ticket investment schemes have been mentioned over the years, but few were realised. Recently, though, a rash of acquisition deals have gone through, suggesting the slowdown at home has Chinese investors seeking other opportunities, or to move money outside the country.

Xi was in Prague earlier this year on a controversial visit that many complained felt like the Czech capital was rolling out the red carpet for an emperor. Meanwhile, many in the market have questioned the provenance and local links of Chinese companies busy snapping up assets at surprisingly high prices.

Paying for the privilege

Hungary claims that it is the leading regional economy regarding links to China, illustrating the race for Beijing’s favour. The eurosceptic Prime Minister Viktor Orban has been trying for years to redirect Hungarian trade and investment relations away from their heavy dependence on the EU. China is the jewel in that crown, but Beijing has for the most part failed to back up friendly words with hard cash.

Hungary became the first CEE sovereign to issue yuan-denominated debt in April, when it sold CNY1bn (€137mn) of a three-year ‘Dim Sum’ bond, or issue outside China. It was Hungary’s first action on the international markets for around two years. “Chinese-Hungarian relations in the financial field are further strengthened by the issue,” Hungary’s economy ministry stated at the time.

However, Budapest paid for the privilege. The bond was issued on April 14 at a yield of 6.25%; following the swap of the yuan to euro, the actual yield was expected to be 2-2.5%, officials claimed. Still, three-year forint-denominated bonds were trading at around 1.5% at the time.

Poland was last on the international debt market in mid-April, when it sold €750mn of 20-year Eurobonds, tapping an earlier issue. That issue was viewed as an alternative to a yuan bond, with the Chinese market suffering at the time. However, Poland has since seen yields spike again well above 3% to the levels experienced in January, after Standard & Poor’s downgraded the sovereign.

Nowak, however, hints that Warsaw doesn’t expect to pay the same sort of premium as Budapest did. “Our team visited China in June. We have met all the major accounts and received a very positive feedback,” he claims. “We looked at the Dim Sum market, but it is less attractive for us from several points of view. Our target is to access Chinese onshore investor base. Also pricing in Dim Sum is less competitive.”

Dennis Masich from SEB’s emerging markets fixed income desk also suggests the Polish issue, while likely to pay a premium compared with local yields, will price more competitively than Hungary’s.

“Poland is a much larger and better known issuer than Hungary,” he tells bne IntelliNews. “Polish domestic debt is popular in Asia already, and the finance ministry in Warsaw is pretty savvy – they tend to price fairly close to the curve.”

On top of that, Warsaw is under little pressure to approach international markets right now, having already pre-funded 70% of 2016 financing requirements, Raiffeisen Bank International (RBI) analysts point out. However, “the worsening [of Poland’s] risk profile clearly is reflected in the relatively higher premium compared to same rating peer group within and outside CEE,” continues Gintaras Shlizhyus in a note. “In particular, the Polish spread to similarly rated Lithuania widened from -30bp last year to nearly +30bp this year.”

Follow the money

At the same time, Warsaw is simply following the money. Poland saw Asian investors overtake US counterparts as the second-biggest holders of its domestic debt last year, as China seeks to stimulate the market by easing monetary policy while the US Federal Reserve’s schedule for hiking rates trims demand for emerging market assets.

Meanwhile, China will welcome the moves in CEE to tap its markets in yuan. Beijing has been pushing for some years to raise its profile on global markets, and push the renminbi as an international currency while criticizing the power of the dollar.

China first legislated to allow Panda bonds in 2005, but the market has been slow to develop. Fitch ratings reports that outstanding Panda bonds – mostly corporate issues – total just $2.5bn. However, the inclusion of the Chinese currency in the International Monetary Fund’s basket of reserve currencies in December was a key step. South Korea issued the first ever Panda bond the same month, and saw it five times over-subscribed.

CEE sovereigns are likely to prompt strong appetite should they take the splash, which is another advantage for which they’re clearly ready to pay. Asian investors have proved their enthusiasm for Polish debt over recent years, and a Panda bond is only likely to expand that alternative base for Warsaw.

Establishing a presence on a bond market that is now the world’s third-largest, after the US and Japan, is clearly an attractive prospect, despite the raised costs. It’s notable that both Hungary and Poland have limited the volume of their initial steps. Meanwhile, Beijing has doubtless hinted to states in the region that support for its markets will be smiled upon.

“In terms of tenors/size we are quite flexible,” says Nowak, who insists the move is simply motivated by financial market strategy. “Opening a new market and further diversification of our investor base are the key features for us,” he states. “We hope that Chinese investors will be more interested in our debt altogether, which will translate into higher participation of Chinese entities in our domestic market, which is the main funding source for us.”

“On the one hand, I think the likes of Poland and Hungary are simply looking to diversify their funding base,” agrees Masich. “On the other, it’s a PR exercise to introduce the countries further on a political level.”