Chinese Banks Refused To Place Russian Bonds

Because of the threat of Western sanctions.

Plans by Russian companies to enter China's debt market in search of cheap financing have run into a problem: local banks and investors are avoiding such deals because of the threat of Western sanctions, Reuters reported, citing sources familiar with the situation (translated by moscowtimes.ru).

Businesses from Russia have been cut off from Western capital markets since the conflict in Ukraine began. But after President Vladimir Putin's visit to China in September, leading Russian companies, including state corporations Rosatom and Gazprom, said they were considering issuing yuan-denominated bonds ("panda bonds"). According to a manager of a Chinese state-owned company, Russian firms need cheap financing and are ready to structure loans in conjunction with commodity deals.

Chinese bankers and investors interviewed by Reuters are skeptical about the prospects of Russian issuers entering this market soon. One of the agency's interlocutors familiar with the situation said regulators and banks are wary of the risk of secondary sanctions. "Preparations are always underway, but it is impossible to move the project forward," he said, pointing to the lack of progress over the past year by Rosatom and Rusal in terms of panda bond offerings.

Few Chinese institutional investors have also emphasized that they are unlikely to buy such debt due to geopolitical risks. China's state-owned brokers have stopped Russia-related transactions as early as 2022, and the four largest state-owned banks have refused to act as arrangers of such bonds for the same reasons.

A partner at Shanghai-based Yuanda China Law Offices Zhan Cai said there are no legal obstacles for Russian companies to enter the panda bond market unless the issuer is on the US sanctions list. "But no doubt local bankers and traders are wary of acting as underwriters or buyers," he emphasized. - Ultimately, the market decides the fate of the bonds, but I don't expect much interest in Russian issuers in China."

A Russian official speaking to Reuters added that there are no obstacles to issuing panda bonds if there is demand: "Large companies are working on placements themselves, the government is only helping with infrastructure and solutions. Now the main question is who will buy these securities in China, where banks fear secondary sanctions."

The first and only Russian company that managed to place panda bonds in China was aluminum giant Rusal: it entered the PRC market in 2017. Since then, Russian businesses have not managed to conclude a single deal on panda bonds, although only in January-July this year 35 foreign companies placed such bonds in China for $16.3 billion, and last year the volume of such financing reached a record 194.8 billion yuan.

Nevertheless, the process of Russian companies entering the market of panda bonds may take years, says Expert RA analyst Kirill Lysenko: "Even in the conditions of a "friendly country" geopolitical risks remain. If sanctions affect China's financial infrastructure, there may be complications with debt servicing," he noted.

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