Have you heard about Panda Bonds?
We hadn’t either, but a theory is circulating that the B.C. government created assets, sold in China, are easing foreign cash into the real estate market.
Is it true? To get some clarity, we talked with Tom Davidoff from UBC’s Sauder School of Business.
LISTEN: Tom Davidoff explains what Panda Bonds are looks at the theory they’re coming to Canada
What are Panda Bonds?
So what exactly are Panda Bonds?
They’re bonds created by the B.C. government, but sold exclusively inside the Chinese market, in Chinese Yuan (as opposed to Canadian dollars).
This year B.C. became the first jurisdiction in the world to issue them, selling more than $665 million worth. That’s on top of a previous issue of about $1-billion in B.C. backed Chinese currency “Dim Sum” bonds in 2013 and 2014.
But since large sums of Chinese cash, which the province now holds, aren’t supposed to leave China, what’s in it for B.C.?
Davidoff says there could be plenty of reasons, including deepening ties with the Chinese government, gaining greater market access, and helping B.C. businesses abroad.
The province says the money has been reinvested in Asian markets, and will produce a positive return.
The conspiracy theory
But could the bonds be used to somehow get Chinese money into Canadian real estate?
Davidoff says that’s a theory that’s circulating, and says the idea is based on borrowing in Canada off the solid-gold reputation of the B.C. backed bonds.
“So what I’d like to do is borrow money from a Canadian bank, but that’s tricky because I don’t really have any collateral that the Canadian bank will accept.”
Instead, he says, an investor could theoretically pay Chinese Yuan for a Panda Bond, then take that bond to a Canadian bank and offer it up as collateral.
“Then a Canadian bank will say “oh, look at this asset you have, instead of Yuan, which I can’t accept and you’re not allowed to bring into Canada ideally, now you’ve got a Canadian denominated asset that’s totally safe, I’ll lend you money against that and against that, and against the house, and you can sort of leverage the panda bond you own to buy assets in Vancouver.”
How true is it?
Davidoff says first and foremost this is a theory, and there is no evidence Panda Bond cash has gone directly to Vancouver real estate.
He adds there could very well be legitimate reasons for the B.C. government to want to deepen capital ties to China.
He says he spoke with the Finance Ministry, who laid out that these bonds are not being sold directly to wealthy Chinese individuals.
“It’s not like they’re selling to mom and pop, it’s not like Mr. Smith in Beijing can buy $100,000 worth, they’re selling large chunks of this to financial institutions in China. So it’s not like they’re directly selling to guys who are going to buy houses here.”
A spokesperson for the BC Ministry of Finance, Jamie Edwardson, issued this statement:
The Panda Bond was issued in the China Inter- Bank Bond Market and, by local regulation, only institutional investors may purchase bonds in this market (e.g. banks, insurance companies). China’s inter-bank bond market is not open to retail investors – neither as primary purchasers nor secondary purchasers. The joint lead managers for BC’s Panda Bond report that there has been little, if any, secondary trading of the bond, and any such trading was among institutional investor
But Davidoff says while there’s no sign of intent by the province, or that the bonds are directly pumping cash into Canada, he says it may be possible that the instruments are being used in secondary ways to skirt capital controls.
He says large Chinese financial institutions could, for example, be re-selling new securities that are based on Panda bonds.
“I think they can rule out that the initial buyers, it’s not like they’re directly selling to high net worth individuals, but I think [the province] might need to do a little bit more homework to say for sure that the ultimate buyers aren’t high net worth individuals that they can post against purchases in the Vancouver market.”