How to Issue Panda Bonds: Requirements, Process, and U.S. Tax

To issue panda bonds, a foreign entity registers renminbi-denominated debt with either the People’s Bank of China or the National Association of Financial Market Institutional Investors, depending on what kind of institution it is, then works through a Chinese lead underwriter to file audited financials prepared under Chinese Accounting Standards, obtain a domestic credit rating, secure a PRC legal opinion, and price the bonds under PRC-governed documents. The framework comes from PBOC and Ministry of Finance Joint Announcement No. 16 of 2018, the Interim Measures for the Administration of Bond Issuance by Overseas Institutions in the National Interbank Bond Market.¹

Who Qualifies to Issue

The 2018 Interim Measures sort eligible issuers into four categories, and the category decides which regulator you deal with.

Foreign government agencies. Sovereigns, local governments, and entities with government functions. They need prior bond-issuance experience and sound debt-repayment capacity. NAFMII handles registration.¹
International development institutions. Multilateral, bilateral, and regional development finance bodies. Same experience and solvency conditions apply, and NAFMII again handles registration.¹
Overseas financial institutions. Banks, insurers, and securities firms face the highest bar. Paid-in capital of at least RMB 10 billion (or foreign-currency equivalent), three consecutive profitable years, and effective supervision by the home financial regulator. These issuers go through the PBOC directly rather than NAFMII.¹
Foreign non-financial enterprises. Corporations issuing debt financing instruments through NAFMII. They must show financial transparency and meet minimum creditworthiness standards. Red Chip companies, incorporated outside mainland China but operating primarily within it, sit on a related but distinct pathway.

In recent years, panda bonds have been sold by issuers ranging from the Hungarian sovereign to Volkswagen, Bayer, BMW, and the African Export-Import Bank, which gives a sense of who the framework actually accommodates in practice.

What to Prepare Before You File

Financial Statements Under Chinese Accounting Standards

You will submit audited financial statements for the three most recent fiscal years, prepared under Chinese Accounting Standards or under a framework the Ministry of Finance has recognized as equivalent. Only EU and Hong Kong SAR standards currently qualify as equivalent. Issuers reporting under IFRS or U.S. GAAP have to add a reconciliation table showing every difference between their home-country statements and CAS. That reconciliation is, in practice, a second set of financials, and it should be budgeted for both in cost and in calendar time.¹

A Domestic Chinese Credit Rating

A rating from a domestic Chinese rating agency is generally required. Global ratings from Moody’s or S&P count only as supplementary information onshore. Note the calibration gap: mapping tables published by Chinese rating agencies show that entities rated anywhere from global “AA-” to “AA+” may all land at domestic “AAA.” An issuer used to its international rating should expect a materially different position on the domestic scale, and should plan its investor conversations around that.

Legal Opinion and Disclosure Package

A qualified PRC law firm must issue a legal opinion confirming that the bond structure complies with Chinese law. The application also has to disclose the issuer’s governance structure, historical debt, financial-health metrics, maturity, any collateral, and the specific terms of the proposed debt. All offering and transaction documents must be governed by PRC law.¹

The Filing and Issuance Process

Registration

For NAFMII-track issuers (foreign governments, development institutions, and non-financial enterprises), you submit the completed application package through a designated lead underwriter, typically a major Chinese bank. The underwriter handles the technical interface with NAFMII’s registration system and coordinates with regulators. Once NAFMII’s Registration Meeting accepts the filing, it issues a Notice of Registration Acceptance. That registration is valid for two years, and during that window the issuer can launch one tranche or several depending on funding needs and market conditions.²

Overseas financial institutions run a different track. They submit the application to the PBOC for direct approval rather than registering through NAFMII, which generally means a more involved review.¹

Book-Building, Pricing, and Settlement

After registration, the lead underwriter runs the book-building process, collecting institutional orders to gauge demand and set the coupon. Once pricing is finalized, a public announcement confirms the coupon rate and total issuance volume. The bonds are then recorded in China’s national clearing and settlement systems, with the China Government Securities Depository Trust & Clearing Co., Ltd. handling settlement for the interbank market.³ From that point they trade in the secondary market among qualified participants.

How the Proceeds Can Be Used

Use of proceeds is overseen by the PBOC and the State Administration of Foreign Exchange (SAFE). The issuer must open a dedicated special RMB account in mainland China to receive and manage the money raised.

From that account, there are two basic options. Keep the proceeds onshore for domestic use, such as funding local operations, lending to domestic entities, or investing in China, in which case foreign direct investment and foreign debt rules apply. Or remit the proceeds offshore, provided that use matches what was disclosed in the prospectus. The special account can also handle conversion into foreign currency for outward remittance.¹

Either way, periodic reporting to regulators is required, detailing how funds were spent against the original issuance plan. Missed reports can bring administrative penalties or restrictions on future market access.

PRC Governing Law and Default Resolution

Offering documents must be governed by PRC law, and any dispute resolution mechanism specified in the prospectus must operate inside the People’s Republic of China. Arbitration goes to a PRC tribunal; litigation goes to a PRC court.¹ There is no option to route disputes to international arbitration bodies or foreign courts. For issuers used to selecting New York or English law for their international bonds, that is a real departure and should be built into legal planning from the start.

Within the CIBM framework, standard protective covenants are available, including cross-default provisions, negative pledges, and change-of-control clauses. A trustee retained by the issuer monitors performance and, upon default, acts on behalf of bondholders by managing collateral, participating in restructuring, filing lawsuits, or joining bankruptcy proceedings. As of late 2024, 96 institutions were registered with NAFMII as debt financing instrument trustees. NAFMII also runs a Mediation Center that handles business disputes between market participants, and its default-resolution guidelines contemplate amending repayment terms, repaying with assets such as goods or equity, and providing trading mechanisms for defaulted bonds.⁴

Managing Currency Risk

Any foreign issuer taking on RMB-denominated debt is exposed to the exchange rate between the renminbi and its home currency. If the RMB strengthens before maturity, the effective cost of repayment rises. Several hedging tools are available.

Offshore, issuers can use CNH forwards, swaps, and options in Hong Kong’s offshore renminbi market. Non-deliverable forwards settled in USD were historically the primary offshore tool, though they carry basis risk and limited tenor availability. Onshore, issuers with access through CIBM Direct or Bond Connect can use CNY forwards, interest rate swaps, and cross-currency swaps. Onshore hedging tends to produce tighter pricing but adds operational complexity. Which side you use depends on your existing market access and how closely the hedge needs to track the underlying bond.

Tax Considerations for U.S.-Based Issuers

Chinese Tax Treatment

China has extended a policy exempting overseas investors from corporate income tax and value-added tax on bond interest income earned in the Chinese bond market. The current extension runs from January 1, 2026, through December 31, 2027.⁵ That exemption sits on the investor side. As an issuer, you should confirm with Chinese tax counsel whether your interest payments trigger any withholding or other liabilities, since that will depend on the bond structure and any applicable treaties.

U.S. Federal Income Tax: Section 988

For a U.S. entity issuing debt denominated in renminbi, Section 988 of the Internal Revenue Code governs the tax treatment of currency-related gains and losses. Because the RMB is a nonfunctional currency for a U.S. issuer, becoming an obligor under an RMB-denominated bond is itself a “Section 988 transaction.” Any gain or loss caused by exchange rate movements between the date the issuer takes on the obligation and each payment date is ordinary income or ordinary loss, computed separately from other items.⁶ Because the treatment is ordinary, these amounts cannot offset capital gains or be deferred, which can produce unexpected taxable income in years when the RMB appreciates sharply against the dollar.

FBAR Reporting on the Dedicated RMB Account

The special RMB account required in mainland China is a foreign financial account for U.S. reporting purposes. Any U.S. person, including a corporation, with a financial interest in foreign accounts whose aggregate value exceeds $10,000 at any point during the calendar year must file a Report of Foreign Bank and Financial Accounts (FinCEN Form 114). The FBAR is due April 15 following the reporting year, with an automatic extension to October 15, and it is filed electronically through FinCEN’s BSA E-Filing System separately from the entity’s federal tax return. Records for each account, including bank name, account number, and maximum annual value, must be retained for five years from the FBAR’s due date.⁷

1
National Association of Financial Market Institutional Investors. Panda Bond Manuals
2
National Association of Financial Market Institutional Investors. Rules for the Registration and Issuance of Debt Financing Instruments
3
Asian Development Bank. ADB Launches 1 Billion Yuan Panda Bonds in China
4
National Association of Financial Market Institutional Investors. The Reform and Development of China’s Bond Market 2025
5
State Council of the People’s Republic of China. China Extends Tax Exemption for Overseas Investors in Chinese Bond Market
6
Office of the Law Revision Counsel. 26 USC 988 – Treatment of Certain Foreign Currency Transactions
7
Internal Revenue Service. Report of Foreign Bank and Financial Accounts (FBAR)