Despite heavy issuances last year, Panda Bonds, or renminbi-denominated bonds issued by companies incorporated overseas, have to overcome several hurdles to grow in a sustainable manner, ratings agencies and investment bankers have said.

The chief hurdle is the disconnect between China's onshore bond market, where the bonds are issued, rated and traded, and the international markets, where issuers and many investors come from. This factor could discourage global issuers and investors, industry insiders said.

Guan Jianzhong, chairman of Dagong Global Credit Rating Co, said there is a marked gap between how a Panda Bond is rated by a major global ratings agency, and its subsidiary in China.

Since foreign raters are barred from rating onshore bonds, they access the China market through joint ventures with local partners.

"Global investors seek to know Panda Bonds' risks using an international rating metric so they could allocate assets globally. It's a joke to give a bond both domestic and international ratings," said Guan.

The problem is compounded by what industry insiders suspect is a prevalent unethical practice - domestic ratings agencies competing with each other for business and, in the process, compromising on principles to give higher ratings to their clients' bonds.

Unlike international ratings, there are limited rating notches in China. As a result, over 60 percent of issuers are rated AA or AA+, said Dagong.

Some issuers receive ratings that are higher domestically than overseas.

Driven by lower interest rates in China and the yuan's depreciation against the US dollar, six overseas entities, including South Korea and Canadian province of British Columbia, issued a combined 15.5 billion yuan ($2.4 billion) of Panda Bonds last year. That amount was much higher than the 3.8 billion yuan worth of Panda Bonds issued from 2005 to 2014.

Guan Xicheng, managing director of Guotai Junan Securities Co, said as an investment banker, he introduces debt issuers to investors, and found there is a huge cognition gap when global investors see China's market.

"It's not due to language or culture. It's two completely alien markets. Both see one another as an oddity," he said. "My fear is simple, that the Panda Bonds could go shallow, without deeper development."

A symptom of the "shallowness" is many issuers are actually domestic firms that are incorporated overseas.

For instance, last year's Panda Bond issuers included Bank of China (Hong Kong) and China Merchants Holdings (International) Co, whose main business is in China.

January has seen Country Garden Holdings, Shimao Property Holdings and Powerlong Real Estate Holdings all issuing or planning to issue up to 10 billion yuan worth of bonds.

Still, Panda Bonds are considered by more and more foreign institutions as an alternative funding option as onshore funding cost in some cases has become lower than offshore funding cost, after five interest rate cuts in 2015. Prior, it was the other way round.

Sun Binbin, a fixed-income analyst with China Merchants Securities, said the pace of renminbi internationalization will likely determine the success of Panda Bonds. "Overseas companies with renminbi assets will naturally want renminbi liability. I'm not worried about the supply side. The key question is how to boost the investor base."

[email protected]