PANDA BOND AND ITS USE FOR DEVELOPMENT PROJECTS

In 2000, I was undergoing military training at Hebei University, Shijiazhuang, China. In one weekend, we were taken to Shijiazhuang Zoo, where we saw a giant panda.

I was very excited to see that and was taking pictures from different angles.

In Chinese society, the giant panda is much more than a rare animal. It is regarded as a national treasure, a symbol of culture, and a symbol of Peace and Friendship.

Historically, China has used pandas as diplomatic gifts or long-term loans to other countries, commonly known as “Panda Diplomacy”.

Between 1949 and 1982, China gifted pandas to a small number of countries, including the Soviet Union, the USA, North Korea, Japan, the UK, and France. After China joined international wildlife conservation agreements, the gifting of pandas largely stopped and was replaced by loans.

Different financial markets often use nationally recognizable symbols when naming bond categories. i.e. Japanese Samurai Bond, Australian Kangaroo Bond, Canadian Maple Bond, British Bulldog Bond, and Chinese Panda Bond.

Political scientists often describe the panda as one of China’s most successful soft-power assets. Similarly, Panda Bonds increase international familiarity with Chinese financial markets and encourage foreign governments and corporations to engage with China. Thus, Panda Bonds are sometimes described as an extension of China’s economic soft power.

What is Panda Bond? It is a Renminbi (RMB) denominated bond issued in mainland China’s domestic bond market by a foreign entity. The foreign entity can be a government, a multinational corporation, a commercial bank, or an international financial institution.

In simple terms, if a non-Chinese borrower raises money from investors inside China and issues the bond in Chinese yuan (RMB), that bond is called a Panda Bond. During 1990-2000, China was gradually opening its financial market to international participation.

At that time, Chinese policymakers sought to promote the international use of RMB and develop China’s domestic bond market.

So, the Panda Bond market officially began in 2005 when ADB (Asian Development Bank) and IFC (International Finance Corporation) became the first foreign institutions to issue RMB bonds in China’s interbank bond market.

During 2005-14, the market expanded slowly, and the system was quite complex. However, China introduced major reforms in 2015-18, thus many sovereign governments (i.e., South Korea, Poland, Hungary) issued Panda Bonds.

What is the mechanism to use Panda Bond?
Any government or multinational can issue a Panda Bond for development projects. Issuers need to get approval from Chinese regulators.

The issuer needs to submit credit ratings, financial statements, the purpose of borrowing, and a repayment plan to the regulator. Bonds are sold to the Chinese domestic bond markets. Chinese investors purchase the bonds, and the issuer receives Chinese Yuan.

Depending on regulatory approval, the Yuan may be used directly for imports from China or converted to other currencies (if permitted). Every year, the Issuer pays interest on the principal amount.

Advantages of Panda Bonds are: By issuing these bonds, governments and companies can access Chinese institutional investors like banks, insurance companies, and pension funds, create diversification of funding sources, Yuan can be used for payment of imports, and issuers are given access to a new group of investors. But there is always a risk factor everywhere, same in Panda Bonds too.

If the Yuan appreciated against the issuer’s local currency, repayment becomes more expensive.

When the bond matures, if market conditions worsen, then refinancing may become difficult. If borrowed funds are used for projects that do not generate export earnings, then things might be complex.

To mitigate the risk, exports to China may be increased, and export earnings can be used to repay the debt.

Currency swap agreements might be signed with Chinese financial institutions. The Panda Bond financial project should have a rate of return higher than the borrowing cost; repayment should be planned from the first year instead of waiting until maturity approaches.

When does Panda Bond make sense for any country?
If any country imports a large amount of goods from China, then Panda Bonds can be utilized for repayment without converting currencies thus transaction costs can be avoided, If interest rate of Panda Bonds are found to be less than that of other International Bonds, If Bond is used for those projects which will generate future economic returns to repay the debt like ports, highways, mega-projects, special economic zones,, bridges etc.

A country should not issue Panda Bonds when it has less or no Yuan earnings, debt levels are already too high, borrowed money is planned for face-lifts and vanity projects, the country lacks strong governance, the administration is overwhelmed with a poor, dishonest, less accountable, and non-transparent system where public money is not valued for the development but for the own consumption of the corrupt personnel.

(The columnist, Dr. Brigadier General Munir, is a logistician, Supply Chain and Procurement specialist. He has completed his Ph.D. on Public Procurement in Bangladesh from Jahangirnagar University. He can be reached at rumi201971@gmail.com).