A Framework to Understand China’s Panda Bonds

By Federica Russo

Last March, Italy officially became the first G7 country to join the Belt and Road Initiative thanks to the signing of a Memorandum of Understanding that is in line with the features of the modern multipolar order. Beijing and Rome gave new impetus to their bilateral relationship enhancing economical, financial, and cultural cooperation through partnerships between private and public organizations and institutions. In the framework of these alliances, particular attention was given to Cassa Depositi e Prestiti Spa, an Italian joint-stock company  that operates under the ownership of the Ministry of Economy and Finance and other banking foundations, and whose main goal is the utilization of Italy’s savings in order to boost the economic and infrustructural growth in the country. Over the recent months, CDP defined effective channels of communication with the Bank of China in order to issue yuan-denominated bonds, which are internationally recognised as “Panda Bonds”. These specific instruments can be emitted only after the authorisation provided by the People’s Bank of China, whose final judgment follows the opinion of Chinese rating agencies that take the overall economic and financial situation of foreign banks into consideration.

On July 26, Cassa Depositi e Prestiti published a release on its website to confirm the triple-A obtained by China Chengxin International Credit Rating Co. Ltd, marking the implementation of a 5 billion renminbi plan to eventually find the necessary resources directed to the support of corporate realities. Indeed, the priority is issuing bonds bought by Chinese istitutional investors in order to collect  liquidity for Italian companies and their internationalization in the Asian Giant. But Italy is not the only European Union member which strengthened its ties with China, sensing the relevance of strategies of openness. Portugal became the first country within the Eurozone which issued panda bonds with a 2 billion yuan program last May, but before Lisbon even Warsaw and Budapest were new potential players to enter China’s interbank  market. Hungary issued its first rmb 1 billion of panda bonds in July 2017, while Poland already contributed to the expansion of these tools in 2016.

The issuance of bond in yuan took its intial steps in 2005 presenting different characteristics. The first two panda bonds were emitted by the International Finance Corporation and the Asia Development Bank with a value of RMB 4 billion, however they evolved significantly from 2015 when HSBC and Daimler AG were authorised by the PBOC, which put in place  the basis for a commercial emission next to the sovereign one previously initiated by Korea, the region of British Columbia in Canada and recently continued by Philippines. On the other hand, several multinational companies were interested in Chinese domestic bond market and an example is represented by the German car automaker BMW that issued a 3 billion yuan deal to issue panda bonds this year. According to China Daily, the total value expressed in billion of yuan-denominated panda bonds was 2 in 2014, 130 in 2016, and 95.59 in 2018, recording a robust growth.

In addition, it is interesting to note how the expansion of this market assumed different nuances even in term of diversification thanks to Social or Global Bonds. Chinese authorities built a “green financial system” which can lead to the achievement of better qualitative results within the society. Green Bonds served this purpose promoting and funding companies which wanted to invest in sustainable development. These particular bonds showed their beneficial impact in 2016, when the New Development Bank issued them to finance projects in China, Russia, and Brazil in the area of renewable sources of energy.

Through these debt instruments, businesses could raise capital to fund their activities abroad, specifically within the complex Chinese market which offers exponential growth opportunities to those who are able to interpret the financial dynamics, as well as the economical and cultural ones. In parallel, the operations of the sovereign issuers have a double function: on one side they involve the presence of international investors who want to hold yuan assets to cover currency rate risks, on the other hand panda bonds become a sort of diplomatic tools to relaunch the relationship with the Dragon, which in turn made them pillars of the yuan internationalization plan started in 2009.

China’s onshore bond market is the third largest in the world due to its value of US11.9 trillions, and in spite of the number of domestic investors evident progress are made toward a greater openness  demonstrating China’s ability in building an integrated society according to the innovative idea of “connectivity” which is not accpted by many actors in the global scene.

Ms. Federica Russo is an Italian freelance writer focused on Chinese economic engagement in the global scene, whose articles were published on Asia Times, the Nepal Istitute for International Cooperation and Engagement, Political Insights and Il Caffè Geopolitico. She studies business administration with a particular interest in Organisational Behaviour, Cross Cultural Management, and Leadership.