Panda Bonds Bring New Opportunities to China

China's economy has been growing rapidly, and one way the country has been tapping into foreign capital is through the use of panda bonds. Panda bonds are a type of bond issued by foreign companies in China's domestic market.

These bonds offer a unique opportunity for foreign issuers to tap into China's vast domestic market, which has been growing steadily in recent years. The Chinese government has been actively promoting the use of panda bonds as a way to attract foreign investment.

In 2015, the Chinese government launched the "panda bond" program, which allows foreign companies to issue bonds in China's domestic market. This program has been a huge success, with many foreign companies taking advantage of the opportunity to raise capital in China.

China's booming panda bond market is a complex phenomenon, not as black and white as it seems. The market has seen a significant surge in sales, reaching 150bn RMB ($21.1bn) in 2023, surpassing any previous annual amount since its debut in 2005.

The main attraction for foreign companies to issue panda bonds is China's cheap borrowing costs. The People's Bank of China is loosening monetary policy to support the economy, widening the difference in interest rates between the US and China significantly.

China's cheap borrowing costs are a major draw for foreign companies. The yield premium of US three-year treasuries over similar-maturity Chinese government bonds increased to 253 basis points in October, the highest level since 2006.

The internationalisation of the renminbi has also contributed to the market's expansion. The currency's share in global payments has almost doubled to 3.6 per cent in October, from 1.9 per cent in January, according to Swift, the international payments platform.

However, the market faces some major hurdles. Panda bonds have a limited pool of investors, resulting in very low liquidity. Selling panda bonds is difficult, and most investors can only hold them until maturity.

Here are some key differences between panda bonds and dim sum bonds:

The market's growth will depend on attracting overseas issuers, including those without operations in China, which will help to expand the investor base.