he government of Pakistan has announced the issuance of Panda Bonds worth $300 million in the Chinese market over the next fiscal year. This policy development is a part of the economic roadmap that aims to revive the economic growth in the country over the next five years.

Tapping into the Chinese capital market in the current scenario seems to be a step in the right direction. It will diversify the source of financing, increase the depleting foreign exchange reserves and leverage the growing economic ties between China and Pakistan.

One of the major benefits of issuing panda bonds will be the improved credit worthiness of Pakistan which will potentially attract foreign investors. Before delving into further details, let’s first understand what a Panda Bond is and how it can help Pakistan achieve the claimed benefits.

A Panda Bond is a bond denominated in Chinese Yuan Renminbi (CNY - Chinese currency) issued by a non-Chinese entity and sold within the People’s Republic of China. Panda Bonds were introduced in October 2005 by the International Finance Corporation and the Asian Development Bank. They comprised 1.13 billion yuan of 10-year bonds yielding 3.4 percent, and 1 billion yuan of 10-year bonds yielding 3.34 percent.

The issuance of Panda Bonds, or yuan-denominated bonds issued by foreign financial institutions in China, has reached 66 billion yuan ($9.12 billion) as of April 14 this year, up 128.36 percent year-on-year, data from financial information service Wind showed, underscoring the allure of China’s low-cost borrowing market for offshore issuers.

The growing volume of Panda Bond issuance globally, reflects the increasing demand and depth of the Chinese bond market. Overseas investors are now managing CNY. More central banks and asset managers are investing in China’s bond market and are benefiting from ample liquidity and decorrelation from other major bond markets.

In addition to that, with Chinese regulators’ continued efforts to enhance the registration process and issuance mechanism for Panda Bonds has made it easier for both overseas issuers and investors to access this market.

Currently, China has the world’s second largest bond market. Going forward, as China continues opening its capital markets, there is a huge growth potential in the Panda Bond market. Pakistan should tap into this market as it holds a significant promise for Pakistan’s economic development, offering a pathway towards diversification and sustainable growth.

As a country with ambitious development goals and a burgeoning need for infrastructure investment, Pakistan stands to benefit greatly from tapping into the Chinese interbank bond market through the issuance of Panda Bonds.

The issuance of Sustainable Panda Bonds presents a strategic opportunity for Pakistan to accelerate the adoption of renewable energy by providing much-needed funding for green projects. Pakistan can thus reduce its reliance on fossil fuels. 

In this context, the recent announcement of issuance of Panda Bonds worth $ 300 million into the Chinese market by the Government of Pakistan is opportunistic, timely and well-thought out. Finance Minister Aurangzeb addressed an event and stressed on capital market participation particularly in the USA and Euro zone.

He also mentioned Panda Bonds as a way-out of economic crunch for Pakistan. The Government of Pakistan plans to lay the groundwork for the issuance of Panda Bonds by following in the footsteps of the successful Egyptian model of Sustainable Panda Bonds. In Egypt’s case, two development banks provided the guarantees to the sovereign issuer of the Panda Bond; the Asian Infrastructure Investment Bank and the African Development Bank provided guarantees to support the issuance of Egypt’s first Sustainable Panda Bond at a value of CNY 3.5 billion.

If we take the Egyptian model and develop it in Pakistan’s case for issuance of Panda Bonds, it will require collaboration between Asian Development Bank and Asian Infrastructure Investment Bank for providing guarantees to Pakistan as a sovereign issuer of Panda Bonds. The AIIB have been engaging with various domestic market players as well as regulators to discuss potential development and further internationalisation of China’s bond market.

The proceeds from the Panda Bond can be channelled towards sustainable development of the key sectors of the economy i.e. the energy sector and the transport sector. The funds from the issuance of these bonds will diversify the funding sources and can be used to finance renewable energy and electric vehicle projects, for enhancing energy efficiency, modernising grids and transportation infrastructure or decarbonising the country’s energy infrastructure.

The issuance of Sustainable Panda Bonds can help achieve the nationally determined contributions and contribute to the long-term sustainability by mitigating the adverse effects of climate change.

Despite the numerous advantages, there are also some demerits associated with issuing Panda Bonds. These include foreign exchange risk, regulatory compliance, limited market size, political sensitivity and potential dependency on the Chinese market. Tapping into this avenue highlights Pakistan’s commitment to exploring innovative financing mechanisms while simultaneously addressing critical developmental needs.

The issuance of Sustainable Panda Bonds presents a strategic opportunity for Pakistan to accelerate the adoption of renewable energy by providing much-needed funding for green projects. By directing the proceeds towards renewable energy initiatives, Pakistan can reduce its reliance on fossil fuels, decrease carbon emissions, and improve energy security. Structural reforms and credit enhancements will be crucial in improving Pakistan’s sovereign rating and enabling broader access to international capital markets.

The writer is a research associate at Sustainable Development Policy Institute, Islamabad. She can be reached at zainabbabar@sdpi.org LinkedIn: http://linkedin.com/in/zainab-babar-537b7117a