African Governments Eye Panda Bonds

By Duncan Miriri and Samuel Shen

NAIROBI/SHANGHAI (Reuters) – Plans by African governments to raise money on China’s domestic debt markets via so-called panda bonds could be undone by their heavy debt loads and a wider lack of market infrastructure, investors and analysts said.

African governments seeking to tap fresh pools of money have sold bonds in currencies other than their own, mostly U.S. dollars and sometimes euros, for three decades.

But gaining a foothold in the world’s second-largest bond market has proven elusive. Changing that is high on the agenda for both Beijing and cash-hungry African governments.

At a China-Africa summit in Beijing this month, President Xi Jinping said he wanted to “encourage and support Africa in issuing panda bonds in China.”

However, there are some very basic hurdles to issuing on the Chinese mainland for African issuers.

“The Chinese yuan isn’t freely traded worldwide, which makes these bonds less attractive,” said Lynda Iroulo, assistant professor at Georgetown University in Qatar.

Growth of Panda Bonds

Panda bonds represent a growing market. Issuance in the first three quarters of 2023 surged to $18 billion, according to data from the National Association of Financial Market Institutional Investors, surpassing the $11 billion total for all of 2022.

This increase follows Beijing relaxing the rules early last year to facilitate issuance. One key change allows issuers to decide whether to spend the proceeds in China or repatriate them.

Lower interest rates make China an attractive market compared to the United States, with the 3-year bond offering a 150 basis points differential.

“We expect onshore funding costs will remain cheaper even with the cuts in U.S. interest rates, as China’s central bank could have more flexibility in cutting interest rates,” said Christopher Lee, S&P’s chief analytical officer for Asia-Pacific.

Trade Relations

African states seeking closer trade ties with China could tap this bond market, according to Jack Buffington, a professor at the University of Denver.

“Most of the African nations that have potential for growth in manufacturing and supply chain are interested in balancing both the U.S. and China spheres of influence,” he noted.

Panda bond issuance could strengthen financial ties between China, which is Africa’s largest bilateral creditor.

Kenya, whose President William Ruto asked China during the summit to reprofile Africa’s debt to include longer grace periods and tenures, is a potential panda issuer.

Reports in March indicated Kenya plans to issue a debut $500 million panda bond in this financial year. Kenya also joined the Asian Infrastructure Investment Bank (AIIB) this month, a requirement for panda issuance.

“The membership will enable Kenya to access concessional funding,” Ruto said.

The AIIB provided guarantees for Egypt’s issuance of the $3.5 billion RMB sustainable panda bond last year, making it the first such issue in Africa. The bank did not respond to a request for comment.

Liquidity Concerns

The dominance of the dollar might hinder a full African pivot to the Chinese domestic bond markets. Despite the dollar’s share as a global reserve currency dropping to 59% from 70% over the last decade, it still dominates global trade and finance.

Shifting to Chinese currency funding would necessitate “a major transformation in the currency and financial system,” according to Buffington. Liquidity issues could further raise the premium that investors demand to hold less frequently issued bonds.

“It is better, at least in the short-term, to concentrate in the dollar which is quite liquid,” said Otavio Medeiros, Brazil’s undersecretary of public debt, when asked if Brazil would consider issuing a panda bond.

However, others are more confident. Hungary, which has strong political and trade ties with China, has been issuing panda bonds since 2017.

Yet, the multiple issuances have not settled concerns surrounding bond trade settlements and liquidity depth, noted Sergey Dergachev, a portfolio manager at Union Investments.

“It is very difficult for me to imagine many emerging markets corporate and sovereign issuers actively issuing in renminbi,” he stated.

Still, African nations should continue pursuing panda bond issuance, suggests Banji Fehintola, executive director at Africa Finance Corporation (AFC). He believes collaborating with partners can ease the process.

“If we all traditionally go west to raise capital without exploring alternative funding sources, that is not the right strategy,” Fehintola concluded.