1. Panda bonds are a type of bond called “foreign bonds.”
2. Foreign bonds are bonds issued to investors in a particular country in the local currency of the country but by a foreign borrower.
Note: Foreign bonds are different from Eurobonds.
The Eurobond is a bond issued in a currency other than the borrower’s local currency. For example, Egypt issues a dollar bond, but it trades it in all global markets such as London, New York, and Singapore, for example.
Panda bonds, on the contrary, trade in the local bond market of a country along with government bonds and corporate bonds in the local currency of the country in which they are issued.
Example:
-The government of Spain issues US dollar bonds in the US bond market called “Yankee”.
-Thailand issues Japanese yen bonds to Japanese investors called “Samurai”.
-Egypt issues Chinese yuan bonds to investors inside China called “Panda”.
3. The first Panda bond was issued in October 2005 by the International Finance Corporation (IFC) of the World Bank and the Asian Development Bank to finance a number of development projects in China.
4. The reasons for issuing bonds in Chinese currency inside China are:
a) Most of the Panda bond issuers are subsidiaries of multinational companies operating in China (such as the subsidiary of Mercedes and BMW in China) and international financial institutions such as the IFC and the Asian Development Bank. The main reason is to avoid FX risk by issuing Yuan financing to finance projects, inside China.
b)The domestic bond market (denominated in yuan) in China is the second largest bond market in the world after the US. The higher the volume of issuance, the higher the trading volumes and the lower the required interest rate because the investor is able to liquidate the asset at any time.
c) The interest rates in China are slightly lower than their counterparts in the United States of America, as previously mentioned. While the yield to maturity on 10-year Chinese government bonds is currently about 2.65%, the yield on government bonds in the United States is about 3.1%.
d) The stability of the yuan against the dollar reduces the risk of exposure to the exchange rate of the exporting country in the case it decides to convert the yuan into another currency instead of spending it inside China. In this case, borrowing in yuan is similar to borrowing in dollars but at an interest rate slightly less than the dollar.
5. It is important to know that Panda bonds are assessed for their risks by Chinese evaluators and do not depend on the assessments of the American trio (Moody’s, Standard & Poor’s, & Fitch) except in exceptional cases.
6. In 2019, the Philippines issued 2.5 billion yuan ($365 million) of Panda bonds with a 10-year maturity and an annual interest rate of 3.75%, which is about 1.1% higher than the yield on US bonds prevailing at the time. It is worth noting that the Philippines’ sovereign assessment of the bond at that time was BBB+.
Note
The credit rating of most (if not all) Panda bond issuers since its inception in 2005 until now is an investment credit rating (BBB- or higher). Therefore the next offering by the Egyptian government may be the first from a country whose credit rating is lower than the investment rating according to the American trio.
Panda Bonds
